How Much Is Too Much Debt?

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Although recent numbers out of Statistics Canada reported a drop in the ratio of household debt to personal disposable income, most experts agree that Canadians are still sitting on a dangerously high percentage of consumer debt. The truth is we live in an inflated economy. An excellent example of which can be found in our real estate market where our desire to own a home, despite the all-time-high price tag, is keeping mortgages accountable for 65% of credit market debt.

 Debt Complacency

It can be argued that society increasingly sees debt as an acceptable fact of life. Access to large sums of credit encourages this thinking and too often it isn’t until individuals are unable to make their mortgage payment that they stop to consider how their lifestyle is derailing their future. Easy access to credit permits immediate gratification and unwise purchasing decisions. It also allows debtors to borrow more to make immediate ends meet, leading to even more financial trouble in the future.

Unfortunately, a common outcome of this complacency is bankruptcy. According to Frank Bennett, an expert in creditor and debtor law, and author of the book Consumer Bankruptcy: A Practical Guide for Canadians, “Over 100,000 people take bankruptcy protection every year in Canada; about half of them in Ontario alone. There are obviously many more people who are in financial difficulties and not yet ready to take protection or are just looking the other way until the debt becomes too much to handle.”

 How To Stress Test Your Finances

One should not owe so much that an unexpected personal downturn such as divorce, the loss of a job, or a physical illness would be enough to send their finances into a tail-spin. One way to determine whether your debt levels are too high is to perform cash-flow and asset tests. Are you able to pay your bills on-time as they arrive? If you sold all of your assets, could you pay off all of your debts? Another variable to examine is your personal savings. Do you have an emergency fund? If so how long would it last if you lost your job?

 Should You Declare Bankruptcy?

If you’re living above your means, don’t have any savings, and are increasingly unable to pay your bills on time, an honest look at your financial statement is in order to determine whether your debt is manageable long term. Bennett’s advice to a consumer debtor considering bankruptcy is to “see a lawyer first.” Even a seemingly simple filing can have hidden traps, and once begun, can be near impossible to reverse.

Bankruptcy is not a “do it yourself” task in Canada and Bennet’s book, Bennett on Consumer Bankruptcy: A Practical Guide for Canadians, can help consumer debtors understand the process and their options by clearly identifying when and why an individual should go bankrupt as well as where he or she can find help.

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