Question: Recently my husband and I applied for a second mortgage to pay off some credit card debt and outstanding bills and we were declined. Within the past year he lost his job and was on EI. With only my income (about $1,800 a month after tax) coming in our credit cards fell behind. He recently got a new job making about $3,500 a month but our credit cards debts are so high we can’t pay them. I was looking at a consumer proposal. We have five credit cards, one in each of our names and three joint. All are in arrears 3-4 months. Our total debts are about $75,000. We own our home (jointly) with about $20,000 in equity. Our 2 kids are in high school so we need to start thinking about how to pay for university or college. What should we do about our combined debts?
What Do Your Options Cost?
You should know that your situation is a lot more common than most people realize. It is quite possible for your income to decrease dramatically overnight, unfortunately your expenses don’t do the same. Just because you’ve lost your job you still have to make the same mortgage and car payment, and continue to pay for insurance, groceries and other living expenses like putting your children through school. We see this story played out every day in our practice – good people falling on hard times.
The correct solution will depend on your monthly budget – how much does it cost you to live? How much do you have available to service these debts?
You have already tried to consolidate your debts through a second mortgage on your home and been denied. It is possible that your lender felt your income was too low, or unsteady, to support an additional loan. Given that, it is unlikely you will be able to afford a debt management plan although that is certainly an option. In your case, a debt management plan to repay your $75,000 in credit card debt would cost at least $1,250 a month assuming your credit counsellor can negotiate your repayments over a 5 year period (most creditors prefer a maximum period of 4 years).
What A Consumer Proposal Would Cost
What about the consumer proposal you were originally thinking of? When you file a consumer proposal in Canada you need to offer your creditors the greater of:
- What they may receive if you were to file for bankruptcy; and
- 1/3 of what you owe – your case $25,000.
The cost of bankruptcy in Canada is based on your assets (like your house equity) and your income. Based on the information you have provided, bankruptcy would cost you $37,000 ($20,000 for your house equity and another $17,000 based on your income). Your bankruptcy would last for 21 months and your payments would be an estimated $1,762 a month. It seems unlikely that bankruptcy will make sense for you.
Since your creditors would receive $37,000 in a bankruptcy, you would need to offer them at least that amount. If you take the maximum allowable time of 60 months your payment will be $617 per month although you may have to offer them slightly more given you are extending you payments from 21 months to 60. Even at $650-$700 a month however, your monthly payments would be less than they are in a bankruptcy which would help you meet your every day needs.
Monthly Cash Flow Requirements
| Debt Relief Option | Monthly Cost |
| Debt Consolidation Loan | Denied |
| Debt Management Plan | $1,250 for 60 months |
| Bankruptcy | $1,762 for 21 months |
| Consumer Proposal | $650-$700 for 60 months |
As you can see, each option offers a different payment plan. Which you choose will depend on your personal circumstances and how much you can afford to pay each month.
There are consequences to each of the solutions I have set out above. To fully understand which option would be best, I recommend you contact a trustee in your area. Only a licensed trustee in bankruptcy can file a consumer proposal on your behalf – be careful to make sure the company you are dealing with are actually trustees and not some form of debt consultant that will charge you a fee and then refer you to a trustee.
The good new is – you have options. The trick is to choose the one that makes the most sense for you and your family.
Is it legal for a credit card company to take three separate amounts out of my debit account to put on credit card without notifying me of it in advance? I have since changed banks and am concerned that they might take money out of my chequing account at the new bank and my rent and other bills will bounce and I will be evicted. Can they do this at another bank too? I am a low income senior (1,375.) monthly and was advised I was debt protected for the credit card. I have tried to work a payment plan out with the credit card company of 50,00 a month with no interest. I have no coverage for medical needs and now have to save up for them. I am also concerned with the economy and food prices if I will be able to keep up with the payments. They put my minimum over 300 a month and raised the interest to 21%. This is just making it more impossible. I will try for as long as I can at 50.00 a month but if it comes to eating and having needed medical equipment replacements or paying credit card I will have to decide which is more important. I am waiting to hear back from them whether they will accept my offer. My major concern is ending up on the street if they can legally take money out of my new bank account. I will not survive on the street. Can they do this? I had a credit card for 27 years and this year has been the first time I had to go to minimum payments April because of unexpected expenses and no income tax return just set this thing in motion and it got out of control. I never paid only minimum until April this year.
They cannot legally take money out of your new account unless they get a Court Order authorizing them to do so. You need to watch your mail to make certain you don’t miss any letters from either Small Claims Court or a lawyer representing one of yoru creditors.
Your creditors were able to access your old bank account because in your credit card agreement is a clause allowing them the “right of set-off’. It means if you owe money on a credit card or a loan or a line of credit and you have money on deposit in a bank account they have the right to automaticaly take money from your bank account to make payments, even without telling you. The only way to stop them was to move to a new bank, which you have done.
You may want to consider contacting either a lawyer or a trustee. As a pensioner, your pension income is protected under the law. That means your creditors cannot take money directly from your pension. You need to speak with someone that will explain your rights under the law.
Hi i was just wondering if , can i pay one my debts that is already included in my bankruptcy what i mean is i have a about 5 diferent creditors that i owed money too one of them is my bank , anyways i would like to know if i can pay that , will it dessapear from my files once i pay it even though it was included.
If you are still in your bankruptcy then you cannot decide to pay one of your creditors – if you do, it might put your bankruptcy at risk of being cancelled. Once you have been discharged from bankruptcy (once your trustee tells you your bankruptcy has been completed) you may repay any/all of your creditors without getting into trouble. Call your trustee to discuss your concerns BEFORE you do anything that might cause problems…
I would like to know if during our 36 months of bankruptcy if our monthly surplus income payments fluctuate with the different amount of income earner each month? or can a trustee estimate amount owing based on one monthly income amount? also can a trustee fine you for being late on your reports of income/expense reports?
There is discretion in the Bankruptcy Act to handle surplus either way – you can submit statements every month and your trustee can calculate the actual surplus you owe each month, or you can submit statements for 6 months (or 21 if it is your second bankruptcy) and then your trustee can calculate your average income and set your surplus payments for the entire bankruptcy based on the calculation. We usually give people a choice – we tell them the average number and then they can decide to pay that every month or pay the actual every month. Fines? really? AS long as whatever you pay your trustee goes into their trust account for your creditors they can try and charge you whatever you will pay. If you don’t pay these fines I don’t know that your trustee has anyway to enforce them, except to take you to Court and ask the Court to Order you to pay them. The Court might make such an order, but I doubt it… Th