Month: May 2014

Failed Debt Consolidation. Now What?

failed-debt-consolidation

Sometimes when faced with numerous loans and credit card bills, the first step people try is obtaining a debt consolidation loan.  The attraction is obvious – a single, lower monthly payment where a lot of unmanageable monthly payments used to be.

Remember a debt consolidation loan does not actually reduce your debt.  Although debt consolidation may lower your monthly payments you still have to be able to afford those payments over the life of the consolidation loan. When taking out a consolidation loan the first step should be to make a budget to keep you on track and reduce spending where you can.  A budget is a plan of where your money will go each month and will help you to know exactly how much money you can afford to pay each month towards debts.

While debt consolidation is a good option for some, for others it can be dangerous and drive you further in debt, just the opposite of what you want.

Why Debt Consolidation Often Fails

How does this happen?  Well, it’s not too hard to understand the potential risks of consolidating debt with a loan:

  • Poor credit and no assets to pledge as security, may be making it hard to secure a consolidation loan at a reasonable cost.
  • You extend the term of the loan too far. The math is pretty simple – the longer the term, the lower the monthly payments. However the lower the payments, the more interest you pay, the longer it takes to get out of debt. Life has a funny way of intervening in the meantime. Someone in the family loses their job, unexpected expenses crop up. Now you’re missing even these payments and you’ve tapped out all your credit resources.
  • You didn’t consolidate all your debt. This is a common one. You went to the bank and they said they would give you a second mortgage of $35,000. You used this to eliminate some, but not all of your credit card debts. You figured with the lower monthly payment you could deal with the other credit cards on your own. Again, life got in the way and the extra debts remained, and perhaps even increased.
  • Your debt payments still took too large a percentage of your monthly budget. Before you take on any consolidation loan, make sure there is enough savings that you can a) afford the payments and b) get ahead. Otherwise you are just trading dollars and not getting anywhere.

Now What? Can You File Bankruptcy After Consolidating Debt?

You may find yourself at a point that you tried the debt consolidation program, failed and are wondering, what now? 

If you are struggling with your consolidation payments you can look into two options when a debt consolidation program fails, that could be a solution for you:

  1. Bankruptcy – If you have little or no assets, and your income isn’t high, then bankruptcy could be an answer.
  2. Consumer Proposal – A consumer proposal allows you to pay back a portion of what you owe to your creditors when you can’t afford to pay them back in full.

Both options will give you protection against legal action from your unsecured creditors.

If you are missing your payments on your debt consolidation loan, call us to discuss filing a bankruptcy or a consumer proposal and get the fresh start you need.

If you are considering a consolidation loan, but haven’t signed on the dotted line yet, call us anyway for a free consultation. We would be happy to take a look at the numbers with you and see if you will succeed by trying a consolidation loan or if you should save yourself the extra time and stress, and look at another option first.

A Clean Credit Report Does Not Equal A Good Credit Report

A Clean Credit Report Does Not Equal A Good Credit Report

One of the most common questions that we are asked by people researching debt relief options is “how will this affect my credit report?” This statement is usually followed by, “I have perfect credit and I don’t want to lose it by filing bankruptcy or a consumer proposal.” Are you having those same thoughts?

Before answering the first question, I’d like to explore the second phrase, if I may.

People often confuse a clean credit report with a good credit report.

A clean credit report shows that you are making all of your required payments. You haven’t defaulted on any of your debt. You are in fact a good “payer”. A clean credit report is very important because it will impact the interest rates you may be charged and whether or not a lender will request security or a co-signer for your borrowing – but it is only half of the story.

A good credit report shows that your total debt falls within the normal range of borrowing and that you meet the lender’s criteria to be approved for additional credit at reasonable rates. The factors that make up a good credit report are much more complicated than “I’m making my payments”.

When someone tells me they have “perfect credit” the first thing I ask is, “Have you applied to your bank for a line of credit or loan to deal with your debts?” Invariably the answer is, “They won’t approve me because I have too much debt.”

I am sorry to tell you, but if you cannot be approved for new credit then you don’t have perfect credit. By refusing your new credit application the bank is telling you that you have too much debt.

