5 Steps For Paying Down Your Debt This Year

5 Steps For Paying Down Your Debt This Year

If your top financial goal this year is to pay down debt, you’re in the majority of Canadians. According to a press release issued by CIBC, their annual Financial Priorities poll found that 18% of Canadians (more than any other category) plan to focus on paying down debt in 2023 rather than focus on other financial priorities like saving and investing. Many Canadians also reported that they took on more debt in 2022, partly as a result of inflation and rising interest rates. However, an intention without a plan isn’t worth much. If you want to succeed at reducing your debt load this year, you’ll have to decide how you’re going to do it, and start implementing the plan right away.

As a Licensed Insolvency Trustee, Charla Smith & Company is trained and licensed to provide advice to individuals in Alberta on their options for managing their debt (not just those that involve a formal insolvency filing), and we're a licensed provider of financial counselling to help insolvent individuals achieve their financial goals. Based on that experience, here are our top tips for anyone who wants to pay down debt, following these steps:

  1. Prepare a budget

No one likes to hear the "B" word, because they think it’s going to require them to cut back on expenses. But that’s not the goal of a budget… unless you want it to be. The point of a budget is to get a good handle on where your money is going and to make sure your spending is intentional. To prepare a budget, you’ll start by making note of what you’re actually bringing in (income) and where that money has actually been going on a historical monthly basis (expenses). Putting this information into a spreadsheet or a template will make it easy to total everything up. Hopefully, when you deduct the expenses from the income, there is something left to use for savings and/or paying down debt.

However, after you've entered actual historical information into the budget, you might decide you don’t like how it looks. Perhaps there isn’t enough money left over for paying down debt, or maybe you realize that you are spending too high a percentage of your income on things that aren't important to you. In that case, you can change the numbers to reflect the changes you plan to make, such as reducing what you’re gong to spend on certain things or adding in income from a second job you plan to take.

Now, your budget has become a plan. And yes, that plan may involve cutting back on some expenses, but that will be up to you - based on what you think is important and what’s realistic for you. If paying down debt is important to you, you’ll make sure there’s room in the budget to put toward higher debt payments. When you’re done, you should have a specific dollar figure that you believe you can afford to put toward debt each month. This key to the rest of your plan.  

  1. Assess your current debt

You'll need to start by making sure you know what your outstanding debts are. Collect all of your bills and statements and make a list of the most recent balances and total them up. Make note of the interest rate being charged and the minimum monthly payment for each.

When you add up all of the minimum monthly payments, compare that to the amount you’ve budgeted for debt payments in step 1. Hopefully the amount you''ve budgeted is more than enough to cover your minimum payments, in which case you can proceed to step 3.

If you didn’t budget enough to cover your minimum payments, you’ll need to look at your budget again and see if you can make further adjustments to the plan to increase the amount you can put to debt. However, if your budget won’t realistically allow you to make at least the minimum debt payments, you are going to need to consider other options. This means a jump to Step 5. 

  1. Allocate your payments to the highest interest debt

When you're able to pay more than the minimum payments toward your debt, you'll have to decide which debts to direct the extra funds to. There are multiple strategies for determining which debt to focus on, but the one that makes the most financial sense is to pay the debt with the highest interest rate first, assuming your debt agreement allows you to make those extra payments without penalty. Paying off the highest interest debt first means that more of your future payments will be used to pay down the initial balance on your other debts (the principal) instead of interest.

There are many online debt calculators that not only assist you in figuring out which debt has the highest overall interest rate (including any fees), but also estimate how long it will take to pay off each of your debts based on the amount you plan to pay. Here's one we've tried which seems to work well: https://www.calculator.net/debt-payoff-calculator.html.

  1. Grind your interest rate

If you don’t like the debt payment timeline you calculated in step 3, you can always go back to your budget to find more ways to adjust and allow for higher debt payments. You can also focus on making each dollar count more toward your debt re-payment by reducing the interest rates you’re paying. Here are some things you can try:

  • Negotiate with your lender.

Shop around to see what’s being offered in the marketplace and ask them to meet or beat those comparables.

  • Re-finance.

