How Working in the Best Interests of the Debtor Produced a Debt Consolidation for the Ages
In January 2014 I met with a gentleman who I immediately realized was extremely cheerful by nature. I don’t want to use his real name, so let’s call him Jerry. It’s a good thing Jerry was naturally cheerful as he was staring at a debt load of $109,700. Eight credit cards, two lines of credit, and a bank overdraft. Some of the debt belonged to him, some to his wife, but most of the debt was jointly held between him and his wife. To make matters worse, Jerry had just been laid off a month earlier. While his wife was still working, Jerry was on EI and looking for new work.
With the limited income, Jerry and his wife could just barely pay their household expenses. Add the cost of debt though (over $2000/month), Jerry and his wife were sinking fast.
Seeking Options – Can I Use My House?
Jerry found his way to me through a convoluted, but not at all unusual path. When Jerry’s debt started to spiral out of control (only a year earlier his debt was less than $60,000) he looked to his home as a possible means of escape.
Utilizing one’s home is a common solution for debt. If a home possesses sufficient equity, an indebted individual may obtain a secured line of credit, 2nd mortgage, or attempt some other form of refinancing in order to acquire money to pay off debt. In Jerry’s case though, he was told he did not qualify for any refinancing options. His income was a challenge given the layoff, and while his home did possess equity, the amount of equity available – even through private lenders – was insufficient to cover his debt.
That was the end of that conversation.
Seeking Options – Trustee in Bankruptcy
Jerry reluctantly went to visit a Trustee in bankruptcy. Sadly, he had been down this road before. Jerry had filed for bankruptcy in 2001. The thought of a second bankruptcy disturbed him immensely, and the idea of his wife having to declare bankruptcy made him feel even worse.
Jerry’s meeting with the trustee left him with two options. First, Jerry could file for bankruptcy. While this would eliminate his debts, it also meant
- Jerry’s home would be up for grabs. He would either have to pay whatever equity existed in the home to the trustee, or the trustee would register on title and possibly try to sell the home
- The small amount Jerry had invested in his daughter’s RESP would be up for grabs as well
- Being his second bankruptcy, Jerry would be in Bankruptcy for 24 months , at least
- If during the 24 months of Bankruptcy Jerry found new work and increased his income, his bankruptcy term would be bumped to 36 months
- Upon exiting Bankruptcy, Jerry would have his bankruptcy listed on his credit report for 15 years!
Bankruptcy was out of the question. Jerry simply couldn’t afford to lose or settle on his home with the trustee. Moreover, if his wife declared Bankruptcy, the home and RESP were still in jeopardy. At this point the trustee discussed the idea of a Consumer Proposal with Jerry.
At first, the Consumer Proposal sounded like a fantastic alternative to Bankruptcy. Jerry understood that a Consumer Proposal would
- Protect the equity of his home. There was no fear of having it sold out from under him
- Protect his Daughter’s RESP
- Give Jerry up to 5 years to pay an amount agreed to by his creditors
- Stay on his credit report for up to 8 years, possibly less if he paid out the proposal sooner
- Allow him to rebuild his credit right away
A drowning man will reach for whatever is thrown to him. Jerry was no different. He jumped at the chance to do a proposal, but almost immediately fell back when he was struck by reality.
The trustee informed Jerry that a ‘reasonable’ proposal to his creditors would need to be at least 35 cents on the dollar. This meant an offer of $38,395. When spread over 5 years this worked out to a monthly payment of about $640. This was far better than Jerry’s current situation, but he could see that a monthly payment of $640 just wasn’t feasible.
The trustee told Jerry that the monthly payment could be lowered if Jerry was willing to offer a balloon payment at the end of the proposal. Perhaps Jerry could offer $400/month with a balloon payment of $14,400?