Having sorted that out, let’s look at what your credit report might look like today.

Credit Report Rating System

All of the different credit items that you have are rated individually on your credit report.

  • A rating of 1 means you are making all of your required minimum payments. A ranking of 2 means your payments on that particular debt are one month late.
  • A rating of 3 means you are two months late and so on. Each lender has their own policy as to when they will assign an account to a collection agency. In practice, most lenders treat any ratings 4 or worse as a seriously derogatory issue.
  • You’ll never see a 5 or 6 on a credit report because most lenders refer your file to collections once you fall three months behind (a rating of 4 for that debt on your report).
  • I’ll skip 7 for a moment and come back to that.
  • A credit rating of 8 is used if a lender comes and takes their security for a loan. For example, if a car company repossesses your car then the debt will show as an 8, but not for very long. 8’s very quickly become 9’s. Ignoring bankruptcy for a moment, a 9 can also appear on your credit report when a debt has been written off, or when it assigned to a collection agency, or to a law firm.

So if you are meeting all your monthly payments you probably have a 1. However as we just saw, this does not mean you have access to any further credit.

If however, like most people considering talking to a bankruptcy trustee, you have missed a few payments or are frequently late, your lender probably reported this information to the credit bureaus and you have a ‘mark’ against your credit.

So far we have covered off a lot of ‘bad’ credit rating factors, before we have even considered filing for bankruptcy or a consumer proposal.

Right about now, most people are saying to themselves that “they don’t want to file for bankruptcy” because it will “destroy their credit”. Yet, as we have seen, their credit score is already in jeopardy and they probably can’t get access to new credit at reasonable rates.

So yes, bankruptcy and a consumer proposal do appear on your credit report. Technically, a bankruptcy is reported as a 9, and a consumer proposal, just like any other form of debt settlement, appears as a 7. Each will remain on your credit report for a specified period of time.

Initially filing for bankruptcy may appear to have the most detrimental effect on your credit report, but looks may be deceiving.

The question you really want to ask is not will filing bankruptcy or a consumer proposal affect my credit report, but rather what’s going to happen to my credit report if I don’t? If you need fresh start, free from debt, a bankruptcy or proposal may be the solution. Contact us today for your free consultation.

Worried about your credit? For more information on credit scores and credit repair try our Free Online Video Course on Rebuilding Credit.

Enroll for Free

Pursuing the “Do Nothing” Strategy

Man walking alone

As a Licensed Insolvency Trustee I meet with people every day who need to file for bankruptcy or submit a proposal to their creditors to deal with their debts. None of them want to take that route. It is an emotional and stressful decision but one they arrive at based on one over-riding conclusion: They need to get out of debt.

It is always your choice what action you take to deal with debts. It may be possible to continue along the same path you are on today, however let’s look at the consequences of a ‘do nothing’ strategy.

Interest squeeze: The first thing most people in debt start to realize is that their debt payments start to take up an increasing percentage of their monthly cash flow. If for example you owe $20,000 in credit card debt your minimum monthly payments are probably around $400. Unfortunately the majority of that is interest. That’s $400 less each month that you have to use for rent, food, clothing, transportation or whatever other bills you have to pay. To make ends meet they apply for more credit. This just increases their monthly payments even more until eventually they are so squeezed by interest costs they start to miss payments.

Debt collections: Once you begin to miss a few payments, you can expect to start hearing from your creditors. They will start by sending you a statement with your payment marked “overdue”. Next will come notices and letters requesting payment. Eventually your creditors may refer your account to collections and now you are desperate to stop the collection calls.

Desperation Borrowing: With your credit cards maxed out and the inability to apply for traditional loans, many start to turn to even more expensive alternatives to keep afloat. Almost 1 in 8 insolvent debtors use payday loans before they end up filing bankruptcy or a consumer proposal. Most take out multiple payday loan companies before they seek help.

The Never Get Out Of Debt Plan: Even assuming you stop putting money on your credit card, your debt will never disappear by paying the minimum payment. Using our same $20,000 credit card debt example, if you want to be out of debt in three years you will have to increase your monthly payment to $725. For the average person who comes in to see me that is 30% of their take home pay. That leaves very little left for you and your family to live on.