Find a new lender who charges a lower interest rate and transfer your balance to them. This can include a consolidation loan, wherein you borrow funds (at a lower interest rate), which you use to pay off your other debts. Usually, the lowest interest rate can be achieved if you have equity in your home and you can take out a second mortgage or secured line of credit. Be careful when re-financing though – there can be hidden traps like set-up fees, introductory interest rates that jump much higher after a period of time or after missing a payment, or early re-payment penalties.

In this case it's crucial that you do not use the old debt account anymore. It is heartbreakingly common to see people open a new, lower interest, debt account and transfer their balance over to it, only to rack up the same amount of debt in the initial account all over again, doubling the amount they owe.

If you have a less-than-stellar credit rating you may not qualify for the above options to reduce your interest rate. And if you can't make payments high enough to actually gain ground on your debt at your current rates, you may need to consider more drastic options. The following will reflect negatively on your credit report, so they are usually only used by those that are already struggling with their credit score after defaulting on debt payments and need help to get ahead of their debt:

  • Obtain the assistance of a credit counselling agency to enter a Debt Management Plan.

This is an informal proposal wherein a repayment schedule is agreed upon with your creditors (to the extent they are willing to participate), and may include a reduction or elimination of interest. Note: the fees of the credit counsellor can outweigh the interest saved, so caution should be taken.

  • Consider an Orderly Payment of Debts (OPD) program.

This is a legal settlement which allows you to make one monthly payment to a coordinator (in Alberta, it is administered by Money Mentors) who then distributes payments to your creditors. The interest rate under an OPD is 5%, and you get the added benefit of legal protection from potential collection action from your creditors while in the program.  

  1. Consider options for settling the debt for less than you owe

If you're unable to pay at least the minimum payments on your debt, or you aren't eligible for or can't afford the options in Step 3 to allow you to make progress in paying down your balance, you may have to face the fact that you simply can’t afford to pay back your debt. If this is you, you have options, including:

  • Settle your debt for less than you owe directly with one or more creditors.

This is typically only an option if you are already in default and you can come up with a lump sum to offer. It’s important however that you get any agreement in writing and ensure you understand how it will be reported to the credit agencies, as it can impact your credit rating even further.

  • Make a Consumer Proposal to your creditors.

This requires you to obtain the assistance of a Licensed Insolvency Trustee to prepare legal documents and present the offer to the creditors. You must include all of your unsecured creditors, not just those you don’t want to deal with anymore. However, you get legal protection from all of your unsecured creditors, and, as long as the majority agree to your proposal, all of your unsecured debt will be dealt with. Depending on your situation, your creditors may agree to accept significantly less than what they're owed. Once you complete the agreed-upon payments, the rest of the debt is forgiven. This will negatively impact your credit rating for up to 2 years after you finish paying, but then your record will be clean.

  • File a bankruptcy.

Again, a Licensed Insolvency Trustee must be engaged to prepare the documents and communicate with your creditors. You may have to turn over some of your assets to the Trustee and you will have duties including reporting and payments that you must comply with to get discharged from the process. Once you are discharged, you are relieved of any remaining obligation to pay the un-satisfied debt. This will negatively impact your credit rating for at least 6-7 years, but eventually your record will no longer show the bankruptcy.

Before taking the above steps, we recommend that you speak to a professional*, as they can help you:

  • Understand the negative credit score consequences of various actions.

It may seem obvious that bankruptcy has negative implications on your credit score, but did you know that changing to a new credit card provider can negatively impact your score? Or did you know that a seemingly friendly voluntary settlement with a creditor can be reported as a default? Or that an OPD settlement impacts your credit rating almost as severely as a bankruptcy?

  • Ensure that a step that you think will help won’t put you in a worse financial situation.

For example, many consolidation loans stretch payments out over a longer period of time, so even with a lower annual interest rate you’re paying more over time. And if you don’t cancel a card after transferring the balance elsewhere, you are statistically likely to use it again and end up with more debt than you started with.

  • Avoid unanticipated consequences in case you end up defaulting on your debt.

For example, you must know that if you default on a Home Equity Line of Credit, the bank could foreclose on your house, whereas a credit card lender can’t easily come after your assets.

