How Bankruptcy can help put a person on a path to homeownership.

Buying a home is tricky; you generally need a good credit score, steady income, a down payment and you need to meet certain debt service ratios.  If you are carrying a lot of debt or have bad credit or low score, you might not qualify for a mortgage.  To qualify for a mortgage, lenders will ask about other debt obligations and their existence will reduce the maximum amount of mortgage you could qualify for.  If your household income is not enough to get ahead and pay down debt in a reasonable time frame, or you suffered a rough patch leading to bad credit or a low score, you might be wondering if you have any options.

Although it may sound ironic, in some situations, Bankruptcy can actually help a person get on the path to homeownership.  To illustrate, lets consider a single person currently earning $40,000 per year gross, but carrying a mix of credit card debt totalling $25,000.00.  Minimum payments for this credit card debt total $500 per month and simply maintaining minimum payments considering an average interest rate of 19% would take in excess of 30 years to pay off.  Although $40,000 per year gross income equates to $3,333 per month, after mandatory deductions, this same person would only net approximately $2,644 per month.  This figure of $2,644 per month would equate to approximately $1,220 net, if the person were paid bi-weekly and that is assuming only mandatory deductions for income tax, Canada Pension Plan and Employment Insurance.  If this person was subject to additional deductions for benefits, insurance, group savings or other, their monthly net would be less than the figures noted above.

Continuing with this example, after covering minimum-only payments of $500 per month for the credit cards, this person would have $2,144 remaining to cover all other monthly expenses.  A single person does not have the benefit of splitting living expenses compared to a couple.  Let’s assume the following is a breakdown of other monthly expenses:

Rent $1,000
Power/Heat $150
Food $300
Entertainment/Lunches/Dining out $50
Internet/Cable/Cell $175
Streaming services $40
Clothing $50
Personal Grooming $30
Bank fees $17
Renters Insurance $30
Car Insurance $100
Gas/Maintenance $200   
TOTAL: $2,142

Looking at the breakdown above and starting with $2,144 after minimum credit card payments, this person would have $2 remaining and while I don’t think there is much that could be trimmed, is there anything missing?  Everyone should have a portion of the budget allocated for savings such as an emergency fund or retirement but in this scenario, it would be difficult to find money for those priorities.  Also, this scenario assumes the person has a vehicle that is paid for.  What happens when the vehicle needs to be replaced?  A basic vehicle payment plus all the other costs of owning a vehicle will not fit and allow for minimum credit card payments to be maintained. It would be highly doubtful a single person at this level of income could significantly increase debt payments above the minimum amount required and if anything, highly questionable whether the minimum level of $500 per month could be maintained month after month.  An unexpected expense, rent increase or health issues leading to unpaid time or reduced income could lead to missed payments affecting credit score and could lead to higher interest rates being charged due to missed payments.  If this person does not expect any significant wage increase beyond the rate of inflation, are there any other options?

Assuming this person has no significant assets they could liquidate to pay down debt, they could consider debt consolidation however the interest rate charged will determine whether this is a viable option.  A $25,000 consolidation loan over 5 years at 10% interest would equate to monthly payments of $531, which stretches the upper limit of their budget but might be worth consideration.  However, the same 5-year consolidation loan at 12% would equate to payments of $556 per month, while 14% would equate to $582 per month and 16% interest would equate to monthly payments of $608.  Unless this person was offered a very competitive rate on a consolidation loan, the option to consolidate, may not be viable long-term.  Qualifying for a consolidation loan at a competitive rate of interest can be tricky without collateral to offer and if debt is spread across multiple institutions, lenders are not always eager to take on debt of other lenders besides their own. 

If this person was unable to consolidate their debt at reasonable terms and does not receive a significant wage increase or an unexpected windfall, is a repayment term of 30 years or more realistic or viable?  

The financial situation described above is a prime example of when bankruptcy would dramatically turn this financial situation around.  After filing bankruptcy, all credit card payments would stop.  That immediate boost of monthly cash-flow would all this person to rework their budget and allocate funds for all of the things they should be doing with their money but could never afford to.  These might include saving for emergencies, retirement, a down-payment for a house as well as other financial goals.  During the bankruptcy, we would focus on budgeting and cash-flow management strategy, setting financial goals as well as credit reports, credit scores and best practices to help ensure long-term financial stability and security.  A first-time bankruptcy is generally 9 or 21 months in duration depending on household income and family size.  In this particular example, a single person with no dependents and a gross income of $40,000 or less (before deductions) would likely qualify for the shorter duration.  In as little as 9 months, this person could be out of bankruptcy, debt free and on their way towards working on their financial goals.  In most cases, a first-time bankrupt can qualify for a mortgage in as little as two years after being discharged from bankruptcy provided, they have the necessary down payment, steady income and took steps to rebuild their credit score.  A potential path to homeownership in just under three years compared to thirty years or more is certainly worth consideration.

If you are faced with an unmanageable level of debt or feel you might never be free of debt, there are options worth exploring.

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.