Keeping your head up while drowning in debt - MoneySense

Keeping your head up while drowning in debt

When bills start piling up it’s easy to think you’ll never be debt free again. But never say never. Bruce Sellery explains how to get your finances back on track.



My wife and I have two kids and we are both students. We have been unable to make payments on certain debts and as a result around $7,800 has been turned over to collections. Besides this debt, we owe $7,000 on our car, plus we have student loans, which luckily don’t have to be paid until after graduation. How much of a hit to our future are we taking by keeping this $7,800 in collections? It’s unrealistic for us to pay this debt off until after we graduate and find jobs. We would like to own a house someday, but I’m scared this debt will damage our credit report and that we may never see this dream come true.


Never is a very long time. Your situation may seem dire, but believe me, I have seen far worse. As you say, you are taking a hit to your future having debt in collections, but it is a hit, not a fatal blow. It is going to take some time and hard work to get your finances back on track. But if you do a few things right you’ll be on top of it long before never arrives. Here’s the basic plan:

Make an appointment with a not-for-profit credit counsellor
You may be ignoring the phone, hoping that the collections agency will just go away. While that is a common and understandable response, it is better to be proactive. Get in touch with a credit counselor to develop a plan and then give the collection agency a call for a change. (For more on how a credit counsellor can help please see Debt relief.) Jeffrey Schwartz, the executive director of Consolidated Credit Counseling Services of Canada, says a counsellor will be able to “help you negotiate a reasonable repayment structure with your creditors based on your income and expenses.” He adds, they will also typically provide money management education and work with you to create a budget you can live by.

Focus on the basics of cash flow management
The credit counsellor will have tips on how to credit a budget. But for starters I would recommend that you put your credit cards away and go strictly with cash. And be sure to live within your means, even they are meager right now. Use your creativity to find ways to increase your income and decrease your expenses between now and the time you graduate. This might include choosing to have one of you pause school for a year to work full time, taking in a boarder, cancelling cable, etc.

Make a plan to rebuild your credit
Once you have both graduated from school, get back to using credit so you can demonstrate to lenders that you know how to use it responsibly. “There are programs available which are designed to help rebuild credit by developing a positive history of borrowing and repaying a fixed-payment loan and a revolving line of credit,” explains Schwartz. Find out about how to access a program like this.

Set up a pre-authorized contribution to savings
Once you graduate and have some stability to your income and expenses, set up a pre-authorized contribution to a Tax Free Savings Account—even if it is only $50 a month in the beginning. This will get you into the habit of saving, which is critical as you work on building up a downpayment for your house.

Right now it seems like your dream of owing a house will never come true. But that’s not the case. Debts that are sent to collections and then settled are usually off your credit report in six to seven years. During that time you can be rebuilding your credit, save for a deposit and spend lazy Sundays touring open houses in neighbourhoods you will be able to afford.