Falling Into a Debt Spiral? Here’s How to Get Out

Despite making up less than 27% of the adult Canadian population, millennials filed for nearly half (49%) of all insolvencies in 2022, according to a study by Hoyes, Michalos & Associates Inc., a licensed insolvency trustee firm in Ontario.

The firm’s annual Joe Debtor 2022 study found that millennials experienced a 9.1% increase in unsecured debt last year. Student loan debt, along with the pandemic and its subsequent economic downturn, has made it harder for many to keep up with the high cost of rent, mortgage payments, bills, food, and other essential goods.

According to the study, tax obligations among millennials have also risen significantly, with 46% having tax debt in 2022, up from 37% in 2021. The average tax obligation among millennials increased by 22.6% to $12,137 in 2022, partly due to the collection of COVID-19 benefit repayments, the study found.

As a result, many in this generation have found themselves caught in a debt spiral, unsure of how to escape.

“Compound interest is great when you’re saving money, but when you owe money, the interest accumulates,” says Douglas Hoyes, co-founder of Hoyes, Michalos & Associates Inc. “In most cases, debt gets worse, not better, so the sooner you deal with it, the better.”

Signs you’re in a debt spiral

Debt spirals often start when it unexpectedly becomes difficult to pay off what seemed like a manageable amount of money.

Soon, you may only be able to make minimum payments on your debts, but the interest and fees keep adding up, and the progress toward paying off your debt slows down.

How to know you’re in a debt spiral:

• You regularly use credit cards to pay for necessities without paying the balance off every month.
• You’ve exhausted your credit limits.
• You miss bill payments. Maybe a utility company has cut off service because of late or unpaid bills.
• You borrow from one lender to pay off another and consistently rely on borrowing to cover expenses between paydays.
• You’ve been denied new credit.
• You’re using or are considering a payday loan.
• You’re dodging and avoiding calls from lenders and collections agencies.

Debt can also have a significant impact on one’s mental health. Symptoms of a debt spiral can include feeling depressed, anxious, overwhelmed, hopeless, or having suicidal thoughts.

“You may find yourself beginning to withdraw from your usual activities,” says Taz Rajan, community engagement partner at Bromwich & Smith, a national debt relief firm.

As the debt mounts, you may experience physical symptoms, too, such as headaches, insomnia, stomach issues, joint pain, weight gain, and even high blood pressure. Recognizing the warning signs of a looming debt spiral is a positive step toward resolving the issue.

“You know when you’re in trouble because you can feel it in your gut,” says Hoyes.

Consider asking yourself these questions:

• Do I feel anxiety about my ability to repay my debts?
• Is it frequently hard for me to make minimum payments on bills, or have I missed a payment recently?
• Do I ignore letters from lenders?
• Am I actively avoiding a debt collector?
• Do I have any money set aside for an unplanned financial emergency?

If the answer to one or more is yes, it’s time to take action.

How to escape a debt spiral

Acknowledging that you’re trapped in a cycle of debt is a great place to start. The next steps can look different depending on your situation, but here is a general guide for how to get out of a debt spiral.

Be proactive

Escaping debt requires patience and persistence. By taking a proactive approach and making small changes over time, you can take control of your debt and improve your financial situation.

Knowing where your money goes each month can help you identify areas where you may be able to free up more cash for debt repayment. Make a list of all your debts and try to put a little bit extra toward the ones with higher interest rates and/or balances.

If you’re struggling to make payments, consider contacting your creditors to negotiate a lower interest rate, a payment break, or a more manageable repayment plan.

Find non-judgmental professionals to talk to

Having debt can create feelings of guilt, shame, embarrassment, and failure. If you find it hard to take action, identify where you might need support.

“You’re not alone,” says Rajan. “Get the right help, and let’s move onwards to thriving and rebuilding.”

Professionals such as credit counselors, money coaches, and financial therapists can guide you through your options and help you get back on track.

Explore alternative borrowing options

Not all debt is created equal. Some types of debt have higher interest rates and fees making them more expensive.

One option is to explore alternatives like debt consolidation, personal loan settlement, balance transfer credit cards, overdraft protection, or lines of credit. These borrowing options often come with lower interest rates and fees than credit card cash advances or payday loans. This means more of your monthly payment will go toward your balance each month, helping you escape the debt spiral faster.

Hoyes says another alternative is to consider borrowing from family or friends. While this can be a touchy subject, it can be a way to avoid high-interest debt and get the financial help you need.

Avoid taking on new debt

While it may be tempting or more familiar for you to use credit cards or take out loans to cover expenses, taking on new debt can make it harder to get out of the debt cycle. Besides the stress, loan repayment problems remain on your credit report for years and could make it challenging to qualify for new loans if you have bad credit in a time of need.

Find the right debt solution

As a Canadian, you can seek debt forgiveness through a licensed insolvency trustee. It can be scary, but these firms provide a safe space to discuss your debt, explore options, and help you rebuild. Using their services is optional, but talking to the right person and figuring out your options, such as filing a consumer proposal or bankruptcy, can provide relief.

Start practicing self-care

In most cases, you can’t get out of debt overnight, so manage your expectations and be kind to yourself. Dealing with financial challenges can be exhausting, so try to celebrate the small wins. Celebrating your money milestones can create a positive feedback loop and motivate you to continue paying off your debt.

“There is life after dealing with debt,” says Rajan.

Spend some time understanding what role debt has played in your life. To truly move forward and make better, informed decisions, it’s essential to look back at how you got here in the first place.