How to manage your budget with a reconstituted family?

Real-life case: A valuable lesson for a “new” family

Derek and Macha** have been in a relationship for 2 years. With each having 2 children from previous relationships, they decided to live together and buy a larger family home. It was a great project that almost turned into a nightmare.

Last July, they embarked on this great adventure. Derek’s lease ended on June 30th, and Macha had sold her condo. They moved in together, thinking that despite the higher cost of the house, it would still be cheaper than living separately. Since they each owned a car, they also agreed to sell them and purchase a 7-seater van. Everything seemed to be going well for this new family, but life sometimes brings surprises…

Underestimated expenses

July was a tough month for their finances. “As is very often the case, the couple underestimated the costs involved in buying a house. They didn’t factor in moving costs, “welcome” tax, notary fees, unforeseen small repairs, buying furniture, curtains, and more. The list is long, and if you don’t have some money set aside to pay for them, you have to, like Macha and Derek, turn to credit,” explains Pierre Fortin, a licensed insolvency trustee, president of Jean Fortin and Associates.

When they received their credit card bills at the end of August, which amounted to $18,000 plus an $8,000 line of credit, they were overwhelmed. On top of this, there was the $320,000 mortgage. With the additional expenses associated with the back-to-school season for their 4 children, they lost control of their finances. Desperate to avoid disaster, they quickly consulted an insolvency expert.

Consolidating debts

The minimum monthly payments for their credit cards and line of credit, in addition to their mortgage and auto loan payments, total more than $2,950. A burden too heavy for the household, with a total gross annual income of $127,000. “Furthermore, a significant portion of their consumer debt was incurred on credit cards with an average interest rate of 17%. In these conditions, it would take them 22 years and $16,000 in interest fees if they only make minimum payments. The same debt on a line of credit with an 8.5% interest rate would have been easier to manage,” says Pierre Fortin.

While preparing Derek and Macha’s budget, the trustee observed that they could allocate $700 per month for a repayment plan. The most suitable solution in their case is a consolidation loan that will allow them to repay their credit card debts all at once, and then make a single monthly payment at a lower interest rate.

Eligible for a consolidation loan?

What factors do financial institutions consider when granting such a loan? “They first use the debt ratio to determine if the weight of the debts and housing allows for the addition of a loan. The couple’s ratio was 34% before refinancing, and 31% after the desired consolidation loan, which is within an acceptable range,” notes Pierre Fortin, who also points out that this calculation does not take into account the number of dependent children, which reduces the couple’s flexibility.

The bank will also check the borrowers’ credit history: since Derek and Macha have never had unpaid bills, their credit reports are impeccable. Their employment stability is another factor in their favor.

In the end, they obtained a loan to consolidate their credit card debts. The amount due on the line of credit was excluded since the applicable interest rate was lower than that of the consolidation loan, which was 13% and thus more advantageous. They will have to make payments of $410 for 60 months to repay the loan, instead of the minimum amounts of $540.

But they must absolutely avoid accumulating new balances on their credit cards. “While it is possible to consolidate debt once, you cannot do it again within 5 years,” warns Pierre Fortin.


Their financial situation

  Gross annual income Debts Monthly payments
Macha’s salary $62,000    
Derek’s salary $65,000    
Credit cards   $18,000 $540
Credit line   $8,000 $60
Auto loan   $36,000 $550
Mortgage   $320,000 $1806*

*Including municipal and school taxes

**The names have been changed to protect their identity. **