Note: Our meeting with you is confidential. This story is based on a real couple, but we have changed the names and some of the facts to keep their identity confidential.
A few months ago I met with a couple in our Kitchener office to discuss their financial situation. In 2003 Paul and Jackie (not their real names) had been married for five years, were living in a rental unit, had a four year old car that was paid for, a nominal savings account and small balances on two credit cards. They were both employed, had an infant daughter and decided they would like to take the plunge into home ownership.
They fell in love with a brand new home in Kitchener priced at $275,000. Their savings were insufficient to meet the down payment requirement, so Jackie’s parents granted them a loan to top up. They amortized a mortgage of $250,000 over 25 years and moved into their new home.
They needed appliances and some new furniture so they took advantage of a “Don’t Pay A Cent Event” from a local furniture store. They also realized that they needed window coverings for the many windows and in fact required the hardware as well. A trip to a department store took care of that, but they had to use their credit card as the legal and other incidental costs of purchasing the house had depleted their savings.
Paul decided that he would really like to build a deck on the back of the house. He is handy and did the work himself, but the material went on their new building center credit card, as did a lawnmower and other gardening tools. Jackie also did some landscaping around the house in the first year.
It had been their intention to put money aside each month to cover these debts, but they found that utility bills and taxes were more than they had anticipated. At the end of the first year of home ownership they had to transfer the “Don’t Pay a Cent Event” debt to a high interest loan, they now had four credit cards with substantial balances, and they had not even begun to repay Jackie’s parents for the loan. Paul was in line for a promotion at work and they planned to use his raise to start paying these debts off in the second year.
Paul did get his promotion and raise, but learned that he had to accept a transfer to his employer’s Mississauga location. They needed a second car and decided their best choice was to lease one. Paul’s raise was eaten up by lease payments, insurance and gas for his commute to Mississauga every day. The second year brought an added surprise when they learned that they were expecting another child.
Jackie took maternity leave when the new baby was born which eliminated the need for day care, but her income was also reduced when she started collecting EI benefits. By end of the third year they were further behind than ever and had to start using credit to cover intangibles like gas, clothing and even food at times.
Jackie returned to work which meant day care for two young children and their car which was now seven years old starting requiring a lot of repairs. They had to take a few cash advances from their credit cards to help the cash flow situation. The three year renewal period was up on their mortgage and the interest rate had crept up a bit, which meant a higher payment each month. They talked to their bank about a consolidation loan to merge the unsecured debt but their debt to income ratio was too high and they did not qualify.
They decided to come in and meet with us when they started receiving calls from creditors about late payments. Their situation was as follows:
- Combined income of $4,500 per month. Mortgage payments plus taxes and utilities ate up almost half of that. The lease payments on Paul’s car plus insurance and gas were another $800. Day care, groceries and other living expenses took care of the rest. Jackie’s car required constant maintenance.
- They had $50,000 in unsecured debt and were barely able to make the minimum payments, which did nothing to reduce the debts. They couldn’t even begin to repay the loan to Jackie’s parents, which was another $15,000.
I took a hard look at their situation. Purchasing a home was a good idea for Paul and Jackie, but they made the fatal error of buying a home that was too expensive for them to handle. As first time home owners they had no experience with all the “extra expenses” involved with home ownership. Their intention of putting money aside to cover their debts was blind sided by everyday living expenses.
As a couple they also found themselves overwhelmed by the stress of trying to keep everything together.They had already made a budget and they were reducing their expenses to free up cash, but that alone was not enough. They were also unable to qualify for a debt consolidation loan (their debt was too high).
Next we discussed filing a consumer proposal. In a consumer proposal, we negotiate a settlement with your creditors; in most cases you pay less than the full amount owing. Since Paul and Jackie have good incomes, and did not want to declare personal bankruptcy, this was the correct option for them. We ended up filing a proposal where they pay $400 per month for five years. The creditors are getting some of their money, and Paul and Jackie will keep their home and avoid bankruptcy.
A proposal is not the correct option for everyone, but it is a good option for many people. To find out if a proposal would work for you, please call us at 310-PLAN (310-7526, no area code required) or e-mail us to arrange a free initial consultation. There is help available, so give us a call, and let’s get started.
The topic of taxes always draws a lot of attention as we are all affected by taxes and there are many rumors around how they work. There are several reasons that individuals owe taxes to Canada Revenue Agency (formally Revenue Canada), including but not limited to:
