Income loss

Even though the causes of indebtedness are numerous, the majority of them converge towards one main reason: insufficient income to cover increasing costs or unforeseen events,” mentions Pierre Fortin, president and trustee at Jean Fortin & Associates.

When it is possible to do some overtime, many people accept and are happy to have the additional income. However, there is a risk in the long-term of taking for granted the overtime offered because the conditions that allow for over-time are never guaranteed. Additional income from over-time should never be taken for granted.

To illustrate the possible risks, the team at Jean Fortin & Associates highlights the real-life case of Martin**, who, with a good salary and overtime hours, had a good standard of living until his employer revised its overtime policy. Martin works in the aerospace industry and earns a salary of $60,000 per year, in addition to an average of $15,000 in overtime over the past 3 years. 

Unfortunately, the industry in which Martin works started to face challenges and his employer was forced to reduce overtime. In the last year, Martin has only earned $3,000 in overtime.

What are the problems associated with a significant income drop?

Unfortunately, Martin relied on the extra income earned from overtime to support his lifestyle. He accumulated $20,000 on his credit cards, in addition to an auto loan that he now has difficulty repaying. Relying on his base salary alone, Martin’s debt-to-income ratio now exceeds 40%.

What can be done to overcome such an income decline?

Martin first went to his bank, but he was denied a debt consolidation loan due to a too-high debt-to-income ratio. A friend advised him to meet with a licensed insolvency trustee to get a free analysis of his current financial situation and possible options to his debt. His advisor at Jean Fortin & Associates suggested several solutions to his drop in income:

• Balance his budget
• The negotiation with his creditors
• The sale of certain assets
• The consumer proposal
• The bankruptcy

After some consideration, Martin decided that the consumer proposition was the solution that suited him best. In fact, a consumer proposal is an agreement negotiated by your trustee with your creditors with a view to reducing the total amount to be repaid, aligned with your financial capacity to repay.

So, the monthly payments Martin will have to make under his settlement offer will be $450 for 60 months, significantly less than the $850 he would have had to pay if he had obtained a consolidation loan. Although his credit score will be affected, Martin knew well that his loss of income was already impacting his debt-to-income ratio and his ability to repay all his debts. In this context, he would eventually have been unable to make all his payments, which would have tarnished his credit score. Martin quickly opted for the peace of mind that the consumer proposal would provide him and monthly payments that he would have no difficulty meeting.

How to manage additional income properly?

Relying on guaranteed income (i.e., your normal salary) is the right thing to do. Now, following the recommendations of his insolvency advisor, Martin treats his overtime as a surplus that he sets aside. With this approach, he settled his proposal in less than 60 months and was able to treat himself to a small all-inclusive trip, paid out of his savings account. What a nice way to celebrate the end of his indebtedness!

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