When debts accumulate – Real-life case

It is often said that time heals everything. “Unfortunately, this is not always the case when it comes to personal finances. Sometimes, even a very short period of 3 to 6 months can turn everything upside down,” says Pierre Fortin, President and Licensed Insolvency Trustee at Jean Fortin & Associés. This debt expert invites you to learn about the real-life case of Charles**, a 42-year-old man facing unforeseen circumstances that have led him in a spiral of debt.

An active family who accumulates debts

Charles has been working as a civil servant for nearly 15 years. His partner, Marianne, is an elementary school teacher. They have two children aged 9 and 12. This active family engages in various activities, including extracurricular activities, sports, neighborhood social involvement, and camping. The children take piano and gymnastics lessons. Obviously, a second car is necessary for this busy lifestyle, and Charles, the family’s financial manager, carefully monitors the monthly budget.

A tight budget in the face of unforeseen events

“Year in, year out, we barely make it financially, but we manage,” says Charles. But a year ago, a few unforeseen events jeopardized this precarious balance. The thirty-year-old house needed a new roof, the older child required orthodontic care, and the second car needed significant repairs. The family budget could no longer cope, but discontinuing family activities was not an option.

Warning signs of financial difficulties

Warning signs of financial difficulties are sometimes hard to detect because gradual indebtedness doesn’t necessarily sound an alarm, especially when one believes they can manage their finances and all payments are up to date.

However, Charles was juggling two credit cards, a bank line of credit, and the mortgage for six months. In reality, it was new credit that filled the gaps at the end of each month. The fact that payments are up to date creates the illusion that everything is under control, but it is sometimes only a mirage.

Marianne knew that Charles would do everything to resolve the situation, except… seek help from a professional. It had become a sensitive topic between them. After 8 months, he could no longer pay the minimum balance on the credit cards anymore. Creditors began calling, and the pace intensified. Charles had to face the fact that he was experiencing several symptoms of over-indebtedness.

What to do?

The 1^st step was to seek help from a financial institution, as Charles and Marianne did. The financial institution analyzed the following 4 criteria to assess the possibility of granting a consolidation loan:

1. Debt ratio
2. Credit score
3. Credit rating
4. Employment stability

“Unfortunately, in Charles and Marianne’s situation, it was too late for a consolidation loan. A few months earlier, and everything would have been different,” says Pierre Fortin. Indeed, the key element to have a chance to consolidate debts is to have a good credit record. Significant and recent delays scared off the financial institution and they refused the consolidation loan.

Other solutions?

Since their financial institution couldn’t provide the required assistance, Charles and Marianne turned to a licensed insolvency trustee. They chose the insolvency expertise of the Jean Fortin & Associés team. During their 1^st meeting, the advisor reviewed their financial situation to identify the best approach to address their financial problems. Here are the solutions considered to resolve their debt:

• Budget review: Sometimes, adjusting the budget can help resolve debts.
• Negotiation with creditors: An agreement aimed at reducing the amount of debt and interest.
• Asset sale: Getting rid of non-essential assets, whose maintenance is often costly, can be financially advantageous.
• Voluntary deposit: This measure protects against wage garnishment and seizure of certain assets.
• Consumer proposal: An agreement with creditors allowing repayment of only a portion of the debts and lower monthly payments.
• Personal bankruptcy: Although it is the last option to consider, it offers the opportunity to start afresh. 

After a few days of reflection, Charles and Marianne chose to opt for a consumer proposal for the following advantageous reasons. Because they have a good family income, they  had to offer to repay a significant portion of the principal ($30,000 out of $32,000) owed. However, the fact that there were no interest charges on the amounts repaid in a consumer proposal meant that monthly payments decreased from $800 to $500 for 60 months. Moreover, the consumer proposal allowed them to keep all their assets and continue their various activities, a crucial factor for this active family. 

As for the disadvantages, it mainly involves an impact on the credit report. However, even though the proposal is noted on their credit report, the damage was already done. If they had decided to continue as they were, they would have been forced to face legal actions from creditors demanding full repayment of both capital and interest.

When should you consult a debt specialist?

“Many people wonder how to know when it is time to act,” Pierre Fortin mentions. When bad news create important deficits in your budget, when you’re juggling from one credit card to another and can’t bring down your balances, these are alarm signals that need to be addressed. You should take the time to analyze your financial situation (inventory of debts and calculation of your debt ratio). Know that when late payments start to appear, you are entering a dangerous phase because those payment habits will weigh heavily on your credit report and for a very long time…

It’s always better to prevent than to cure.

**The names of individuals have been changed to preserve their anonymity.