Tackling Debt After Divorce Family Law Toronto

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Tackling Debt After Divorce: What Do I Address First?

Like many who have recently gone through a divorce, you may have run up some debt through the process.

Paying for legal costs, setting up another residence, real estate fees, land transfer taxes, credit card debt, and quite simply incurring greater expenses on a lesser income, can add up quickly. Whatever the reason, there needs to be a strategy to get out of debt in order to resume your new life with as little stress as possible.

There are different strategies for paying down debt, and some are better than others. The following steps will guide you in the right direction, and help you get out of debt more quickly so that you can get back to enjoying your life again.

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Establish a Budget

The first place to start is to establish a budget. It’s important that you understand your income and your expenses. The more detail, the better. Obviously, you will account for the big items on your list: rent or mortgage, insurance, car expenses, childcare costs, and food costs, but don’t neglect the small items. Those are items that tend to catch people off-guard. When things don’t balance at the end of the month, it’s largely because of those small incidental costs. The important thing to remember is that your income must be greater than your expenses, otherwise you will incur greater debt.

What to Pay off First?

Logic may dictate that you will want to pay off the high amount debt items first, but you should focus on the items that yield the highest interest rates. Credit cards and cash advances often have annual interest rates that are 20% or more. Credit card interest is not only high interest –  when you consider daily or monthly compound interest, it makes the actual cost much greater than 20%.

If you have to carry credit card debt, many banks offer low-interest rate cards that have rates that are half of what normal credit cards offer. They may not offer the travel incentive, rewards, or the cashback programs that some of the other credit card offer, but they will afford you the ability to pay off your debt more quickly.

Consolidation Loans or Line of Credit

Many will look at their monthly debt-load and become overwhelmed. So many different bills to pay can be intimidating, discouraging and depressing at times. By consolidating all your debt into one payment plan (car loan, student loan, line of credit, credit card debt, personal loans) not only will this shrink the number of payments that you need to make on a monthly basis, but should reduce your overall interest rate – thus allowing you to put more money each month against the principle amount and less of your money to pay off interest.

You can often approach your bank for a consolidation loan or line of credit in order to do this.  You will likely be asked to submit proof of income, which will be satisfied with recent Notice of Assessments from your personal tax returns.

Pay with Cash or Debit

The best way to not have debt is to not use credit. By paying with cash or debit you resist running up additional debt. Don’t give into the credit facilities that continue to offer you credit cards. Resign to paying for items that your bank balance can afford. You will also find that by paying with cash versus credit, you will have greater resistance to paying for those incidental items that you don’t really need.

By resisting and not using credit, you will pay for what you can afford, you will pay off your debt more quickly, and you can take that interest charge line item off your monthly budget more quickly.

Remember that a $20,000 credit card balance will in many cases incur an interest charge of $400+ per month. That’s $400 every month that goes directly to the bank and doesn’t reduce your principle. Put another way, that’s like throwing almost $5,000 in the garbage every year!  That vacation that you said you can’t afford, all of a sudden became a little closer to reality.

There is a more strategic way to pay off your debt: pay off your highest interest paying amounts first, establish a detailed monthly budget, utilize a consolidation loan to limit your number of monthly payments and lower your interest rate, and limit your use of credit to make purchases.

Once you’ve tackled these items, it will set the foundation for how you manage money in the future.

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