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
|Debt Consolidation Loan
|Debt Management Plan
|$1,250 for 60 months
|$1,762 for 21 months
|$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.