How a Consumer Proposal turned one couple’s finances completely around.
Are you making minimum payments on debt but cannot seem to substantially reduce the balance owed? With the rising cost of living, many need to use a greater share of their income just to cover basic living expenses leaving very little for extra payments to reduce higher interest debt on credit cards, loans or lines of credit. If you have not been able to consolidate higher interest debt into a new loan with favourable terms and payments you can actually afford, you might want to consider a Consumer Proposal.
To illustrate how a Consumer Proposal can help, consider the following situation. A couple with two teenage children has a home worth $300,000 but still owe $270,000 on their existing mortgage. The gross household annual income (before taxes and deductions) is $100,000, which works out to approximately $5,500 net, per month after mandatory deductions. Using current federal guidelines, a family of four requires $4,725 net per month to cover basic necessities of life. Besides the mortgage, the couple has approximately $100,000 in unsecured debt between lines of credit, credit cards, a personal loan and lingering student loans. They each have vehicles which are financed and worth approximately what is owed against them. Due to competing financial priorities, they have virtually no savings and nothing set aside for retirement. With a pro-longed period of higher inflation and interest rates, they struggle to make ends meet and after making minimum payments for all debts, there is just nothing left to help them get ahead.
Their household financial net worth can be calculated as follows:
Assets:
Household Furniture/Appliances/etc. $10,000
Vehicles $30,000
House $300,000
Total Assets: $340,000
Less Liabilities:
Lines of credit $40,000
Credit cards $30,000
Personal Loan $10,000
Student Loans $20,000
Vehicle Loans $30,000
Mortgage $270,000
Total Liabilities: $400,000
Net worth = Total Assets - Total Liabilities
Net worth = ($60,000)
If this couple decided to sell everything they owned, they would still come up short by $60,000, own nothing and likely not be happy. There is not enough equity in the home to consolidate their other debt besides the existing mortgage and vehicle loans. Minimum payments on the lines of credit, credit cards, personal loan and student loans total to $1200 per month and at that rate, most of the payment is going towards interest accrued rather than paying down the principal balance owed. Even if their bank agreed to consolidate the lines of credit, credit cards, personal loan and student loans, they would end up with a $100,000 consolidation loan. If the interest rate was 8% over 5 years, they would pay $2028 per month for a grand total of $121,680 over 5 years. If they stretched the loan over 7 years, at 8% interest, they would pay $1559 per month for a grand total of $130,956 over 7 years. If this couple is struggling to maintain present minimum payments of $1200 per month, a consolidation loan, even with favourable terms will not provide any relief.
Realizing status quo is not an option and with no prospect of windfalls or higher income, this couple decided to file a Consumer Proposal. Under the terms of the proposal, the couple would continue mortgage and vehicle payments ensuring they could keep their home and their vehicles. For the lines of credit, credit cards, personal loan and student loans totalling $100,000, minimum payments on these debts would cease upon filing the proposal and an offer of $500 per month over 60 months, for a total of $30,000, was made to settle with those specific creditors. The $500 per month payment would cover proposal fees to the administrator and the balance of the payment would be divided among creditors on a pro-rata basis. Each creditor receives one vote per dollar owed and to end up with a legally binding agreement on all creditors, the proposal is deemed to be accepted as long as a simple majority vote to accept it. Once accepted, the couple would commence payments and the total offer of $30,000 would not be subject to interest. Also, they have the right to pay it off sooner, without penalty.
New Projected financial net worth upon proposal completion; assuming no earlier pay-out:
Household furniture/appliances/etc. $10,000
Vehicles (paid off, but now worth less) $10,000
House (assume conservative 2% appreciation per year) $331,224
Total Assets: $351,224
Less: Mortgage (5 years later) ($230,000)
New Net worth: $121,224
After proposal completion, this couple would go from a financial negative net worth of ($60,000) to a positive net worth of $121,224 – a difference of $181,224; for the sum of $30,000 over 5 years! Besides the significant change in net worth, this couple went from paying $1200 per month and not getting ahead down to $500 per month. This boost in monthly cash-flow will reduce future reliance on credit, fits their budget better and provides them the freedom to work on other important financial goals such as emergency funds and retirement savings. If the couple were able to start contributing to an RRSP or TFSA at the rate of $50 each on a biweekly basis from the start of the proposal, with an average return of 7%, they could add approximately another $19,500 to their new net worth by the time of proposal completion.
Every financial situation is different and there are many variables to consider but if you are looking for debt relief, a Consumer Proposal might be a viable 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.