What should I do?
This is the second part of our series on the analysis of options to deal with debt. Further articles will change one or two variables to see how reasonable options differ depending on circumstance. If you wish your situation analyzed, send us your fact pattern.
The situation:
Personal
Jack is 38, single, with no dependents, and nets BC's average wage of $3,095 monthly. His car, now worth $20,000, was purchased with a loan. He pays $400 / mo. and owes another $21,600.
Debts
Jack owes $31,000 on credit cards, $40,000 for income taxes (up from $15,000 in our last column), $4,000 to a bank, and $2,000 for MSP. He has a lot of debt.
Assets
Other than his car, Jack has $5,000 (garage sale value) of furniture, some tools from his self-employment, and an autographed photo worth $2,000.
Cash Flow
Jack's car costs him $850 monthly for payments, insurance, gas, etc. After rent of $1,100 he has $1,145 for food, debt payments and everything else. He thinks he could pay about $600 towards debt.
The options:
Hang in there
Roughly, $77,000 of debt at 10% interest requires $642 of monthly interest payments. As he cannot afford this, his debt load is going to grow.
Jack is in danger of CRA demanding full repayment followed by his wages being “garnisheed”. It will be difficult for Jack to deal with his debts on his own, even if he let his car go to save $650 monthly (after $200 for transit) and found cheaper accommodation.
Seek a consolidation loan
If Jack could reduce his debt to $75,000 by selling his photo, at 10% interest a consolidation loan would require about $1,000 monthly for 10 years, or $1,650 monthly for 5 years if he could get one.
If it is worth it to Jack pay these amounts and appease creditors and forego a lower cost debt workout or bankruptcy filing, then his creditors will be happy and Jack will defer his fresh start. This is a decision Jack must make when considering his options.
Consumer proposal to creditors
A reasonable consumer proposal would require Jack to pay $425 monthly for 5 years, or $25,500. This would include his entire debt to CRA. At this reasonable cost, Jack could afford to keep his car or he can let it go and get a jump on building real wealth. All collection activity must stop. Jack could apply for and receive a new credit card.
Bankruptcy
This is a very realistic option for Jack and it would cost a lot less, allowing him to start fresh much earlier. A bankruptcy would probably cost Jack about $500 monthly for 21 months. He would have a poor credit rating for almost 8 years.
Next Issue
We will see what happens if Jack has a spouse bringing home $2,200 monthly.
Let your debts go
If you have too much debt I can get you headed in the right direction. Contact me at
ken@debtsgo.com. You're only a click away from financial security and freedom from debt.
604-531-4186, www.debtsgo.com
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