Jerry winced. He knew there was a good chance his home would increase in value over the coming years, but who could predict the future? How long would it take him to find a new job? Would his credit be good enough to obtain refinancing later on? Would another tragedy hit the family? Furthermore, a monthly payment of $400 was still scary as money was already extremely tight.
Jerry asked if the offer to creditors could be lowered, but the trustee was skeptical that such an offer would be accepted. Moreover, the trustee informed Jerry that his home equity and RESP had to be factored into the offer, and this alone meant the offer to creditors had to be above $30,000. Finally, the trustee informed Jerry that given his recent unemployment and reliance on EI, he would be wise to obtain a new job before attempting a proposal.
The trustee wasn’t being mean or callous towards Jerry. He was simply doing his job by presenting Jerry with the facts as he saw them.
The situation became awkward when Jerry persisted and started to suggest ways he may be able to lower the amount he had to pay. Jerry mentioned to the trustee that one of the creditors he owed about $45,000 to was the same bank who held his mortgage. Perhaps if he offered this creditor the chance to write a mortgage on that debt he could lower his overall debt and then make an offer to the rest of the creditors by…
Before Jerry could finish, the trustee stopped him. The trustee informed Jerry that he was an officer of the court and represented his creditors. He could not get into discussions about settling debts informally with creditors, or favoring a creditor, or anything else of this nature. The trustee wanted to help, but given the nature of his role, he could not advise Jerry further on his situation.
Defeated, Jerry thanked the trustee for his time, left the office, and drove home. The entire drive home Jerry was convinced he had no choice but to go bankrupt.
Try the House One More Time
Jerry started thinking that if he couldn’t use his home to pay off ALL of his debt he could maybe use it to pay off SOME of his debt. What he would do after such an arrangement was made was anyone’s guess, but at this point Jerry was desperate. He happened to contact a mortgage broker I know professionally and provided the broker with his scenario. Almost instantly, the broker realized he was dealing with a man who was in a complex and tenuous situation.
The mortgage broker informed Jerry that any arrangement he made with his home would not solve his debt problem. The numbers simply didn’t add up, no matter how creative the arrangement. The broker then suggested to Jerry that he contact me to set up a free consultation. The mortgage broker told Jerry that I specialized in restructuring and looked after the needs of the Debtor, not the creditor. Jerry was reluctant, as he felt he had been down this road with the trustee. However, figuring he had nothing to lose, he called me.
Getting Past the Roadblocks
In our meeting, I ran headfirst into the roadblocks the mortgage broker and trustee had previously uncovered. Here we had a man who needed to take action. But what to do?
- If Jerry did nothing his debt would continue to grow and consume all of his income
- If he stopped paying his debt the creditors would send him to collections, eventually sue him, obtain a judgment, and then place a lien on his home. Potentially, they could even force a foreclosure
- If Jerry sold his home he’d only be able to pay a portion of his debt, would have no liquid cash available, and would have to find another place to live
- If Jerry went bankrupt he’d lose his home and RESP and his record would be in horrible shape for 15 years
- If Jerry obtained a new job he’d still be in debt and face the same options above
- If Jerry utilized the equity in his home he’d still come up short and would now have a portion of his unsecured debt become secured against his home
- If he filed a proposal he would surely fail to keep up with the monthly payments
I completed a budget with Jerry. While the budget helped him uncover a few areas where he could save money, it also confirmed he was in no position to make monthly payments. Even though I informed Jerry I could arrange a proposal with a trustee for far less than 35 cents on the dollar (average proposal we structure for debtors is between 17 and 22 cents on the dollar), a monthly payment would be a great burden on Jerry, especially while he was on EI.
I was determined to find an answer and a final review of Jerry’s assets provided the answer we needed.
Lump It!
Jerry was fortunate enough to possess a LIRA, otherwise known as a Locked in Retirement Account. Imagine an RRSP that you technically can’t access until you retire. While LIRAs are particularly difficult to break, they can be broken, usually if the holder of the LIRA can prove financial hardship.
Ordinarily, I’m loathed to touch someone’s retirement account, but tough times demand extraordinary action.
I informed Jerry that he may want to dip into the LIRA in order to obtain enough money to provide his creditors with what is known as a Lump Sum Proposal. Instead of making monthly payments to his creditors over 5 years, Jerry would offer them a one-time payment utilizing the funds from his LIRA.
Providing a Lump Sum Proposal utilizing the LIRA provided Jerry with all kinds of advantages…
- Creditors are very partial to lump sum offers as it allows them to realize an instant return on what’s owed to them. There is no need to wait several years
- A lump sum guarantees a creditor with a return. In Canada, about 35% of all consumer proposals fail (Proposals prepared by 4 Pillars fail only 3% of the time). If a creditor knows there’s a 100% chance of realizing a return, they will often accept a lower amount in exchange for not having to deal with the risk of failure
- By utilizing funds from the LIRA Jerry would be taking money out of his retirement savings. However, he’d be eliminating the need to rely on monthly payments to satisfy his creditors. He would effectively eliminate his debt in one fell swoop
- A lump sum would allow Jerry to effectively complete his proposal instantly, thus allowing him to rebuild credit and put distance between himself and the proposal faster
- Jerry could file a “Joint” proposal, and include his wife in the proceeding, thus allowing her to avoid bankruptcy and reap the benefit of the lump sum. NOTE: a Joint proposal would also be possible in the case of a regular proposal with monthly payments. In this case though, the lump sum option was preferable.
Jerry was very excited, but soon looked defeated again. His LIRA only held $23,000, and the trustee had informed him that a proposal had to be over $38,000. I informed Jerry that since I worked for him, I would work to find ways to make a lower offer feasible. I further informed him that the average proposal I structure and present to a trustee for filing the offer is usually around 17 to 22 cents on the dollar to creditors, and my clients have never lost a proposal.
Jerry paused, took a sip from the coffee I handed him when we first met, and then stared at me for what seemed like a minute. He then said “Let’s do it…it seems to be my only shot.”
We started to work on his file.
The Offer
After reviewing Jerry’s assets, his home, income, creditors, etc. I prepared an offer for a Consumer Proposal to be filed by a Licensed Trustee in Bankruptcy. The offer…
Lump sum payment of $13,500 payable within 30 days of the proposal being approved by creditors and the courts
A little quick math will show you that this offer works out to 12.3 cents on the dollar! Who would take such an offer?
I told Jerry that the offer we were making was very aggressive. However, given Jerry’s circumstances and the fact that we were offering a lump sum I still felt the offer was reasonable. The creditors did have the right to counter offer or reject, but I believed they would accept.
The Result
After the standard 45 days of voting, the majority of creditors ACCEPTED Jerry’s proposal!
By taking the time to explore Jerry’s situation in detail and do whatever I could to represent his interests we were able to…
- Reduce his and his wife’s debt form $109,700 to $13,500. A reduction of 87.3%!
- Protect the family home from creditors
- Protect his daughter’s RESP from creditors
- Avoid monthly payments and the danger of failing the proposal in the long run
- Help him rebuild credit and put distance between himself and the proposal
- Provide him with the flexibility to seek new work and not have to worry about having to report his income or worry about earning too much/too little
- Allow Jerry to potentially sell his home at a later date under his terms
Jerry’s story is truly one of my favorites because it shows how by working for the debtor 4 Pillars offices are able to not only save our clients considerable amounts of money, but in many cases we’re able to save their ‘lives’…their property, way of life, and comfort.
Not all proposals will work out like Jerry’s. Every situation is unique. What I know for sure is that 4 Pillars will always work to find an arrangement that provides our clients with the greatest chance of success, short and long term.
About the Author:
Zach Brull operates the 4 Pillars Markham, On and North York, On Debt Restructuring office. To contact him directly visit his website or call him directly at : 289-466-1029
