Sam McMaster in Personal Finance and Investing Feb 24, 2020 · 2 min read · ~10

5 Danger Signs That You Should Think About Filing Bankruptcy

Bankruptcy tends to be a word people dread. No one wants to consider bankruptcy as an option, but there’s a reason it exists, and it could be what saves you from the endless cycle of debt.

5 Danger Signs That You Should Think About Filing Bankruptcy

Bankruptcy, as well as alternatives like consumer proposals, provide real debt relief, including debt forgiveness, relief from interest rates, and relief from collectors. You can find more information about bankruptcy from G. Slocombe & Associates Licensed Bankruptcy Trustees.

How do you know it’s time to consider debt relief as an option? These 5 signs are good indicators that it’s time to get in touch with bankruptcy trustees.

#1 You Can’t Make Minimum Payments

The inability to make minimum payments on all your cards and bills is a big warning sign. Defaulting on payments will damage your credit score and could lead to your debts moving into collections.

One of the reasons many people want to avoid bankruptcy is the hit to their credit score. But missing minimum payments can have the same effect.

#2 You’re Dealing with Collectors

When you start defaulting on payments, lenders may sell your debts to collectors or hire them to collect on their behalf. That can mean getting phone calls and visits from collectors at home or at work, which can feel stressful and invasive. Other actions include wage garnishments, which can make it very difficult to manage your own finances.

#3 There’s No End in Sight

Even if you can afford minimum payments, that doesn’t mean there’s an end in sight. Minimum payments are designed to maximize the amount you pay in interest and keep you in debt forever.

Consider this: you have a $2,000 balance on a card at 18% annual interest. That doesn’t even sound like much, does it? Making minimum payments of 2% of the balance or $10 (whichever is greater), it would take you over 30 years to pay off, and you would wind up paying over $4,900 in interest charges.

You need to be able to make more than minimum payments to get out of debt. If it’s just not possible, it’s time to consider bankruptcy or a consumer proposal.

#4 You Can’t Get Credit

Having a loan application rejected can be a big wake up call that your finances just aren’t where they should be. One of the most common reasons loans are rejected is credit utilization rate, the percentage of your available credit that you’re actively carrying. As a general rule of thumb, you should keep your credit utilization to 30% or below.

There are multiple reasons a loan or credit card application can be denied. Even not having a credit card (or any debts) could be a reason for a risk-averse lender to reject your application. But if you’re already in debt already, a loan rejection is a sign that something needs to change.

#5 You’re Using Retirement Savings

The majority of your retirement savings are exempt from a bankruptcy. A bankruptcy trustee cannot use savings in a registered retirement account to pay back money you owe to lenders, except for contributions made in the 12 months prior to filing bankruptcy. It doesn’t make sense to use retirement savings to pay down overwhelming debt.

There can also be significant taxes incurred when withdrawing money from an RRSP.

Bankruptcy and consumer proposals exist to help you when debt is otherwise impossible to manage. If you notice any of these warning signs in your life, it may be time to think about hitting restart on your finances.