It might sound crazy but dealing with insolvency can create a wealth opportunity. To understand what I am talking about let’s first consider what the different aspects of this concept are including the insolvency itself and wealth creation.
What is insolvency?
The basic definition of insolvency is when an individual can no longer meet the financial obligations of their lender(s) as the debts become due. It’s basically the amount of money you have to pay to satisfy your monthly debts based on the amount of money you have available.
How much does the minimum payment pay off?
If you are only making the minimum payments every month to your creditors and you are not in a position to pay more you could still be insolvent. The problem is every month you are typically paying less than 3% of the principle and the other 97% of your payment is paying interest. You are spending a lot of money but paying very little to pay off your debts and certainly doing nothing towards creating wealth.
What is wealth?
Wealth, as defined by the Merriam-Webster dictionary is: “abundance of valuable material possessions or resources.” In other words, owning something of value (real estate, vehicle, stocks, bonds, etc.) which is fully unencumbered (no loans against it) and/or having cash in the bank or on hand. Everyone can have different priorities in how they like to hold their wealth and there are many strategies to acquire wealth but ultimately the end result is the same; you must have something of significant of value.
To create wealth consumers must be in a cash positive position where their income, less living expenses leaves money left in their bank accounts for investments.
If you have debts, how do you create wealth?
So, how do we go from being insolvent to wealthy? It’s not going to happen overnight but it most definitely can happen.
Step 1: Review your financial situation
- The first step may be the most difficult: take an honest look at your current financial situation.
- Are you carrying a large amount of unsecured debt every month?
- Are you only making the minimum payments and/or struggling to pay even that?
- Are you using your existing credit to make the payments?
- Do you have a cushion of cash in your bank account or are you living paycheque to paycheque?
If you answered yes to any of those questions insolvency may greatly improve your financial situation.
Step 2: Consider fast debt free solutions
In Canada there are two fairly common options for dealing with insolvency:
1) Bankruptcy
2) Consumer Proposal
To determine which one may be right for you consider obtaining independent professional advice. Both processes will typically greatly reduce your principle amount owing to your creditors and also stop any further interest from accruing.
Imagine, being able to repay only the principle. Now imagine only having to pay back a portion of that principle!
An example of a debt free plan:
So let’s now look at the numbers: Let’s say you owe $40,000 of unsecured debt, which coincidentally is about the Canadian average. It would usually take at least $1000/mth to service that debt and more than $900 of it would be paying interest only. If you file a consumer proposal the creditors could settle for $12,000. So you would have 60 months to pay the $12,000 at zero interest (the remainder of the debt is forgiven) which would be $200/mth. Compared to the $1000 you were paying out it now frees up $800/mth. So your $200/mth is paying principle only and now you have $800/mth to use to create wealth. To expand the math over the 60 months you will have paid off the $40,000 of debt through the settled amount in the proposal of $12,000.
Step 3: Invest to create wealth
What do you do with all that extra cash flow? You could invest the $800/month in many ways; RRSP’s, RESP’s, Tax Free Savings Account, accelerated mortgage payments and more which should multiply that money even further.
Saving the $800 month for 60 months creates $48,000 in savings (wealth) and no debt!!
How does this change your situation?
When debt restructuring is combined with wealth creation it creates a very powerful opportunity to go from wasting $900 per month on interest to investing $800 per month into wealth and a new future. The numbers may sound crazy but it is simple math and many of my clients have employed this strategy to get themselves in a position of wealth.
Keep in mind that I have you used numbers that are quite typical of what I see on a day to day basis.
What about your situation?
Situations can and will vary so if you are struggling with debt I encourage you to give me a call so I can assess your situation and let you know what can be done. Your situation may be significantly less or more than the example I provided but my point is – is that there is likely an effective solution available to you to help you turn your insolvency into a wealth creation opportunity.
To learn more visit Trevor Glasser at his Oshawa office
This article is by Trevor Glasser, a debt consolidation expert in Oshawa, Ontario. Trevor Glasser has over 7 years of experience helping Oshawa families and businesses get out of debt.
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