Dealing with Debt

photo o a businessman at his workplace with a tablet computer

Consumer Proposal vs Home Equity Loan or Second Mortgage: The 100% proposal

If you are struggling with high interest credit card debt or balancing multiple loan payments every month you may be looking for a way to consolidate your debt into your home mortgage, a second mortgage or a home equity loan.  This assumes that the equity in your home is greater than what you owe.  But you need to ask yourself, is this the best option or are there other options that are better?  Before going to your bank, mortgage broker or a credit counsellor, you should consider seeing a Licensed Insolvency Trustee (“LIT”) to talk about a consumer proposal.

A consumer proposal is a way to combine your unsecured debts into one lower monthly payment and may allow you to get out of debt sooner. Yes, even when you are paying your debts in full plus the fees of the LIT.  And you are not subject to any qualifying criteria or interest rate fluctuations.  So, when does it make sense to either file a consumer proposal or refinance the equity in your home.

Home Equity or Debt Consolidation Loan

Homeowners can consolidate credit card debt, lines of credit and other personal loans into their mortgage either by refinancing or by taking out a home equity loan or a second mortgage. A debt consolidation loan secured by the equity in your home will usually carry a lower interest rate than the debts you are combining into your mortgage.

While a lower interest rate can mean a lower monthly payment than the total of your individual payments, whether you save money will depend on the term of your loan.  It is very important to understand that interest is still being charged on your new loan. The longer your mortgage or loan amortization is, the more interest you will pay.  The shorter the amortization period means less interest but a higher payment.

As well, it is important to note that a debt consolidation loan does not reduce your total debt.  If you consolidated $50,000 in credit card debt, you end up with a $50,000 home equity loan or second mortgage.  Your total debt has not decreased.  Only the interest rate has decreased.

You should also be aware that you have now transformed your unsecured debt into secured debt either by increasing your current mortgage or by placing a second mortgage on your home.

When a Second Mortgage is Not a Good Option

A concern with a secured debt consolidation loan is the risk that you may lose your home if you default on your payments. If your debts are more than you can reasonably repay even when rolled into your mortgage, debt consolidation may not be the best choice.  If you suddenly become unable to make your mortgage payments, your lender will likely take action to recover their loan by foreclosing on your house.

A second mortgage is also not a good solution if it does not deal with all your debt problems. If you have debts that cannot be combined into your mortgage, or you continue to use your credit cards and accumulate new debts, you could find yourself owing more than you did when you started.

A Consumer Proposal is not a Loan

A consumer proposal is like a consolidation loan, except you don’t borrow any money.   You just start making payments and it’s interest free.  Filing a consumer proposal allows you to maintain control of your assets and keep your home by making a proposal to pay the equity in your home to your creditors over a period of time.  It is not a new loan; it is a payment over time.  And the interest clock stops.

A consumer proposal is also a good option if the total amount of all your unsecured debts exceeds the equity value in your home.  Even if your equity is greater than what you owe, it can still be a viable option if you are getting harassing collection calls.

How much you will have to pay will depend upon the equity in your home, the amount of unsecured debt as well as your income; however, it is certainly a viable option for consolidating high interest or multiple unsecured debts and/or even tax debt.  An LIT can provide a complete assessment of your situation and outline the payments.

Scenario

Let’s assume you have sufficient equity in your home to pay your debts in full and let’s assume you choose the Consumer Proposal route.  We have set out below a schedule of what it would cost an individual to pay their creditors in full plus the fees of the LIT. We have used a range of between $50,000 and $100,000 of debt.  We have calculated the amount of the LITs fees utilizing tax rates in British Columbia.  The actual fees would be the same across the country. The total cost would range between $65,144.64 and $128,435.78.

Table 1

A Consumer Proposal has a maximum term of 60 months.  Monthly payments would range between $1,085.74 and $2,140.60.   The fees of the LIT are calculated in accordance with Rules set out in the Bankruptcy and Insolvency Act.  There are be no additional costs or fees and no interest.

Now if you wanted to borrow the money to pay off your debt through a consolidation loan, a second mortgage or refinancing of Home Equity Loan, we have set out a table below showing the cost of borrowing.

If you borrowed the same amounts at 11% amortized over a five-year term, the cost of borrowing ranges between approximately $15,227.27 and $30,454.54 which is slightly more than the proposal.  This utilizes the same term as a consumer proposal.  The total amount paid under the proposal is almost exactly the same. However, if you have a variable interest rate, which could easily change over the term of the mortgage, the cost of borrowing would rise.   It also doesn’t consider any fees that may have to be incurred for appraisal and legal fees that are usually extra.

