How a Bankruptcy provided a much-needed fresh start.

The substantial increase in basic costs of living over the past few years has led most people to use a greater share of their income just to cover basic living expenses.  For many people, increased costs of living lead to choices which may not have been contemplated only a short time ago, such as what do I give up or go without just to cover minimum payments on debt.  

To illustrate how a Bankruptcy can help, consider the following situation.  A single person with no dependents at home earns $40,000 gross, per year, before mandatory deductions.  After mandatory deductions, this person has approximately $2,600 net, per month, to work with.  According to current federal guidelines, a single person needs $2,543 net, per month to cover the basic necessities of life.  This person has approximately $30,000 in unsecured debt consisting of a line of credit, a credit card and a higher interest finance company loan.  Previously, this person had a higher paying job until an unexpected lay-off led to their current lower paying position.  In addition to the loss of a higher paying job, being a single person means they had to absorb 100% of increased rent, grocery and other expenses over the last few years.  Being single means there is no one else in the household to help share living expenses.  Higher interest rates have also led to higher minimum payments to service debt with variable interest rates such as the line of credit.  In order to simply service their existing debt, minimum payments amount to $450 per month.  After covering these minimum payments, this person is left with $2,150 to cover living expenses; substantially less than recommended according to current federal guidelines.

This person rents and has no assets of value besides an older vehicle which is paid for.  Their job consists of irregular hours and is located in an area which is not well served by public transit, so the car is a necessity.  This person has no savings, nothing set aside for retirement, and has opted not to participate in their employer’s matching savings program because they cannot afford even the slightest reduction to current net pay.  This person is currently paying $1,000 per month for rent; $200 for equalized hydro; $200 for internet, cable & cell; $100 for vehicle & renters’ insurance; and $350 for gas, car maintenance & repair.  After deducting these basic living expenses, this person has $300 remaining per month to cover groceries, grooming/toiletries, clothing/footwear, and bank fees.  Unfortunately, there is no room for simple luxuries such as entertainment/recreation, or a vacation and no resources to deal with a major unexpected car repair or health issue requiring unpaid time away from work.  Although this person might be able to manage for now, there are a number of variables that could easily lead to falling behind and suffering the consequences of missed payments on debt obligations.

Realistically, are there any options to break the cycle of living pay cheque to pay cheque and hoping something catastrophic does not happen to cause this person to fall further behind?  Assuming this person could qualify for a $30,000 consolidation loan to cover all existing debt, they would be looking at a monthly payment of $667.00 per month with an interest rate of 12% over 5 years.  If they are barely managing current minimum payments of $450 per month, there is no ability to pay an extra $217 per month over the next 5 years.  A second job might be an option for some people but is it sustainable long-term without conflicting with or jeopardizing the primary job?  

Looking to break the cycle of pay cheque to pay cheque with no light at the end of tunnel, this person decided to file bankruptcy.  Filing bankruptcy would stop all debt payments, end collection or legal action, if applicable, and eventually eliminate all of their unsecured debt in as little as 9 months.  During the 9-month period of bankruptcy, they would be required to complete two counselling sessions focusing on budgeting, managing cash-flow, setting financial goals, building and maintaining a good credit score and responsible use of future credit.  They would also be required to supply proof of income during the period of bankruptcy and as long as their income trended at or below federal guidelines, they would qualify for discharge from bankruptcy in as little as 9 months.  A discharge from bankruptcy is what actually eliminates the unsecured debt once and for all.

Although this person might endure a period of living on cash only during the bankruptcy with no credit, being free of making minimum payments on the original debt allows this person to set financial goals once out of reach, such as building emergency savings and working on retirement savings.  After the bankruptcy is complete, they will be able to obtain credit again, but by taking the time to build emergency savings, they will not need to rely on credit like they did in the past simply because they will have resources to deal with the unexpected instead of resorting to credit.

 
Every financial situation is different and there are many variables to consider but if you are stuck in a pay cheque to pay cheque cycle, bankruptcy might be an option worth consideration.

If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options.  Every financial situation is unique and viable options can differ from person to person.  A conversation free of judgment and cost, is the first step to determine options for debt that make sense for you.  For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.