In Today’s blog addition, I am going to evaluate Bill’s situation. Bill is married and has two children that are dependant on his income. Bill recently was laid of from his job and his spouse is currently on maternity leave. If Bill were to file a bankruptcy, it is unlikely there would be any surplus income. After taking into the account the current market value in his property and the estimated selling costs, he has determined there is no equity in the house. In fact, the selling price would likely not enough to pay the mortgage and the selling costs and he would likely end up losing $20,000.
If Bill were to file bankruptcy, he would have two options. The first would be to walk away from the house. If Bill were to walk away from the house and it was sold for a loss, then the shortfall would be included in his bankruptcy.
The second option for Bill would be to keep the property and file for bankruptcy. Bill would not be required to pay the trustee anything to keep the property, because there is no equity in the property. If Bill chooses this option, he must be confident that he can keep up with his mortgage payments and cost of maintaining the house. If Bill makes a mortgage payment after he files a personal bankruptcy, he essentially renews the mortgage debt, which means if down the road, Bill defaults on the mortgage and as a result the property is sold, Bill will be liable for the shortfall and it cannot be included in the bankruptcy.
A consumer proposal is another option Bill could look at. Given his current circumstances, Bill’s creditors are not likely to get much (if anything), if Bill were to file a bankruptcy. As mentioned in my previous blog, I talked about having to offer the creditors more in consumer proposal then they would get in a bankruptcy. Does that mean they would accept say $5,000?
$5,000 is better than nothing, but creditors are not likely to accept $5,000 when the total owing is $45,000. The reason they are not likely to accept that amount is there are filing fees, preparatory fees, HST and other costs that are taken before the creditors receive their share of the proposal. Also creditors often want a minimum return in a proposal otherwise, they just assume you file a bankruptcy and they can write off the debt.
Typically you will have to offer 30%-40% of what is owed for your proposal to be accepted (depending on who your creditors are). Thus it would be reasonable to offer $15,000 at the rate of $250 a month and the there would be a good chance it would be accepted. For this option work, Bill would also have to demonstrate the ability to make the payments under the term of the proposal.
The next thing Bill could look at would be a Debt Management Plan. Bill would have to get all the creditors to agree (which they likely would) for him to pay back the full amount of what is owed interest free over a period of time not exceeding 5 years. That means Bill would likely have to pay something like $835 a month for five years. This option is more expensive than the previous options and Bill would need to look at his budget before making this commitment. It is worth noting that both a consumer proposal and a debt management plan, have the same implications on your credit rating.
The last option, would be for Bill to look at a consolidation loan. However, given the fact Bill does not have any equity in his house and currently, both he and his spouse are not working, it is unlikely that Bill would be able to qualify for a consultation loan. He could look at getting a co-signer, but if he is unable to make the payments, the co-signer will be held liable.
If you are in a situation similar to Bill’s, the first thing to do is make a monthly budget to see how much you can afford to pay towards your outstanding debts.
If you cannot afford a consolidation loan, debt management payment or a consumer proposal payment, then they are not likely the right options for your situation. In the end, there are only two ways to balance your budget. Earn more income or cut your expenses.
Usually people in Bill’s situation file a personal bankruptcy. They also often walk away from their house. Although it is never easy to walk from the family home, it is often the right decision when the potential shortfall is high. Filing for bankruptcy is about dealing with your debt problems and getting a fresh start with your financial affairs, and sometimes this comes with making some tough decisions.
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