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September 5, 2017

The real challenge is getting back into debt in a manageable way.

One of the greatest fears we hear expressed from people filing either a bankruptcy or a proposal is that they will never get credit again.  A common urban myth is that it will take seven years to rebuild credit – the “seven years” comes from the length of time that a bankruptcy will be visible on a credit report and not from some form of restriction imposed on former bankrupts.

Many people find that their credit lives start to return to normal in the next year or two following their discharge from bankruptcy.  The point being they “start to return to normal”, it’s a process.  It took time to get into debt and even more time to get into trouble with debt, for many people it also took a while to decide to do something about it.  It should be no surprise then that it will take time to re-establish debt (credit)

But how much debt can you safely manage?

The magic formulas used by banks and other institutional lenders usually involve an algorithm based on a percentage of gross family income.  So for instance the bank might think that you can afford to utilize up to 38% of your gross income on debt management (including mortgages).  Nuts!  That very same formula was used forty years ago before taxes increased by 80%.  Clearly such numbers are self serving – banks want you to be as far in debt as you can be without defaulting.

So what’s the answer?  Everyone is different and we all have divergent views on what debt means and how we want to use it, but my suggestion is if you can’t pay your credit card off in the next three months, without some drastic refinancing strategy then you are carrying too much debt.  Similarly, loans should be payable on time every time with extra payments being made from time to time to facilitate faster repayment.

Plan your finances, no matter how simple they may be.

We should all try to plan every expenditure that we make, from costlier expenses such as rent or mortgage to the simplest things such as a cup of coffee.  Over the years I have literally worked through thousands of budgets with people and found that very few could identify exactly where their money went.  A cup of coffee a day can easily add up to the same amount of money as an all expenses paid week long vacation in the sunshine.  It’s always your choice.

If you choose in favour of buying the daily cup of coffee, you cannot grumble when money isn’t available for the vacation.  If you are going to buy something on a credit card, think about how long it will take to pay it off with regular monthly payments for instance $1,000 on a credit card could be paid off in about six months with $200 per month payments.  Savings should also be a part of a planned expense, plan to put money away regularly, start small and get more ambitious as you get more comfortable.