Another Kamloops Debt Story—March 2016
Diane was at her wits’ end. She and her teenage daughter had been managing on her very limited income, but it was getting tougher and tougher. She was quite frugal, but had relied on a couple of credit cards to keep the two of them going when her ex-husband fell behind on child support. For a period of time he had lost his employment so staying current on his support payments was impossible. Diane’s casual income from providing home care didn’t come with any benefits and if she didn’t work, she didn’t get paid. Then her daughter got sick for a while and needed care—Diane missed several shifts that month, and then missed making her minimum credit card payments. Ooops!!! MasterCard wasted no time at all changing her interest rate from a relatively low 11% to 19%. Now she was really in trouble! Her ‘managing’ was really just treading water by making minimum payments each month to the credit cards. It was really postponing the day of reckoning, not dealing with the debt. While the amount owing wasn’t that large—only about $19,000—it was too much for her. And, there was one more ‘last straw’ waiting for Diane. Realizing that she was struggling to make the new minimum payments, she went to the car dealership who had sold her a very modestly priced vehicle three years ago to see if they would change the financing arrangement so she could end up with lower payments. They weren’t able to accommodate her request but it was the Finance Manager at the dealership who said: “Diane, you should call 4 Pillars”.
Diane made that call. The first step was for her to provide us with an overview of her finances, and then we met a week later so I could let her know what options were available to her for dealing with her debt. Coming into the meeting, Diane had seriously thought that bankruptcy might be her only option. She had shared her situation with a couple of close friends, and bankruptcy was the only option any of them could suggest. As it turned out, it was the cheapest option to get out of debt, but it carried with it a number of negatives.
Diane’s income was such that she could likely have completed a bankruptcy in nine months, and paid $200 per month during that period. However, for those nine months, her income would be monitored by a bankruptcy trustee’s office. Diane would be providing paystubs and reporting her expenses every month. Any additional income she earned from working extra hours, pay increases, bonuses, GST refunds and income tax refunds would all be reported to the trustee. If her income increased sufficiently during the nine month period, then the bankruptcy could last for 21 months. If this additional income came into play, she would lose half of every dollar earned over approximately $2500 of take home pay. Not a very attractive option!
One of the biggest negatives of bankruptcy for Diane was the credit impact she would experience. The negative rating at the credit bureaus would last for six years after the discharge of the bankruptcy. In practical terms, even getting a small secured credit card from a mainstream bank would likely take two or three years after completing the bankruptcy reporting period. Finally, Diane learned that there is a permanent record of a bankruptcy that is held by the Federal Government. If she ever got into financial difficulty again later in life, the bankruptcy record would come back to haunt her. At that time, the reporting period would be significantly longer (twenty four or thirty six months) and the credit rating impact of a future bankruptcy would last for 14 years after completion of the two or three year income reporting period.
Bankruptcy was not for Diane. She didn’t feel that her debt amount was that large—bankruptcy felt like a drastic option. Plus, she didn’t feel right about not paying anything back to her creditors. We talked about a consumer proposal as an alternative to bankruptcy. Everything about the proposal option felt better to Diane. A consumer proposal is simply a deal with the creditors where she would agree to pay something more to her creditors than they would receive if she went bankrupt, but much less than the full amount of the debt. The proposal would be based on her income and budget, making the payment plan affordable. The terms of the proposal repayment were also very favorable. Instead of making payments for 9 or 21 months in a bankruptcy, the proposal payments would span 60 months and the plan would be at 0% interest with the right to prepay at any time. In reality, in a bankruptcy Diane would have been paying back $200 per month which might have increased depending on how her income changed during the initial nine month reporting period. In a proposal, once the creditors agree to accept the deal it becomes the new legally binding agreement for both the creditor and the individual. In Diane’s case, we projected that her proposal payments would work out to $100 per month. The final major benefit Diane saw with the proposal was the ability to rebuild her credit more quickly. Unlike a bankruptcy, new credit can be accessed soon after a proposal is filed. At 4 Pillars, we encourage our clients to begin a credit rebuilding process, not so they begin to get in trouble with credit again, but so they can recover their credit as quickly as possible after the proposal filing.
Diane took very little time to decide to move forward with a consumer proposal as a solution to her debt issues. 4 Pillars’ role in working with Diane was threefold:
- To provide assistance in helping her put forward the proposal offer to her creditors by agreeing the terms that best fit Diane’s budget and financial circumstances
- To have her proposal filed with a bankruptcy trustee of 4 Pillars’ choosing. By law, all proposals must be filed with a trustee. It is important to recognize that bankruptcy trustees have a legal and financial responsibility to the creditors and therefore cannot exclusively represent the debtor as we at 4 Pillars do.
- To help Diane with rebuilding after the debt restructuring process, through assistance with budgeting and repairing/restoring her credit
Over the course of the next several weeks, we worked intensively with Diane. She gathered all of the required documents needed to prepare her file. We reviewed her paperwork and helped her to put forward the best possible offer to deal with her debt. We selected the trustee’s office that would administer her proposal and met the trustee together with Diane. Her proposal was filed at the amount we had forecast when we first met with her. The offer to Diane’s creditors was to pay back $100 per month for 60 months. Once Diane completes the proposal payments, she will have paid $6000 at 0% interest, rather than paying back $19,000 at an average of 19% interest as the credit card company terms dictated. In cash flow terms, the consumer proposal saved Diane about $400 per month in comparison to ‘treading water’ with the credit cards by making minimum payments. Diane was delighted to have the deal filed and the offer sent to her creditors. Forty five days later, we informed Diane that the creditors had voted in favor of her proposal. Now all she had to do was to make her $100 per month payment for the term of the proposal.
Fast forward one year. . . During the year, we met on several occasions with Diane. We worked on her budget, and gave some guidance about budgeting practices that would help her avoid ever getting in financial trouble again. We also helped her establish some new credit so she could begin the credit rebuilding process. During the year, Diane was able to begin saving again. Her savings allowed her to accomplish a very important life goal. Her eldest daughter had moved out of country a number of years ago, and Diane had not been able to visit. After filing the proposal and some careful budgeting, she was able to save enough money to visit her daughter and be there for the birth of her first grandchild! Along the way, Diane provided the following testimonial to us:
Bob, I want to express my sincere gratitude for your competence and effort in helping me with my financial distress. Your calm manner and clear education of the process put me at ease straight away. (My family is grateful for you too!) I will highly recommend you to anyone I may encounter with a similar dilemma. Thanks so much for all you’ve done, again and again, your help has been life changing for me!
You are very welcome Diane! We are delighted to see the strides you have made. Well done, and congratulations!
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.
