Many of us dream of having a challenging career, one where we are our own boss and enjoy what we do. Working for yourself can provide just those benefits, however the potential rewards also come with risk. For one of our clients, the risk was the implications of a long term illness on her income and personal finances.
Madison (not her real name) was a high earning self-employed sales rep for an Oshawa distribution company. She was earning a great salary, $180,000 a year before taxes, enjoying the fruits of her labour while still saving for her retirement. Madison was doing everything right financially until she developed a chronic, but treatable illness. Off work for 4 years to recover and work out treatment plans, her finances took a huge hit. Madison used up any savings she had, sold a small cottage she owned, and eventually had to pull out her RRSP money. Selling the cottage and even her car reduced her monthly expenses, but it wasn’t enough. With no steady income, and no disability insurance, she turned to credit to pay for basics like food, a roof over her head and on-going medical costs not covered by OHIP. All the while, Madison kept hoping her illness would stabilize enough that she could return to work so she could reverse the downward spiral of her finances.
Illness Often Leads To Financial Problems
- More than one in 7 debtors in Canada list illness as the primary cause of their insolvency despite public health care in Canada.
- Loss of income or inadequate disability payments can lead to increased debt and default on existing debt payments.
Madison has since returned to work but is easing in slowly so as not to cause a relapse in her health problems. Unfortunately the minimum payments on her debts are now more than $2,500 a month. Her income is now less than half of what it was before her illness. What also worried Madison was that while she was able to make the minimum payments on her credit cards, she was only able to do this by postponing her income tax installments and was building up more debt through taxes she owed.
Madison’s solution needed to solve not only her debt problems but fit her personal situation. While her still higher than normal income would mean surplus income payments of around $1,400 a month in a bankruptcy, uncertainty around her health situation made Madison reluctant to commit to a consumer proposal. While her monthly costs would be lower in a proposal, this would mean committing to a 5 year repayment plan rather than the 21 months her bankruptcy would last. From Madison’s perspective she was still lowering her monthly payments from $2,500 a month to an expected $1,400 – a substantial savings and enough to allow her to keep up with her future tax installments. For Madison bankruptcy was the right solution, whereas for someone else, based purely on the numbers, they may have chosen a consumer proposal.
Additional financial risks for a self- employed earner
Madison’s situation shows the impact that a health challenge can have on anyone’s finances, especially someone who is self-employed. She faced the typical risks of a self-employed earner that can often lead to debt:
- Fluctuations in income
- Unpaid sick leave
- No company disability or benefits
- Failure to keep up with personal tax installments
For Madison, bankruptcy was not something she ever expected, but it did become the solution to her financial recovery while she focused on her health and concentrated on her customers.