Table 2

As you can see, the cost between the two options is not very different at all.  However, should the term of the loan be longer than 5 years or the interest rate be different than set out above, the cost of borrowing would certainly be more expensive.   The consumer proposal has no such variables.

The other intangible is qualification.  You will have to qualify for the loan and arrange for a lender who probably wants an appraisal etc.  This all takes time.  Meanwhile your creditors are pressuring you for payment and threatening enhanced collection action.

To qualify for a consumer proposal, you only need to owe less than $250,000 (not including the mortgage on your principle residence). A proposal to your creditors can be prepared and signed in a very short time.  The other advantage is that it then provides you the certainty of retaining your home.

What if I can’t afford to pay the monthly amount under the consumer proposal?

As we all know, it is not cheap living in Metro Vancouver.  So what if you can’t afford the monthly payment under a consumer proposal.  Don’t worry.  There is another option.  A Division I proposal is available to lengthen the term and lower the payment.  And yes, it is still interest free.

Is a Debt Management Program Better?

Some would argue that a Debt Management Program (“DMP”) is a better option as you only pay 100% of your debt as opposed to 100% of you debt plus fees.  That is a misconception and a misrepresentation of the facts.

A DMP in this scenario would not only have you pay 100% of the debt but the fees of the DMP Company as well.  The DMP Company gets paid a monthly fee from the debtor of about 10% of the monthly payment but, it typically maxes out at about $75 per month and they receive funds from the creditors for administering the plan.  The fee they receive is usually around 22%.

Using these figures the total cost of a DMP for $50,000 would be approximately $65,500.  Creditors receive full payment.

Can I Pay Off my Consumer Proposal Early with a Mortgage or other borrowings?

As previously stated, a consumer proposal is like a consolidation loan, except you don’t borrow any money.   You just start making payments and it’s interest free.  To borrow money to pay off a consumer proposal doesn’t make good financial sense.  You will be paying interest on the loan whereas you can maintain the payment in the proposal which is interest free.   It would, however, start the three-year time period that a consumer proposal remains on your credit record earlier.

As well, until your consumer proposal is paid in full, it may be difficult to convince a lender to lend you more money because they are likely worried that if you default on your proposal, all your old debts are revived and can return.

Summary

In our view, a consumer proposal is a better option than a Home Equity Loan, second mortgage or Debt Management Plan for the following reasons:

  1. There is one monthly payment;
  2. It includes all creditors, even income taxes.
  3. The proposal is interest free. Once accepted by the creditors, there are no variables that would change the terms or the final cost;
  4. There is no credit check and no qualifying; and
  5. You get to retain the equity in your home.
Consumer proposalRefinancing, 2nd mortgage, HEL, DMP
One monthly paymentRisk of foreclosure
Interest free, no future variablesLess equity in home for the future
Includes all creditorsDMP cannot include government debt
No prepayment penaltyPossible penalty for early payout
No credit check or qualifyingAdditional costs fees, qualifying
Retain equity in homeInterest rates fluctuations
Debt free and fresh financial start

In all cases, to achieve a fresh start, a consumer needs to change the habits that got them here in the first place.  They need to get their spending under control.

Before you take out a second mortgage on your home to pay off credit card or other unsecured debts, talk to an LIT about your options. Find out if a consumer proposal will save you more money in the long run. Don’t rush to make a decision before you make an expensive mistake.

The professionals at Boale, Wood & Company Ltd. will put your mind at ease and help you understand your options.

We will sit down with you and review your situation and help you to decide the best course of action to become debt free and make a fresh start.

Call us.  It’s not too late.  (604) 605-3335.

 

 

 

 

 

 

 

 

 

 

 

Take Control of Your Debt

Money pouring out of cupped hands

One of the top concerns of the Bank of Canada is the high level of Canadian household debt.  Notwithstanding those concerns, the level of household debt continues to rise, hitting 171.1 per cent of disposable income in the third quarter of 2017.  If your debt is starting to feel overwhelming, minimum payments might keep the calls from coming but, you realize that you’re treading water.  Is it time to panic or deal with your debt head on?

There are some tips that can help you take control of your debt and build towards a sound financial future to avoid having your debts get out of control.

