People on YouTube are borrowing money and bragging about living off debt and not repaying money to creditors. It’s a slippery slope that can lead to financial trouble. This practice is known as “debt maxxing” or debt maxing. You borrow money up to your maximum limit to buy material things or invest it. However, there’s no intention of repaying the money, and you rely on bankruptcy. Here, I’ll explain what debt maxxing is, how it works, and smart strategies to pay off debt.
What is debt maxxing?
There are two schools of thought for debt maxxing:
- Use leveraged investing to earn money: You borrow money to invest in the stock market or start a business to earn a larger profit than the interest rate. For instance, you borrow $5,000 at 4% and then invest it at a higher rate, for example, 6%. Then, your net profit is 2% (minus any costs). The risk is that you could lose money. So, you could owe more than you borrowed.
- Declare bankruptcy to avoid repaying debt: The fact is that you cannot intentionally borrow money if you know you can’t repay it. You also can’t rely on bankruptcy to keep borrowed money. Your assets can be seized and sold to repay your lenders. Also, the Office of the Superintendent of Bankruptcy (OSB) considers this behaviour a severe misconduct.
Types of debt
First, not all debt is created equal. There’s good debt and bad debt. Good debt can help you buy assets that appreciate or earn an education that leads to a higher salary. They usually have lower interest rates. A line of credit, mortgage, or student loan is good debt. In contrast, bad debt is expensive and usually comes with higher interest rates and is a liability. These include credit card debt, payday loans, and a car loan.
Unlike secured debt, which is backed by collateral (such as your house or car), unsecured debt doesn’t need any collateral. Credit cards, personal loans, phone bills, medical bills, or payday loans are types of unsecured debt. They typically have higher interest rates since there’s no collateral to seize if you miss payments. That means creditors cannot take your property. However, lenders can still sue you and potentially procure a court order allowing them to garnish your wages.
Leveraging debt comes with risks
You could borrow money to buy a nice car. Some people may even use that car to earn money through a ridesharing service, a car rental, or for food delivery. However, wear and tear may lead to hefty maintenance costs, which would reduce your earnings.
Using borrowed funds to buy cryptocurrency is very risky. This asset class is volatile and speculative. Remember, while your gains could be bigger, so could your losses.
Furthermore, even if you have a credit limit of, say, $20,000, don’t max it out just because you can. Doing so can also lead to overconsumption. What’s your plan to repay the money? It’s a bad idea to avoid paying off debt, as it will hurt your credit score and make it difficult to borrow money in the future (like if you want to buy a home and need a mortgage).
The stages of unpaid debt
When you start accumulating debt and miss payments, the interest and fees will add up. Then, your financial institution may exercise its right of set-off. That’s when they take money from your bank account and apply it to a debt you owe to them. Another scenarios is that yout debt is sent to collections. If you don’t make payments, debt collectors can contact you by mail, phone call, or email.
From there, a court judgment may be obtained, meaning that you officially owe money to a creditor. Depending on your financial situation, it could lead to wage garnishment. The process involves your employer withholding a portion of your paycheque and sending it to your creditor to pay off your debt.
Depending on your province or territory and the type of debt you have, your wages may be garnished. For example, under the Ontario Wages Act, creditors can garnish up to 20% of your net wages for ordinary debts. So, while you could ignore your bills for a while, you can’t get away with it forever. Eventually, the debt will follow you and reach your paycheque.
Furthermore, a consumer proposal is a formal process managed by a Licensed Insolvency Trustee. You can offer to repay some or all the balances you owe over time. This process lets you keep your assets as long as you follow the payment plan.
Can you declare bankruptcy?
As a last resort, you may consider bankruptcy if you’ve exhausted all your options. However, it becomes part of public records in the OSB system. The OSB frowns upon people displaying reckless financial behaviour. Plus, debt that comes from fraud usually survives bankruptcy. So, the consequences of declaring bankruptcy can affect you for many years.
How to manage your debt responsibly
It can feel overwhelming trying to pay down your loans. To get debt relief, here are some steps you can take:
- Pay off your credit card balance in full and on time each month. Learn about the consumer protection laws for credit card holders.
- Create an emergency fund. It’s ideal to keep your cash reserve in an accessible savings account.
- Work with a credit counsellor to review your options and customize a debt management plan. A debt repayment plan will help you reduce debt and financial stress.
- Negotiate with your creditors to see if they can offer you flexible payment options or a lower interest rate for a set period.
- Explore debt relief options, like debt management programs and debt consolidation, to see if they are a suitable choice. Both of these options simplify the debt payment process and lower interest costs to help pay down your existing balances.
- Track your credit history and rebuild your credit score. Check your credit reports with Equifax and TransUnion yearly to ensure accuracy.
Starting your debt-free journey
Learn the difference between good versus bad financial advice you find online. As tempting as some content creators make Debt Maxxing sound, it’s not worth the risk. At one point or another, in one way or another, the cheque will come due. The form in which is comes due (wage garnishment, a huge credit hit, etc.) depends massively on how you handle the situation. It’s never a good idea to borrow more money just to fund a certain lifestyle. Especially if you’re already in debt. Understand how much you can comfortably borrow, instead of trying to borrow the maximum amount you’re approved for.
Some types of debt are good while others are bad. If you carry debt, understand how much you owe and the costs. Make a repayment plan that you can stick to. With practice, you can reduce your debt and grow your wealth.
If you need help becoming debt-free, sign up for credit counselling with our debt professionals. Contact our team to receive a complimentary consultation.
