When you reach the age of 40, you have reached an important juncture in your life. But celebrating your 40th birthday can also be challenging if you’re concerned that you’re not as financially stable as your friends and colleagues are at the same age. Although you might be starting to give more serious consideration to your plans for retirement, you may still have a mountain of debt that is staring you in the face, now you are considering insolvency.

With credit card debt in your 20s, the consequences can be less severe than in your 40s. At this point in your life, you should be working toward the goal of building assets that will assist you in making the transition into retirement. Building wealth with high-interest debt is nearly impossible. In this article, we will show you how to navigate your way out of debt in your 40s.

Insolvency in Canada

Insolvency can be defined as a state of financial distress based on either of two scenarios: If an individual is unable to meet his obligations as they get due. Another is when a person’s liabilities exceed their assets.

When a person loses his job and can no longer afford to pay his taxes and heating bill, he may be considered insolvent. In the same way, a person may be deemed insolvent if their debts exceed their assets, perhaps as a result of a significant decline in the value of their home since they purchased it. 

Signs That You Have Accumulated Too Much Debt 

Debt-to-income Ratio

The amount of debt you have in comparison to your income can be measured using something called a debt-to-income ratio (DTI). You acquire a percentage by taking your total monthly loan payments, dividing that number by your gross monthly income, and then multiplying by 100.

Using this percentage, a lender can determine if you’re overextended, before giving you another loan. They will look at your debt-to-income ratio (DTI) after taking into account the increased loan installments. Even if you have a good credit score, you won’t be authorized if the percentage is too high!

If the applicant’s DTI is more than 41-45 percent after taking into account the increased loan payments, the majority of lenders will not approve their loan application. This indicates that you should strive to keep your DTI lower than 36 percent in most cases.

You need to make sure that your ratio of debt to income is below 36 percent at all times, therefore you should check it frequently. Even though you were granted the most recent loan you requested, this does not necessarily suggest that your ratio is satisfactory. If you carry a balance on more than one credit card, you run the risk of becoming overwhelmed by your total credit card debt.

Credit Card Debt Ratio

The percentage of your income that goes toward meeting the obligations of your credit card minimum payments are referred to as your credit card debt ratio. To calculate the percentage, first, divide the total amount of the required minimum payments by the total amount of your monthly income, and then multiply the result by 100.

The amount of your take-home salary that goes for minimum payments should never exceed 10% of that total. If it is any greater than that, it may start to eat into your budget, and you may find yourself forced to live paycheck to paycheck as a result.

Credit Utilization Ratio

The percentage of your overall credit limit that is being used at any given time is referred to as your credit utilization ratio.

To calculate this ratio, you will add up the current balances of all of your revolving credit lines. After that, you take that number and divide it by the aggregate credit limit of all of your credit cards and credit lines combined.

Your credit score may suffer if your utilization ratio is greater than 30%, and having a lower ratio is always preferable. If you notice that you are hurting your credit score because your utilization ratio is too high, this indicates that you need to look into ways to reduce your debt.

Other red flags that you may be carrying too much debt include the following:

1. You have a hard time meeting the due dates for your bills.
2. Your debt is growing as a result of the fact that you are using an overdraft, a line of credit, or taking on new credit such as payday loans or cash advances to meet your financial obligations.
3. You are only able to make the required minimum payment on your credit cards because you do not have the funds for any additional payment. 
4. Collection agencies continue to contact you and send you letters and phone calls.

Average 40-49-year-olds wipe away these debts through bankruptcy or consumer proposal:

• Over $17,800 in credit card debt that is being paid off at a slow pace
• $20,000 worth of loans from the bank, including overdrafts, installment loans, and lines of credit
• More than half of those who take out payday loans end up owing about $7,400.
• Many people file because they are unable to keep up with a high-interest installment loan that charges between 39% and 59% interest.
• One-third of taxpayers were able to eliminate their tax debts, which averaged $19,900.

Your debt doesn’t need to be at an extremely high level for it to become a concern or for you to consider filing for bankruptcy or submitting a consumer proposal.

How Long Will It Take Before I Get Back on My Feet?

Surviving from paycheck to paycheck while attempting to raise a family while still paying for the necessities of daily life isn’t easy. You might wish to either buy a new house or keep the one you already have. You believe that you cannot make it through this time without credit, and unfortunately, you are right. However, this is not a viable option over the long run and will simply make matters worse as you hit your 50s and 60s. The purpose of filing for bankruptcy or submitting a consumer proposal is to begin life anew.

To help you have a better idea of how long the process can take, we will discuss the two main types of insolvency solutions that are available to deal with unmanageable debt.

Filing for Bankruptcy

A person who is in their forties and filing for bankruptcy has an average monthly income after taxes of slightly more than $2,900 for a family of two. 

You may be able to get a secured credit card even if you are currently going through the bankruptcy process, but other than that, your access to new credit will be severely restricted during this time. Having said that, once you have finished, you are free to continue taking steps to fix your credit score. Your bankruptcy will have less of an impact on your credit score over time, and it will be completely removed from your report 7 years after your discharge from bankruptcy.

Consumer Proposal

To put it simply, it’s an arrangement with your creditors in which you agree to pay a portion of your debts and they will forgive the rest of your debts. Your monthly payments under the consumer proposal are determined by how much of a settlement amount your creditors are ready to accept and how fast you wish to pay it off.

The maximum duration of time for a consumer proposal is sixty months (five years). You are free to negotiate the number of your monthly payments based on a period of five years, and you are free to pay off your proposal earlier if you choose so. 

Final Thoughts

Being in debt at the prime age of 40 is nothing to be ashamed of. What is most important is getting out of it as soon as you can, so you can start making preparations for your retirement. Do not allow worry to consume you as there are good opportunities provided to vindicate you. Speaking to a debt expert is one of the best ways to start your journey of being debt free. We have qualified and trained debt experts that would listen to you without judging you in any way. Contact us today to book a free consultation.