How Much Debt is Too Much? Key Signs You May Be Insolvent

Most Canadians carry some form of household debt. From a mortgage to a car loan to a credit card balance, we all use debt as a financial tool. But when does normal borrowing cross the line into the danger zone?

Understanding how much debt is too much debt can spare you some very real financial problems—stress, maxed-out credit limits, or debt collector calls. The good news? There are clear warning signs, as well as some tools you can use to assess your financial situation.

What is Too Much Debt?

What qualifies as too much debt varies from person to person, but there are common signs that your debt may be unmanageable:

1. You only make the minimum payment

Paying just the minimum on your balance means your debt isn’t really going down—especially if it carries a high interest rate. Interest can add up fast, and if the principal is left untouched, your debt just grows. This is one of the most common signs of pending financial trouble.

2. Your debt-to-income ratio is too high

A Debt-to-Income (DTI) ratio is a simple way to assess if you can repay your debt. It’s calculated by dividing your monthly debt payments by your monthly gross income. So if you earn $4,000 per month and pay $2,000 in debt, your DTI ratio is 50%.

Financial experts generally suggest keeping a debt-to-income (DTI) ratio under 36% to qualify for the most attractive interest rates and credit cards.1 Some experts even recommend a DTI of less than 25%, in light of concerns about mortgage costs and rising household debt.

While banks may still lend to borrowers with DTIs of up to 43%, if interest rates go up, a 43% DTI can quickly climb to 50%. A higher DTI also means additional interest charges, which lead to a vicious debt cycle.

3. You skip payments

Skipped or late payments are a clear red flag. They can damage your credit score, result in extra charges, and lead to collection calls, lawsuits, or wage garnishment.

4. Debt collection agencies have contacted you

When creditors cannot collect payment, they may forward your account to debt collection agencies. Threatening letters or persistent collections calls are a sign your debt problem has reached a crisis level.

5. You worry about money every day

Money troubles can affect sleep, relationships, and mental well-being. If you’re constantly stressed about your bills or feel like you are drowning in debt, it’s time to get help.

Are You Insolvent?

Insolvency is the inability to pay your debts as they come due or when you owe more than the value of the assets you own.

What to Do if You Have Too Much Debt

If your financial situation includes a few debt red flags—don’t worry, you have options. Here are a few action steps to take:

1. Seek professional guidance

Talk to a Licensed Insolvency Trustee (LIT). LITs are government-regulated professionals who can help assess your finances and offer debt relief, from budgeting and counselling to formal debt tools.

2. Assess your monthly budget

List your income, expenses, and all debts. Be thorough and truthful. This will provide a good overview of where your money is going and where you can cut back.

3. Explore some available debt relief solutions

Depending on your situation, you may be eligible for one of the following debt relief:

• Credit counselling: Receive support from an advisor, and consolidate certain debts like credit cards and unsecured high interest loans.
• Consumer Proposal: A Consumer Proposal is a legal commitment to pay off a portion of your debt over time, usually up to five years. Once your creditors accept, you make one monthly payment. There are no more collection calls and no more accumulating interest. It should be noted that a Consumer Proposal can only be filed on your behalf by a Licensed Insolvency Trustee.2
• Bankruptcy: Bankruptcy is a legal process that can eliminate most of your unpaid debts. It does have consequences, like a temporary impact on your credit and possible loss of some assets. Still, Bankruptcy is not a failure—it is a legal process designed to give people a fresh start. You should consult a Licensed Insolvency Trustee for advice on what Bankruptcy would look like in your situation.

How to Not to Build Up Too Much Debt Again

Once you are back in financial control, the next challenge is staying on track. Here are some tips to keep on top of your debt:

• Stay within your budget: Make a realistic budget and update it each month.
• Avoid high-interest debt: Payday loans and high-interest credit cards will keep you trapped in the debt cycle.
• Create an emergency fund: Small, consistent monthly deposits will rescue you from future financial stress.
• Learn about your finances: Some money knowledge on interest, credit usage, and investing can do wonders for your financial health.

You’re Not Alone—There’s Help at Hand

If you think that you might have too much debt, the most important thing is to acknowledge the problem—and then get into action. With the right help, you can stop the debt cycle.

At Adamson & Associates, our Licensed Insolvency Trustees can help you understand your options and choose the best strategy. Whether you need a Consumer Proposal or Bankruptcy guidance, we can guide you through the process every step of the way.

Contact us today to schedule a free consultation and start moving ahead towards financial freedom.