What should I do?
This is the third 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, married with no children, and nets BC's average wage of $3,095 monthly. His spouse brings home $2,200 monthly. (This is new from our last column).
Debts
Jack owes $31,000 on credit cards, $40,000 for income taxes, $4,000 to a bank, and $2,000 for MSP. In total, $77,000.
Assets
Other than a financed auto, Jack has nominal assets.
Cash Flow
Jack's car costs him $850 monthly for payments, insurance, gas, etc. After rent of $1,100 the household has $3,345 for food, debt payments and everything else.
Jack does not want his spouse to be liable for his debts, and none of his debts are joint. He thinks he could pay about $700 monthly towards debt.
The options:
Hang in there
The debt to CRA is Jack's greatest concern because CRA has enhanced collection powers. After it has assessed Jack, if a suitable payment plan is not established then CRA can seize bank accounts and “garnishee” wages.
Unless Jack's spouse is willing to help pay Jack debts it will be difficult for Jack to deal with his debts on his own.
Seek a consolidation loan
A consolidation loan will be near impossible without collateral. The CRA debt will scare off most potential lenders.
Consumer proposal to creditors
The CP is an option available to individuals who are unable to repay debts totaling less than $250,000. It is okay if there is an additional debt for a mortgage on a principal residence.
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.
What is particularly interesting about this consumer proposal option is that although in our fact pattern we have added a working spouse, Jacks' realistic consumer proposal option has not changed.
Bankruptcy
Bankruptcy remains a realistic option for Jack. However, with the addition of a working spouse, his required monthly payments in a bankruptcy proceeding actually increase from $503 to $787 monthly. Payment of surplus income is expected for 21 months for a first-time bankrupt.
Next Issue
We will see what happens if Jack has really, really big tax debts.
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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