  • Prepare a budget so that you know where you are spending your money. A budget will help you identify areas where potential savings can be made. For anyone who is tech savvy, you can download a number of free apps which might make tracking expenses more fun. The results of will show you how much is left over for debt servicing and where your money is being spent.
  • Curb your spending habits. One of the most common ways to get into debt is overspending.  Everyone needs to know where they are spending their money.  It’s the little things that nickel and dime you to death that are the problem.
  • Figure out the best way to reduce debt. Two well known methods are called the Snowball Plan. This starts with trying to pay off the smallest debt and leads up to the largest.  This occurs while you are still paying only the minimum payment on all your other debts.  The other method is called the Avalanche Plan. The Avalanche Plan method starts by throwing as much money as you can at the debt with the highest interest rate.  Again all while still paying only the minimum on all your other debts. Once that highest interest debt is paid off you go onto the next highest interest debt and so on and so forth.
  • Lastly get some professional help. Some of you will get a better sense of where you are financially and be able to get out of it on your own. But for most, it won’t be that simple. The amount of money left over at the end of the day will show that you only have enough left over to make minimum payments, which will only leave you treading water. And if something happens where you income is suddenly reduced, you might not even be able to make the minimum payments and you will soon fall behind on the payments.  Then the calls will come.

So, the best way to meet that debt head on is to take control. Licensed Insolvency Trustees are the go to professionals of choice when dealing with debt.  We are mandated to explain all of your options to you.

The experienced professionals at Boale, Wood & Company Ltd. understand the stress that financial difficulty can cause.

We know that realizing that you are experiencing financial problems is a hard thing to do for most people and sometimes you feel helpless. But instead of feeling helpless, let us help you gain control of your debts and understand your options.

Start by scheduling a meeting with us to discuss the solution best suited to your situation. This meeting is free and there is no pressure or obligation for you to make a decision right away.

We have the expertise to find the solution best suited to you.

Call us, it’s not too late. (604) 605-3335.

 

 

 

 

Self-Employed and Can’t Pay CRA?

stopwatch with the word tax printed on the dial

The June 15 deadline for self-employed individuals to file their 2018 tax return has come and gone.  And if you don’t have the funds to pay your tax bill you are probably wondering what can be done.

If you owe taxes and are struggling to come up with the funds to pay the Canada Revenue Agency (“CRA”) you need to speak with us right away.  Don’t delay.

There are debt advisors out there who state that they can “settle” or “reduce” a tax debt with Canada Revenue Agency. If it sounds too good to be true, then it probably is.

They don’t “negotiate” and they don’t “settle” tax debts. CRA is not your typical creditor.  They didn’t choose to lend you money and become a creditor.  They become a creditor by virtue of the self reporting tax system we have.  And they want to be paid. In full.

They are not business people in the traditional sense.  Collectors have no authority to settle or reduce a tax debt save and except for circumstances governed by the Income Tax Act or the Bankruptcy and Insolvency Act.

They also have extraordinary powers.  This would include issuing garnishees to banks, investment sources, and to your customers. They file liens and writs on a daily basis.

CRA uses a number of methods to try and collect the tax debt:

Firstly, CRA collections will demand payment. If you pay, all further action stops. If you don’t pay, the collection action gets stepped up a notch.  There is no negotiation over how much you owe. The collector has no authority to do that.

If you fail to pay, the agent assigned to your case will begin contacting you to try and find out as much as they can about you.

Once you have engaged in a dialogue, the agent may try to negotiate with you if you provide further information. They may offer to consider a payment plan. They will provide you with a financial disclosure form asking you to disclose where you live, work, bank, monthly income and expenses, debts, and assets.

Payment plans are based on essentially two things;

  1. Income available over and above basic household needs or in the case of a business, monthly operating costs.
  2. Your ability to borrow or liquidate assets to satisfy the debt.

Lastly, if you can’t make the payment, for whatever reason, the CRA collections department will take action. Remember that financial disclosure form? It now proves very handy for that agent:

  • Your banking information will be used to freeze your account;
  • Your employment information will be used to garnish your wages;
  • Your housing information will be used to place a lien on your home.

So when you hear debt advisors saying they can settle the debt.  Be careful.

So, the best way to meet that debt head on is to take control. Licensed Insolvency Trustees are the go to professionals of choice when dealing with debt.  We are mandated to explain all of your options to you.

The experienced professionals at Boale, Wood & Company Ltd. understand the stress that financial difficulty can cause.

We know that realizing that you are experiencing financial problems is a hard thing to do for most people and sometimes you feel helpless. But instead of feeling helpless, let us help you gain control of your debts and understand your options.

Start by scheduling a meeting with us to discuss the solution best suited to your situation. This meeting is free and there is no pressure or obligation for you to make a decision right away.

We have the expertise to find the solution best suited to you.

Call us, it’s not too late. (604) 605-3335.

 

 

 

 

 

 

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