Depending on the steps you’re considering, you might need to talk to one or more of the following professionals:

  • A not-for-profit credit counsellor for advice about budgeting and credit
  • A mortgage broker to find you a lower interest rate on a secured loan
  • A credit score expert to advise on the right steps to maintain or improve your credit score
  • A for-profit credit counsellor* to enter a Debt Management Plan
  • A Licensed Insolvency Trustee to determine if you’re eligible for a Consumer Proposal or bankruptcy and explain the benefits and consequences of those options. They can also be a good resource for information about budgeting and other debt re-payment options.

* It's important that you do your homework before contacting a professional to help you with your debt. Unfortunately, not everyone advertising their services is properly trained or sufficiently knowledgeable to help, and some charge unnecessary or hidden fees. In particular, we recommend that you read this alert issued by the Government of Canada before you contact anyone who is not a Licensed Insolvency Trustee.

Most of the above professionals will almost offer you a free initial consultation and/or free advice, in which case there is no financial risk to reaching out for assistance. On the other hand, if you don’t get to work paying down your debt it’ll cost you, because you’ll end up paying more interest over time.

If you need advice on options to deal with overwhelming debt, contact us to set up a free, no-commitment consultation.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options to determine which is right for their situation. 

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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Frequently Asked Questions

Check out our blog post that explains about options for settling your debt, or contact us for a free consultation.

There are many resources for those looking to get started on budgeting. Not-for-profit organizations that assist those with low incomes often provide budgeting workshops. Financial advisors will often help with budgeting, and there are a myriad of resources on the internet. But keep in mind that anyone who is trying to sell you goods or services can be biased in their advice, even if unintentionally. 

A safe resource for budgeting is the information provided by the Canadian government's Office of the Superintendent of Bankruptcy, which you can find here. This is the basis for the financial counselling that Licensed Insolvency Trustees provide to those who make an insolvency filing, and we've found it to be very helpful to those we counsel.

If you're not sure whether budgeting will solve your financial difficulties, reach out to us to discuss your situation.

Reach out to us. You can make an inquiry directly from our website by clicking here, or you can call or text us at 1-403-899-3890. We will respond quickly, and work with you to find a good time for the meeting.

No, you can contact any LIT directly and ask to set up a free consultation. It is not necessary to have a third party assist you with dealing with the LIT. LITs will work with you directly to gather information, determine your best option, and prepare the paperwork. For a more detailed explanation about why you do not need to contact a debt consultant, see our blog post Do I Need to Hire a Debt Consultant?

Canada Revenue Agency is a creditor you want to avoid owing money to. They have special powers to collect tax debt, which can mess with your life. 

That said, if you can't afford to pay the tax debt, you risk being unable to pay the loan you take out to pay it. The loan lender may not have the same special collection powers the CRA has, but if you don't pay it back they can eventually make your life miserable, too.

Generally speaking, if you can get more favorable terms from a lender (lower interest rate or longer payment term) that will allow you to be able to afford to pay off the debt, you should consider this option. Otherwise, you may need to discuss other options with a Licensed Insolvency Trustee. Beyond providing the option of a formal insolvency filing, they can talk to you about budgeting and other considerations that may help you get your finances under control.

A Licensed Insolvency Trustee is a good resource for advice on fixing your credit so you may want to book a free consultation to find out more. We can provide referrals to trusted individuals who can help where we can't.

There are many people who sell advice and/or help with credit ratings, or give advice online, but proceed with caution. Some are more knowledgeable and reputable than others, so you'll need to do your research. There is no magic pill to increase your credit rating, so be cautious about paying anyone who says there is. If you’d like to get in touch with an expert, you can contact Richard Moxley at The Credit Game or take a look at the resources he has made available on his website.

You can find out your credit score, and see the details on your report that are impacting it, by pulling your credit report from either TransUnion, Equifax, or both. Both is actually preferable because some lenders only report to one or the other, so your credit score can actually be different on each.

While the credit agencies will give you the option of paying for regular credit reporting information, you can pull the reports for free. Click on these links to get TransUnion and Equifax reports.


With our experience and our caring approach, we will help you find the best option for debt relief based on your unique situation - from advice on talking to your creditors to a consumer proposal or bankruptcy, and everything in between. We are here to lift the burden caused by overwhelming debt. 

Contact us today at 1-403-899-3890‌ for a FREE, no-commitment meeting, and let us guide you to regaining your financial footing.

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