Monterrey Fire Department employee, Mélanie has a net monthly salary of $3,900. With $14,000 balances on his credit cards and a personal loan of $8,000, his payments are $872 a month, or 22% of his salary.
Unsurprisingly, Melanie struggles to make ends meet.
“In the credit industry, it is recommended that payments for so-called consumer debt, i.e. credit cards, lines of credit and personal loans, should not exceed 10% to 15% of his after-tax income,” recalls Pierre. Fortin, a licensed insolvency trustee and president of Jean Fortin & Associés.
At 22%, it’s no wonder Melanie is having trouble keeping up with her rising grocery and gas bill! What solutions are available to it?
Rebalance your budget
The three largest budget items are usually in order: housing, transportation, and food. In Mélanie’s case, housing costs (rent and heating) are $1,370 per month (35%), transportation costs (car loan repayments, gas, registration, licensing, and maintenance) are $910 (23%), and food is $850 per month (22%). ). . His debt level is currently 47% of his income, which is seven points higher than what is normally considered the maximum.
Of course, in the budget it is always possible to save here and there on certain expenses. Melanie, for example, could change her transportation habits and choose to use shared cars. Other possible solutions include changing your food choices, cooking more, taking advantage of special offers, and reducing impulsive online purchases.
But often, these small savings are unfortunately not enough to rebalance the budget. In addition, the three budget items – housing, transportation, and food – have one thing in common: they cannot be reduced quickly, which makes the financial situation of a young woman even more delicate.
If Mélanie maintains the status quo, since her budget is in deficit, she will have to continue to indulge in unused credit on her credit cards and from the margin, which will lead her into an indebtedness spiral. The latter will only increase, plus the interest fee, and you will not be able to restore its status.
reduce your debts
Under these circumstances, what changes would generate effective and rapid results? He reduced his debts which monopolize a large part of his income.
To achieve this, she will have to think of more powerful solutions. It has three options. The first is debt consolidation, which consists of requesting a loan from your financial institution to pay off creditors in one fell swoop.
“However, debt consolidation, had it been possible, would have reduced his monthly payments by only $109, which is still not enough to enable him to make ends meet. In any case, this option is not possible due to the excessively high level of indebtedness,” identifies Pierre Fortin.
Best option: suggestion
However, it can consider a consumer offer, which is a settlement offer negotiated with its creditors, or even bankruptcy. Under these circumstances, and given his financial position and age, the authorized insolvency trustee advised him to choose a consumer offer.
This would allow her to reduce her debt from $22,000 to $15,000, an amount that creditors agreed to prevent her from going bankrupt and would pay them a much smaller amount. Moreover, interest rates stop working, which is an obvious advantage and prevents debt from continuing to grow. The monthly payment would be $250 instead of $872 (over 60 months), or 6% of his net income. Thus, it eliminates its budget deficit and will be able to cope with inflation.
Her credit will be damaged, but for Melanie, the proposal is the only way, aside from bankruptcy, to get out of it. Given his level of debt, his ability to borrow was already limited, and continuing on the current path would have worsened his condition and, in the long run, would have affected his credit report even more.
- Warning: Reserve debt consolidation is for those whose interest rate is higher than the loan rate (about 12%). If you include debt at low rates, your interest costs will increase rather than decrease.
- If you find yourself in a difficult financial situation, don’t wait to ask for advice. If you allow the situation to deteriorate, you will have access to fewer options.
- Knowing your level of indebtedness (ratioindebtedness.com to measure) lets you know if you are financially healthy enough to handle unexpected events that may require access to credit. By checking it every year, you can make sure that you don’t fall into a debt spiral.