A Kamloops, BC Debt Relief Story
December 10, 2015
THE SITUATION
Cliff and Rita knew they were in financial trouble, and it scared them. Cliff had started a small contracting business several years ago and in the first year of operation, it seemed like he was having to buy a new piece of equipment every few months. He had underestimated the start-up costs to launch his new venture, and as a result it was a constant struggle to stay afloat. Rita had a steady job, but it wasn’t high paying. For a year or so they continued to use credit cards while the business struggled to grow and get off the ground successfully. During this period of time, Rita had some health expenses that weren’t covered by her workplace plan To make matters worse, her work had become somewhat sporadic and her hours dwindled and she was eventually laid off for several months. Altogether, Cliff and Rita had accumulated approximately $50,000 in debt, mostly credit card debt. There was also tax debt that had accumulated as Cliff had fallen behind on his GST remittances to the government for the business.
Before Cliff and Rita contacted 4 Pillars, they had exhausted all of the options they could think of to deal with their debt troubles. Of course, along the way, they had burned through their savings trying to keep up with their various payments – so that money was gone. The first line of defense was to contact their bank to see if the bank would give them a consolidation loan. Even though Rita and Cliff had been loyal bank customers for 15 years, they were turned down almost immediately. The bank wasn’t thrilled by the financial statements of the fledgling company and Rita’s relatively low income didn’t inspire much confidence either.
The next option was to see if they could refinance their house. On paper at least, there appeared to be some equity there. Their mortgage broker quickly dashed their hopes on this front. While there appeared to be some difference between what was owed on the house and its value, the broker explained that refinancing rules had tightened up, and even in a best case scenario, any possible refinancing would only pay off a small portion of the total $50,000 owing. This disappointing news left Cliff and Rita with no other option than to see if they could somehow restructure their debt. They thought bankruptcy might be their only option, even though they desperately wanted to avoid this path. They had friends who had filed for bankruptcy and it had not been a happy experience.
THEIR OPTIONS
When I met with Cliff and Rita I asked them what they thought they could afford to pay on their debt each month. They realized that their current debt payments were in the neighbourhood of $1,400 to $1,500 each month. They admitted that they had been ‘coping’ for months by borrowing from one credit facility to pay another. They were frustrated and emotionally exhausted from the stress and worry that came with this approach to debt management. They realized that what they had been paying was completely unmanageable and they needed another option for dealing with their debt. After reflection, Rita and Cliff thought they could likely ‘get by’ if the monthly payment to their creditors was between $600 and $700. I was skeptical that this amount would work for them, especially since the income stream from Cliff’s business was still inconsistent and varied from one month to the next and Rita’s income was still very limited.
When I sat down with Cliff and Rita to review their options for debt relief, we talked about bankruptcy as an alternative, but they decided against it for a couple really good reasons:
Their house did have some equity in it, and if they filed for bankruptcy, they would either have to pay whatever equity existed in the house to the bankruptcy trustee or the trustee would register on title and possibly try to sell the property. Like most couples, Rita and Cliff definitely did not want to put their home in jeopardy.
- Cliff and Rita also did not want to have to report their income to the trustee’s office for a minimum of nine months, which could easily turn into 21 months if the income from Cliff’s business started to grow and he began to earn more than expected. Cliff had high hopes that his contracting company would become more successful as the months went by and he certainly did not want to be penalized for securing more contracts and bringing more revenue in the door, only to have to share it with the trustee and the creditors!!
I explored with Cliff and Rita the idea of filing a consumer proposal with their creditors. The proposal would give them the same legal protection from their debt as a bankruptcy, but yet, it operated in a completely different way than a bankruptcy. I explained that a proposal was just a deal with their creditors to pay something more than what the creditors would receive if Cliff and Rita went bankrupt; however, the amount paid would be significantly less than 100% of what is owed.
The proposal had a number of very significant benefits that Cliff and Rita found very attractive:
Their monthly cashflow would be dramatically improved. In fact, our initial calculations suggested that Cliff and Rita’s monthly payments to the proposal could be as little as $260 if the creditors accepted the deal. Remember, when trying to manage their monthly obligations on their own, Cliff and Rita were trying to make payments in the range of $1,400 to $1,500 per month. Imagine how much less stressful a payment of around $260 would be to their household budget!
- A huge benefit of filing a proposal rather than going bankrupt was that if Cliff’s business improved and started earning more revenue as he hoped it would, the additional income would all be in his pocket and would not have to be shared with the trustee and the creditors. There is no monthly reporting of income associated with a proposal filing.
- Another significant benefit of filing a proposal was that Rita and Cliff were free to begin to rebuild their credit, whereas in a bankruptcy, no credit rebuilding could occur until after the bankruptcy was discharged, and even then, some financial institutions might be reluctant to extend credit to the individual for at least two years.
THE SOLUTION
After the months of struggle and stress and realizing they were pretty much out of alternatives for dealing with their debt, Rita and Cliff chose to file a consumer proposal. As 4 Pillars clients, we worked with them to ensure they had all the required documents and information gathered so there was complete and transparent disclosure about their financial situation to their creditors. Once all the work was done and the file prepared, Cliff and Rita’s offer to their creditors was presented to a bankruptcy trustee, who is the legal representative for the creditors and an officer of the court. After reviewing Cliff and Rita’s information and ensuring that their financial affairs were accurately stated, the trustee carried the offer forward to the creditor group for their consideration and voting. At the end of the 45-day voting period, the deal was accepted. Cliff and Rita began making their monthly payments as agreed. There was a huge improvement in their monthly cashflow as their new proposal payment was much more affordable and fit well within their budget. And, perhaps best of all, the stress and worry of how to make ends meet and keep their head above water each month was gone.
AND WHERE ARE THEY NOW……..
I recently checked in with Cliff and Rita and I was happy to hear that their financial situation and general outlook on life has brightened considerably. Cliff’s business has improved significantly, as he hoped it would. He has a number of long-term contracts in place that will ensure a much steadier income stream and an improved cashflow for his business – a big step forward from the early stages of his operation. Rita changed employers in the first year after filing the proposal and is now making more money than she did in her previous role. In fact, Cliff and Rita have been able to make extra payments to their proposal, and expect that by spring 2016, it will be fully paid. Plus, they have taken a number of steps to rebuild their credit.
They signed on for an exclusive 4 Pillars credit rebuilding program very soon after filing their proposal – a proposal protection program that insures proposals against the most common reasons of failure, including loss of income due to disability and job loss.
- A year ago, Cliff’s work truck broke down and it was going to cost more to fix it than what the vehicle was worth. We introduced him to a vehicle leasing program that works to provide consumers in proposal and bankruptcy with access to the vehicles they need to continue to function and live. Cliff is now driving a three year old truck that is affordable, without the over-the-top interest rate. The vehicle lease is also rebuilding his credit.
- We will be working with Cliff and Rita to ensure that once their proposal is paid off, that their credit reports are properly updated. The completed proposal will likely result in a 75 to 80 point bump in their credit score, which will make them much more attractive to the credit-granting community. Future access to credit will be easier and more affordable through lower interest rates and greater choice.
Cliff and Rita are delighted with improvement in their financial situation. The worry and overwhelm they had when we first met have been replaced by feelings of confidence, resilience and optimism. They are looking forward to the next chapter in their lives – becoming mortgage free and building savings for their retirement.
Congratulations Rita and Cliff!! Our best wishes to you in the next stage of your financial journey!!
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.
