Steve and Paula thought they were doing OK financially. Steve had steady and reasonably decent income, and Paula had a lower paying job, but between the two of them, they had enough to make ends meet and begin to get ahead. They bought a modest house, in keeping with their income.
Then the problems started. Paula had some health issues and missed some work. They had their second baby, and Paula did not go back to work so she could be with her children for a period of time. Since they didn’t have much stashed away in savings, they began to rely on credit. Their bank had given them a sizeable line of credit, and the interest only payments never seemed to be so high that they couldn’t manage. Slowly but steadily, the level of debt began to rise. After a couple of years, they realized they had over $50,000 of credit card and line of credit debt. Worse yet, while they were paying about $800 a month on the debt, they were just treading water. They finally realized it was time to get some help. They looked on-line, saw the 4 Pillars website, and decided to call us.
After taking down all of their information, we met for a free, no obligation consultation. I reviewed all of their options with them. Bankruptcy was an option, but they would have had to pay $600 per month for 21 months. During that period of time, the more money they earned, the more money they would have to pay into the bankruptcy estate. They would have to report their income and expenses every month to a bankruptcy trustee: income tax refunds, GST refunds, work bonuses, overtime, pay raises, inheritances and even lottery winnings would all be ‘swept’ by the trustee, and they would lose all or a share of this income.
Their age was a factor too: they realized that if they went bankrupt now, it would result in a permanent record with the federal government. If they ever went bankrupt again, their bankruptcy would last much longer and be much more expensive. Worse yet, the credit rating impact of a second bankruptcy would be really painful: a 14 year hit on their credit bureau after the discharge of the bankruptcy. Clearly if they didn’t have to go bankrupt this time, it would be better. And they didn’t need to.
Their other option was to file a consumer proposal. For Steve and Paula, a proposal was a simple but effective alternative to a bankruptcy—it was simply a deal with their creditors where the they would be offered more than what Steve and Paula were worth if they filed a bankruptcy, but much less than paying off 100% of the debt. The proposal would give them the same legal forgiveness for their debt once it was paid off, but the proposal could be paid over five years at 0% interest with the right to prepay at any time during the five year period. Because of the length of time available to pay the proposal off, their payments were $230 per month. $50,000 of debt with interest, was going to be replaced by a new legally binding deal with their creditors to pay back $13,800 of debt at 0% interest. After paying the proposal off in full, the rest of the debt would be written off.
Steve and Paula decided to proceed with the proposal. After several weeks of working together to structure the proposal in the most beneficial manner, collecting their paperwork, carefully selecting the trustee we wanted to administer the proposal and looking at their budget to see what they could truly afford, their proposal was filed. Six weeks later, they received word that the creditors had agreed to accept the deal. It was official. They just needed to make these payments over the five year period, attend two counselling sessions, and their obligations to their creditors would be completed.
Fast forward one year: I met with Steve and Paula to help them look at their credit reports and provide them with a calendar of actions to repair their credit reports by removing old, irrelevant items on their credit bureau reports. Their financial outlook had completely changed. One year after filing their proposal, they had just gone through a Christmas where everything for Christmas had been paid for with cash. They had also been faced with replacing their winter tires and this purchase had been paid for with cash. On top of that, their fridge had broken down before Christmas and needed replacing—guess what, they had enough saved up to pay for that with cash too and they still have money left over in the bank!
They are rebuilding their credit now, slowly but surely. While they have credit cards now, they use them in a completely different way than they did before. When they receive their monthly bills, the credit cards are paid off in full. They don’t make any purchases on credit cards now without knowing that the funds are already in their bank account to cover the cost when the statement arrives.
Paula and Steve are focused now on their financial future—they are building long-term savings so they can upgrade their house sometime over the next five years. Their financial future is brighter now than they could have ever imagined just one short year ago!
About the Author
Bob Hauck operates the 4 Pillars Kamloops, BC Debt Restructuring office. To contact him directly visit his website or call him directly at 250-434-4505.