Like most New Year's wishes, paying down debt easier said than done

OTTAWA - With Canadians setting new records of indebtedness each year, it's not hard to see why paying down debt is once again the top New Year's resolution.

But either Canadians are not very good at keeping their resolutions, or they have a hard time learning from mistakes, says Jeffrey Schwartz, executive director of Consolidated Credit Counselling Services of Canada.

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That's because paying off debt has topped the list of a CIBC survey on New Year's resolutions each of the past three years.

Still, indebtedness keeps growing.

According to the last calculation from Statistics Canada, the average household owes 165 per cent more than it earns in annual disposable income, meaning an average family with $100,000 annual disposable income owes $165,000.

Analysts note that is not as scary as it sounds because the lion's share of what is owed is mortgage debt, and no one pays off a mortgage in one year. Still, it is the most Canadians have ever owed and it approaches levels of debt reached in the United States in 2007 before the roof caved in.

"It means we're spending more than we earn," says Schwartz.

And that's always a prescription for trouble.

Bank of Canada governor Mark Carney has warned that once interest rates start rising, some Canadians will be caught in a trap.

But Schwartz says since rates are expected to rise modestly and slowly, the bigger worry for most people is what happens if another economic downturn happens, or if income drops or someone in the household loses a job. With Canadians already at the limit, "we don't have any buffer zone to be able to weather a storm because we're living from paycheque to paycheque."

His advice is to pay down debt voluntarily before circumstances force you to do it, adding that it may easier to do than many Canadians think.

The first step is to stop spending. That may sound overly simplistic — in fact it is — but many Canadians literally don't know where their money is going, says Schwartz. They leave the house in the morning with $100 in their pockets and come back with $20, but would be hard-pressed to say how they spent the rest.

Bringing lunch to work rather than eating out even three times a week can add up to about $1,400 a year. And does anyone really need 700 TV channels and the hefty cable bill that entails each month?

"People say they don't have the means to pay off their debts. No, they do have the means, they just need to know where they are spending their money and what choices they can make to reduce the amount they spend."

Schwartz recommends families gather their bills and receipts together for the past year and determine where their money is going, and see if they can make different choices.

As for paying off debts you have already accumulated, he recommends setting a specific target — how much and in how long a time — rather than a general promise to pay down debt.

Another strategy is to reduce the amount of interest — a penalty for borrowing — you need to pay by taking out a loan at a low interest rate and use the funds to pay off high-interest debts, such as credit cards.

Many also make a mistake in assuming borrowing costs are set in stone, Schwartz says. Canadians with a good credit rating can often bargain down their mortgage costs, and sometimes can even get credit card companies to be flexible in the rates they charge as part of a pay-back plan.

"You've got nothing to lose," he says. "All they can say is no, but you have to ask."

For the those already over their heads, and facing threatening words like "foreclosure" and "repossession," the above strategies may no longer apply.

In his new book, "Always Call Them Back: A Guide in How to Deal with Creditors for Anyone Drowning in Debt," author George Sheridan says the goal at this point is to buy time.

Sheridan, whose book is actually derived from bitter experience when he got into a hole too deep to deal with, says creditors can make your life a living nightmare with harassing telephone calls ands threats at all hours of the day, sometimes even to your family and friends.

"You can't put your head in the sand," he says. "They'll be hounding you day in day out and my advice is always call them back because that's the only way to buy the time you need until you decide how to proceed."

Sheridan says by following the strategy, he was able to convince his creditors that he intended to pay his debts but would need more time, thereby avoiding legal proceedings.

"These people will listen, as long as you keep talking to them and they don't sense you are trying to skip out on them. In some cases I got two years (grace) on repayment," he says.

No one would wish the experience on their worst enemy, he adds. A far wiser strategy is face up to debt obligations before the situation reaches crisis status.

"The one thing we're telling people is learn from your mistakes," says Schwartz. "It's one thing to recognize that you need to manage your debt, it's another to turn this awareness into action and create a solid plan to get your financial house in order."

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