How to Settle Your Debts Without Going Bankrupt?
More than ever, when it comes to resolving their debt, people have options other than bankruptcy. Why? First of all, because the consumer proposal, which is a reduced settlement offer negotiated by a licensed insolvency trustee with your existing creditors, is better known than before. It is constantly talked about as the most popular debt solution. Secondly, a settlement offer implies that the person facing financial difficulties has a certain level of financial means.
Moreover, Quebec’s job market is now one of the most dynamic in Canada, which means that people, even if they cannot pay 100% of their personal debts (credit cards, lines of credit, personal loans), can pay a portion of them over a 5-year period without interest. Additionally, the consumer proposal has the advantage of protecting all assets of the person in financial difficulty. This includes homeowners whose property values have significantly increased since the pandemic.
These factors largely explain why bankruptcy cases now represent only 3 out of 10 cases.
That being said, for those who cannot afford to present a consumer proposal, bankruptcy becomes a solution that is no less honorable when other options are not viable (consolidation loan and proposal).
Yan’s** situation will give you an idea of the various options available to a person in distress and the pros and cons.
A lover of photography, Yan bought expensive equipment and made several trips to pratice his new hobby. Over the years, his cards and line of credit have been used too much and their balances are close to $38,000.
Today, Yan must juggle every month 5 payments for a total of $780. So far, he has managed to not fall behind schedule, but he cannot pay more than the minimum amounts required. At this rate, he does not see the day when he will be able to free himself from them. So, he decided to meet with a personal finance expert at Jean Fortin.
17 years to repay
The first step is to proceed wi
th the financial analysis of his situation, prepare a balance sheet which lists all his debts, the payments and his assets. “The observation was as follows: if he continues at this rate, it will take him 5 years to fully repay his credit cards, 17 years for the line of credit, which will cost a total of more than $ 24,000 in interest costs, alone” explains Pierre Fortin, president of Jean Fortin, who adds that 3 other choices are available to Yan.
Solution 1: Mortgage refinancing
First solution: he could consolidate his debts by a mortgage refinancing, since he owns a house valued at $ 270,000 on which there remains a mortgage balance of $ 175,000. With appreciable equity ($100,000), he could get a loan from his financial institution.
The advantage? A relatively low interest rate (4%) and the possibility for a long amortization (20 years) will mean a payment of only $60 per month more than the actual mortgage payment. In addition, its credit file would remain intact and its debt ratio would rise from 47% currently to 27%, because its debt would be spread over 20 years.
However, a long amortization will ultimately add 4 more years to his initial mortgage and he would pay a total of $ 34,000 in additional interest, $10,000 more than if he does not change anything in the current situation.
Solution 2: Consolidation Loan
Yan could also apply for a $38,000 loan from his bank. The interest rate is usually higher than an ordinary loan, between 12% and 14%, because the financial institution “buys” the risk from other creditors.
One big advantage is that Yan will only have one payment to make, he will preserve his credit rating and he will be rid of his debts in 5 years which corresponds to the maximum length for this type of loan. On the other hand, because of its high debt ratio, it is not certain that the bank will accept. In addition, monthly payments of $845 will weigh heavily on its budget, and $13,000 in interest costs will be added to the overall bill.
Solution 3: Consumer Proposal
With this option, a licensed insolvency trustee, such as our firm, would negotiate a repayment agreement for up to 5 years with Yan’s creditors. The main advantage is that all interests are reduced to 0% as soon as the proposal is filed, which reduces monthly payments considerably. If Yan offered to pay off his total debts, it would represent monthly payments of $633 and he could also keep his house. On the other hand, his credit report will be affected for the entire repayment period plus 3 additional years.
|Résume||Monthly payment||Lenght||Interest charrges|
|Current situation||$780||17 years||$24,000|
|Mortgage refinancing||$55 (more)||20 years||$34,000|
|Consolidation loan||$845||5 years||$13,000|
|Consumer proposal||$633||5 years||$0|
|Mortage refinancing with the same term||$270 (more)||16 years||$8,000|
- Yan would benefit from consolidating with mortgage refinancing, but only if he maintains the same duration as his current mortgage. His mortgage payment would increase by $270, but he would save $26,000 in interest.
- The big advantage of a debt consolidation is to force you to repay in 5 years maximum. However, make sure that these payments do not exceed your budget.
- Miracle solutions do not exist in personal finance situations. There are always pros and cons to each option, hence the importance of being well informed and consulting experts.
**The names have been changed to protect their identity. **
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