Real-life story – Separation or Divorce
In addition to being emotionally painful, a separation can have a significant impact on your finances.
Philippe is a truck driver in his forties. He and his wife separated last July. A father of two teenagers, he struggled to make ends meet even when they lived together. The past year has been quite rough. Because he has shared custody of their children, Philippe had to find an apartment big enough for him and his two children and contribute to the mortgage payments of the family home until it was sold. Philippe must pay $600 per month in support plus other expenses that accompany a separation (furniture, moving expenses, etc.). He also owed $18,000 on two credit cards before the separation.
At the end of February, when faced with a choice between paying off his credit cards or paying his alimony, he knew he had to take action and ask for help.
Separations and divorces are responsible for 25% of our firm’s insolvency cases (bankruptcies and consumer proposals). In fact, one has to assume the costs of moving, renting an apartment and, very often, to continue to pay the maintenance costs of the family home until everything is settled. You have twice the costs with the same salary. In addition, legal fees can add up quickly in the event of a conflict.
Philippe’s case is no different. In addition, since he has shared custody of the children, he will have to buy extra clothes and other items such as bicycles and personal belongings to avoid having the children carry too many things between homes. Even in the absence of litigation, separations have significant impacts on both spouses’ budget.
Philippe’s minimum credit card payments alone were $540 per month. And the $600 monthly child support payments took up much of his discretionary income, not to mention the extra costs incurred when the children are with him (activities, food or treats, etc.).
Eventually, Philippe had to choose between his alimony or his creditors. Of course, child support is not only protected from a proposal or bankruptcy, it is also, for most people, a moral obligation to be honoured at all costs.
We started by working on a realistic budget with Philippe. After this first step, it was clear that child support and basic needs eliminated any chance of a surplus for the minimum payment of his debts. By calculating his debt ratio, we were able to confirm that it was impossible for him to regroup his debts through a consolidation loan. Even if he were eligible, he would not have been able to make the loan’s $410 monthly payments.
We therefore recommended the following two options for Philippe: a consumer proposal of $7,500 ($125 per month for 60 months) or bankruptcy with a payment of $160 per month for 9 months.
Philippe was worried about the consequences of a bankruptcy, and we had to reassure him. Firstly, a bankruptcy or a consumer proposal does not affect employment. In fact, his employer is unlikely to discover that Philippe has filed for bankruptcy (or a consumer proposal), and even if he did, the Bankruptcy and Insolvency Act contains provisions that protect his job. His job would not be threatened.
As for the divorce, it can take its course and Philippe can continue to honor his child support.
As in many cases, a bankruptcy and a consumer proposal offer very similar protections with few disadvantages. It all depends on your personal preferences. Bankruptcy can be resolved faster than a consumer proposal (sometimes 9 months instead of 60 months) and is less costly ($1,440 plus federal tax refund, if applicable) compared to a $7,500 settlement offer. Despite this shortcut, some people will prefer to avoid bankruptcy at all costs while others will opt for a faster and often less expensive option.
Emotionally, it was a difficult decision for Philippe, but he finally chose bankruptcy because it was the solution that allowed him to quickly turn the page in this difficult period of his life. In addition, he knew that he had many other expenses to come. He decided to invest his time and money to settle down properly.
Under different circumstances, a consumer proposal might have been a better choice.
**The names have been changed to protect their identity.**
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