Wage Garnishment: If you owe the bank money, and you have not made your payments, the bank could take you to court to get a judgement. If they do get a judgement, they could garnish your wages. Also, please note that if you owe money to Canada Revenue Agency, they can garish your wages without a court order.

Cancellations and Repossession: In worst case scenarios, what often happens is individuals miss so many payments they are at risk of having their home or car repossessed and their services cancelled. This can often be the tipping point that forces them to look for a better solution.

One of the most often written or spoken testimonials we receive is from our clients who say that they wish they had contacted us sooner. Don’t let that be you. Refuse to do nothing. Take the time to deal with your debt. We give you options to be Debt Free. Contact us at 1-866-747-0660 today to book your free consultation.

Should You Try to Pay Off Your Debt on Your Own, or Just Go Bankrupt?

I read an interesting article on the Boomer & Echo website by Robb Engen recently titled: A Lannister Always Pays His Debts (And So Should You).

I have no idea what a “Lannister” is (apparently it’s a reference to a character in The Game of Thrones), but his basic premise is that unless you are deep in debt, you should pay what you owe. I agree with the basic premise of that statement.  The devil, of course, is in the details.  Just what does it mean to be “deep in debt”?

Mr. Engen starts with an example of someone who has total debts of $30,500, and he advises that you make your minimum monthly payment on all of your debts, and devote extra money to the highest interest rate debt.  In his example, “the minimum payments total $420 per month, and you’ve found $800 in your budget to commit to a debt repayment plan”.  With this plan, it only takes 45 months to be debt free.

This plan works great if:

  • You have “found $800 per month in your budget” for debt payments, and
  • You can keep at it for 45 months (which is almost four years).

If you have a high paying job and can afford $800 per month, and if you can avoid getting laid off or injured or otherwise becoming unemployed at any point in the next 45 months, this plan works. Unfortunately many of the people I work with don’t have $800 per month. In fact, while 81% of people who file a bankruptcy or consumer proposal have a job, their average net income is $2,366 per month.  Even worse, their average unsecured debt is over $61,000. You can read a lot about the average person who files bankruptcy in our annual bankruptcy study.

In simple terms, the average person who goes bankrupt has twice as much debt as in Mr. Engen’s example, so if we keep the math simple and assume they have $800 per month for debt repayment it would take 90 months (or seven and a half years) to get out of debt on their own.

But wait!  If the minimum payments were $420 per month for the person with $30,500 in debt, the person with over $61,000 in debt would have minimum payments of over $840 per month.

If they only have $800 per month for debt repayment, they have a problem.  They can’t even make their minimum payments, so they have no chance to actually start paying down debt in a meaningful way.

Of course I have also ignored the obvious: how can someone earning $2,366 per month pay $800 per month in debt payments?  That leaves $1,566 to pay rent, food, transportation and other living expenses, which would be very difficult.

Pay Debt or Go Bankrupt?

So here’s my suggested strategy:  I absolutely agree with Mr. Engen that you should make a budget and look for ways to cut expenses to free up cash for debt payments.  If you can free up enough cash to repay your debts in a reasonable time, that is absolutely the correct strategy.

What’s a reasonable time frame?  That depends on your age and financial stability.  If you are relatively young and work in a stable job, you may be able to devote three or four years to repaying debt.  However, if you are closer to retirement, or if your job is not secure, or if your income bounces up and down, a long term plan may not be possible.

If you don’t have the cash flow to repay your debts in a reasonable period of time the prudent approach is to consider other debt relief options

These alternative may include getting help from family, a debt consolidation loan, or yes, you may need to consider filing bankruptcy or a consumer proposal.

You can deal with some problems yourself.  Some problems require professional assistance.

I can fill my car tires up with air.  I don’t attempt to fix my transmission.  For large problems I consult an expert.

The key, of course, is to know whether your debts are small enough that you can pay them on your own, or if they are large enough that the only way to secure your financial future, for you and your family, is to get professional help.

If you are looking for good debt advice, our local, experienced professionals can help. Contact us today for a free consultation.