A Complete Guide to Debt

Millions of people all over the world suffer from high debt. Canada’s debt-to-income ratio was at 174.96% at the end of 2020. This means that for every $1 of household disposable income, Canadians owe $1.75.

What Is Debt?

In simple terms, debt is created when one entity borrows money from another entity. Straightforward debt means one person owes another money. It becomes more complex when a person owes money to a business or to the government.

When money is borrowed, there is an agreement between the lender and borrower that ensures that the money will be repaid. If a payment schedule is needed, it usually includes an interest or a fee.

The most common types of loans come from buying houses or vehicles, using a credit card, or tuition fees for students.

How Is Debt Created?

People with low purchase power take on debt to buy things that cost a lot of money. For example, the average house price in Canada is over $500,000. Very few people can pay that amount in cash, so a mortgage loan is used to purchase a house. Depending on the loan terms, the homeowner or borrower pays off the debt to the seller or the bank with added interest over time.

Student loans work similarly. If the tuition fee is $6,000 a year, students can incur a debt of at least $24,000 after graduation. Once a student is part of the workforce, that debt is paid off in time.

Debt itself is neither inherently bad nor good. If debt did not exist, people would not be able to buy houses or cars, finish college, or even acquire devices and gadgets needed for work and school. Good debt can even help income growth in the long term.

How Can Debt Be Managed?

Debt management ensures that a person only takes on debt that he or she can handle, based on income and other expenses. A person struggling to pay off a student loan should not buy a luxury vehicle and an upscale condo in Vancouver within one calendar year.

Debt problems can be solved in three ways:

1. Debt consolidation – This brings together multiple debts and combines them into one loan paid to a bank, credit union, or other finance companies. It is often used to pay off smaller loans such as credit card balances, bills, and payday loans.

2. Bankruptcy – This is a legal proceeding that allows the debtor to be released from debts, and creditors will no longer be able to require payment. Filing bankruptcy in Canada involves hiring a Licensed Insolvency Trustee (LIT) and surrendering all assets. The bankruptcy filing remains in credit reports for at least six years.

3. Consumer Proposal – This is very similar to filing for bankruptcy in that a LIT is involved. However, the debtor retains all assets and will only pay a portion of the debt over five years, with no accrued interest.

Conclusion

Almost everyone incurs some type of debt throughout a lifetime. While “good” debt is defined as debt that will lead to an eventual increase in income, the truth is debt is neither good nor bad. It’s about managing income along with expenses. If a person is overwhelmed with debt, there are several debt relief options available in Canada.

For the most accessible personal debt solutions in Canada, it’s best to approach DebtHelpers.ca. A wide range of consulting services and debt solutions are available to help Canadians achieve a debt-free, worry-free life. Get in touch for a free consultation today!