Question: My husband owes about $12,000 in outstanding income tax debts after having to close our business. We had to live on credit card debt for a while and we owe another $40,000 in credit card debt. I work now and my husband is looking for work. We own a home and believe we have about $25,000 in equity. What should we do? Is personal bankruptcy our only choice?
Eliminating Debt By Choosing Priorities
If you are willing to sell your home, the obvious answer is to find a place to rent, sell your home, and then use the proceeds of the sale to deal with your debt. If your husband is looking for work and cash is tight, selling the house will reduce your debt and perhaps lower your monthly living expenses.
If keeping your home is a priority, and if you can afford to make the mortgage payments and other costs, your goal will be to deal with the debt while keeping your home. You have the following options:
- You could attempt to borrow against the equity in your home. If you could get a second mortgage, or a secured line of credit, for $20,000, you could pay off CRA and pay down your credit cards. That may be wishful thinking, since if your husband isn’t working it will be more difficult to qualify for a debt consolidation loan. In addition, banks generally will only lend against a portion of your home equity, so a second mortgage will not be enough to deal with both your CRA and credit card debt.
- You could attempt to negotiate payment arrangements with Revenue Canada and the credit card companies. For example, you could offer to pay CRA $500 per month until the debt is paid. In general, CRA will only grant payment terms over a year, so it may take $1,000 per month or more for them to agree, which may not be possible on your current family income. And again, this does not deal with your credit card debt.
- A consumer proposal may be an option to negotiate an affordable repayment plan while keeping your home. In order to get Revenue Canada and the credit card companies to accept your proposal you must offer them more than they would expect to get in a bankruptcy. If they would expect to get $25,000 from your house in a bankruptcy, your proposal would need to be more than $25,000. For example, you could offer a proposal of $30,000 so they will consider the proposal. It may be a good deal for you as well, since you end up paying less than the full amount owing, with no further interest.
As you can see in this decision making process, your objectives with the house are an important consideration. Selling your house eliminates most of your debt. If you keep the house, you can file a consumer proposal, but you will have monthly payments to make during your proposal.
This is a complicated decision and every situation is unique. If you own a home but are struggling with debt, consult a licensed bankruptcy trustee for a no charge initial consultation to review your options in detail so that you can make an informed decision.