What leads to debt?

People with good incomes can go into debt because of their lifestyle or the “inflatable neighbor” syndrome. Because despite a $100,000 annual salary, if we spend $120,000, our financial situation is sure to get worse. Conversely, a person who earns an average or low wage, but sticks to his budget, will be able to succeed without getting into debt.

Contingency and budget deficit

Is overconsumption the only cause of this scourge? Well no, that’s only part of it. Pierre Fortin, licensed receiver and president of Jean Fortin & Associés, knows the main reasons consumers come to his offices. “In 60% of cases, according to him, insolvency arises due to an unforeseen event or due to a life event such as a breakup, illness, job loss, car repair, major appliance breakdown, roof repair. , etc. »

The remaining 40% relate to the structural budget deficit: in these files, the deficit is compensated by the systematic application for credit. “Some low-income people have to constantly go into debt to cover basic expenses. And even with a decent or comfortable salary, if you spend a little more each month than you earn, you will be in the red,” says Julie Brisset, budget consultant at ACEF East of Montreal.

It also mentions instances of gambling, alcohol or drug addiction, or instances where people mismanage their personal finances by neglecting to file their income tax returns or delay paying their bills, for example.

In fact, excessive purchases represent only a small part of insolvency cases: “Most often we see the purchase of recreational vehicles or cars that are too expensive for which the buyer can no longer pay,” Pierre Fortin illustrates.

Sneaky Spiral

These various situations inevitably lead to a debt spiral from which it will be very difficult to get out unless a radical strategy is adopted.

But what is this famous spiral? The process begins gradually with a credit card balance that gradually increases. When paying only the minimum amount, the account grows rapidly and may never be repaid due to the high interest rate (usually 19.99%).

When the card limit is reached, we get another one, it’s that simple! This will make it possible to make the minimum payment of the first and in the future to have access to the loan. If you have a line of credit, you can also use it to pay off the balance of the cards you will use in the future … And so on, until the level of debt becomes such that simply paying monthly minimum payments will eat up most of the income. In the end, we found ourselves in a bankrupt position after exhausting all available sources of credit, and insolvency awaits us. Then we will have to take drastic measures: turn to a licensed insolvency management firm, which will analyze various solutions with us, such as budget reorganization, debt consolidation, consumer proposal and, in extreme cases, bankruptcy.

emergency fund

To avoid this, you must go back to the basics: make a budget so you know where your money is going. “Then you should release the amounts that will allow you to create an emergency fund to be able to cope with unforeseen events,” recommends Julie Brisset. These are the tendons of war. Ideally, this fund should contain the equivalent of three months of expenses. And, when we have to use it, we will try to replenish it as soon as possible.

Various organizations, including the ACEF network, present throughout Quebec, offer free budget advice; Feel free to consult with them. To find out what your financial condition is, calculate your debt ratio regularly using the tools available on the Internet.

And if, despite everything, you got into debt and do not see the end of the tunnel, immediately go to the office of a licensed arbitration manager. Remember: the longer you wait, the more your situation will worsen and the fewer decisions you will have. Take the bull by the horns and get going!

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