Fresh Start A Concise Guide to Living DebtFree By Douglas Hoyes BA, CA, CIRP, CBV, Licensed Insolvency Trustee Co-Founder of Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates Fresh Start A Concise Guide to Living Debt Free By Douglas Hoyes BA, CA, CIRP, CBV, Licensed Insolvency Trustee Co-Founder, Hoyes Michalos & Associates Inc. Introduction Hoyes Michalos & Associates Inc. is one of the largest firms in Ontario dedicated to helping individuals eliminate debt. Since our founding in 1999 we have helped approximately 40,000 people file a consumer proposal or personal bankruptcy. That’s a large number, but even more amazing is the fact we have helped well over 125,000 people deal with their financial problems. Why is the number of people we’ve helped so much larger than the number of people for whom we have filed formal insolvency proceedings? Simple. At Hoyes Michalos we believe that a personal bankruptcy or a consumer proposal are only two possible options for dealing with debt. When you call or e-mail us, and when you meet with us for your free initial consultation, we will explain all of your options. In the majority of cases we will give you advice on how to deal with your debts on your own, or we will refer you to another professional more suited to helping you in your situation (such as a credit counsellor, tax accountant, or mortgage professional). What are your options? Read on for the Hoyes Michalos concise guide to becoming debt free. At any time while reading this e-book you can go to www.hoyes.com and click on the Contact Us button to get our phone numbers and e-mail addresses so that you can talk, one on one, to one of our trained professionals. There are solutions, so let’s get started. Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates Crunching the Numbers Whenever you have a problem, any problem, the logical first step is to attempt to fix it yourself. You don’t always need professional help, so the first step is to determine whether or not you can fix your debt problems on your own. If you have a burned out light bulb, you probably don’t need to call an electrician. You can fix it yourself, because it’s relatively easy to identify the problem, and to implement the solution (go to the store, buy a new light bulb, unscrew the old one, install the new one). Are your financial problems so severe that you require professional assistance, or can you fix them yourself? To answer that question, answer these three questions: Question One: What Do You Owe? Your list should include everyone you owe money to, including: • Credit cards • Payday loans • Bank loans • Student loans • Finance Company loans • Investment loans (like RRSP • Car loans loans) • House mortgages • Taxes • Lines of credit • Loans from family and friends On your list, write down the name of the creditor (that’s who you owe the money to), the amount, the interest rate, the minimum monthly payment, and the security. If you have a computer and know how to use a spreadsheet, do your list on your computer. If not, use paper and a pencil. The method isn’t important; the key is to get a list of all of your debts. Example: List of creditors Name Amount Interest Monthly Payment Security Rate ABC Visa $9,500 19% $200 none XYZ Mastercard $5,500 19% $125 none Bank Car loan $15,000 11% $400 car Payday loan $500 60% $600 none TOTAL $30,500 $1,325 Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 3 Question Two: What Do You Own? Question Two is the opposite of Question One; now that you have a list of what you owe, make a list of what you own. This list will include anything you own that you could turn in to cash, such as: • Cash, or cash in a bank ac- • Tools count • Electronics • Investments (RRSPs, RESPs, • Furniture mutual funds, TFSAs, etc.) • Clothing • Real estate • Household items • Motor vehicles Beside each item indicate its value. Cash is easy; for items like furniture or clothing, estimate what you could get if you sold them at a garage sale (which will probably be significantly less than what you paid for them originally). Question Three: What’s Your Cash Flow? Cash flow is exactly what it sounds like: it’s the amount of cash that flows into and out of your house each month. Again, using a spreadsheet or a piece of paper, make a list of what comes in and what goes out. Here are some practical tips: 1. First, review your bank and credit card statements for the last month or two to be sure you are including all expenses. It’s easy to remember things such as rent, but it’s the incidental expenses that add up and those are the ones you don’t want to forget. 2. Second, include all expenses that don’t happen each month. Examples would include birthday presents, Christmas, back-to-school clothing and supplies, and even your annual license plate renewal sticker. For expenses that don’t happen every month, divide the expense by the number of months between incurrence, and put that number on your monthly cash flow list. For example, if you pay $120 per year for your license sticker, show $10 per month on your cash flow Chart. 3. Third, for cash purchases that may not show up on your bank or credit card statement, carry a pencil and paper with you or use an app on your phone and record every expenditure you make for a week (or a month). That will help you determine what you spend on hidden items, like coffee, parking meters, etc. Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 4 Example: Cash Flow Chart Cash out Cash in Rent (or mortgage) $800 Paycheque $2,000 Groceries $400 Child Tax Credit $200 Utilities (hydro, phone, gas) $300 Total Cash In $2,200 Car payment (or bus fare) $300 Monthly Surplus (Deficit) ($100) Gas for Car $300 Car Insurance $150 Coffee $50 Total Cash Out $2,300 Put It All Together Now, put it all together using the worksheets on the next three pages. When you’re finished you will have three pieces of paper that show you: • What you owe • What you own • How much money you have left over at the end of the month With this information, you will be able to identify the possible solutions to your debt problems. Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 5 Worksheet: List of Creditors Creditor Name Amount Interest Rate Monthly Payment Security TOTAL NOTES: Your list should include everyone you own money to including: • Credit cards • Payday loans • Bank loans • Student loans • Finance Company loans • Investment loans (like RRSP • Car loans loans) • House mortgages • Taxes • Lines of credit • Loans from family and friends Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 6 Worksheet: List of Assets Item Description Cash Value TOTAL NOTES: This list will include anything you own that you could turn in to cash, such as: • Cash, or cash in a bank ac- • Tools count • Electronics • Investments (RRSPs, RESPs, • Furniture mutual funds, TFSAs, etc.) • Clothing • Real estate • Household items • Motor vehicles Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 7 Worksheet: Cash Flow Chart Cash out Amount Cash in Amount Total Cash Out Total Cash In Monthly Surplus (Deficit) Here are some practical tips: 1. First, review your bank statements and credit card statements for the last month or two to be sure you are including all expenses. It’s easy to remember your rent; it’s the same number every month. It’s all of the incidental expenses that add up, and those are the ones you don’t want to forget. 2. Second, include on your list all expenses that don’t happen each month. Examples would include birthday presents, Christmas, back to school clothing and supplies, and even your annual car license plate renewal sticker. For expenses that don’t happen every month, divide the expense by the number of months between incurrence, and put that number on your monthly cash flow list. For example, if you pay $120 per year for your car license sticker, show $10 per month on your cash flow list. 3. Third, for cash purchases that may not show up on your bank or credit card statement, carry a pencil and paper with you or use a phone app and write down every expenditure you make for a week (or a month). That will help you determine what you spend each month on hidden items, like coffee, parking meters, etc. Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 8 Finding the Right Solution Solution #1 – Fix it Yourself You might be able to manage this yourself … page 10 Solution #2 – Debt Consolidation Loan Beware of the traps … page 12 Solution #3 – Debt Management Plan Be careful for-profit counsellors will cost you … page 14 Solution #4 – Consumer Proposal Ontario’s best kept debt management secret … page 15 Solution #5 – Personal Bankruptcy The last resort … page 17 What Should I Do? Finding the right solution … page 19 Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 9 Solution #1: Fix it Yourself You have three pieces of paper, showing what you owe, what you own, and what cash you have available to service your debts each month. Do you own more than you owe? If so, you may be able to turn your assets into cash that you can use to repay your debts. Here are some examples: • If you have investments, such as a savings account or GIC at the bank, you could cash in the investment and use that money to repay your debts. • NOTE: If you have money in an RRSP, you could cash in the RRSP and use that money to pay your debts, but you must pay tax on the money you withdraw. Your bank may only withhold 10%, 20% or 30% of the amount you withdraw, but when you file your taxes at the end of the year your RRSP withdrawal, along with your other income, could push you into a higher tax bracket (up to 50%), so be sure you understand exactly the amount you will end up with, after tax, before cashing in your RRSP. • If you have a second car, or even a first car that you no longer need, you could sell it and use the money to repay your debts. • You could have a garage sale and sell all of your extra possessions, and use that money for debt repayment. • If you own a house with equity, you could sell the house and use the proceeds to repay the debt. If you owe more than you own, you can’t sell assets to repay your debts in full. You may be able to reduce your debts, but you can’t solve your problems entirely. Do You Have Excess Cash Flow Each Month? Even if you have no assets that you can sell, if your income (cash in) is greater than your expenses (cash out) each month, you could use the extra cash each month to pay down your debts. If you don’t have extra cash, make some! There are two ways to increase your cash flow: • Increase your income, perhaps by working overtime, getting a second part time job, taking in a boarder, or finding a higher paying job. • Reduce your expenses, by eliminating all unnecessary expenses. Of course increasing your income and reducing your expenses is easier said Fresh Start: A Concise Guide to Living Debt Free, published by Hoyes Michalos & Associates 10