It may surprise you to learn that 1 in 5 bankruptcies and consumer proposals in Canada are caused by health care issues. Despite public health care like OHIP, the secondary associated costs of an illness or injury lead can lead to overuse of credit. Out-of-pocket costs, time off work and the resultant loss of income are an immediate drain on cash flow. Supplemental health insurance or disability programs and emergency funds are not always sufficient to keep up with fixed living expenses for an extended period. Debts that were manageable before an illness, no longer are on a reduced income.
A medical bankruptcy or consumer proposal can be the solution to debt built up while off work:
- personal bankruptcy is a way to be discharged from medical and debt from other unsecured creditors and is often a viable option for those who continue to experience income loss, are on permanent disability or reduced work hours. A lower family income does not trigger higher surplus income bankruptcy costs. Eliminating debts, combined with scaling down previous living costs, can help reduce the reliance on credit going forward.
- a consumer proposal is a common option for those who have returned to work or been able to re-establish their income after a period of illness. As with our example below, debtors can propose to repay what they can afford in order to recover financially.
Below is an example of how one couple dealt with the financial burden of an unexpected illness.
Adam and Lori (not their real names) didn’t live extravagantly but they did have a fully mortgaged home, had recently financed some new furniture purchases. They were able to keep up with their payments just fine when both spouses were working. Unfortunately, Adam fell ill, and while he was able to collect on his company disability plan for the year he was off, this was at a significantly reduced amount. Lori’s income wasn’t enough to make up the difference and they soon found their credit card debt growing.
Adam and Lori had worked hard to buy their home and up until Adam’s illness, all was going well. Despite the setback, they really wanted to keep their home. Both Adam and Lori were shocked to learn how unprepared they were to handle a reduction in income. Major household expenses are often semi-fixed. It takes time to make adjustments to cut back on most large living costs. Housing costs including mortgage payments, insurance, property taxes, and utilities cannot be reduced overnight. In addition, Adam did not know how long his recovery would take. He was hoping his employer would be able to offer some light duty to allow him to return to work sooner, but that didn’t happen.
The result was that, while Adam was off work, they added to their debt load by supplementing their income with credit card debt. When they came to see us, their objective was to find a way to get back on their feet financially now that Adam had returned to work.
The Debt Scenario
While their mortgage was their biggest debt, with Adam back at work they knew they could maintain those payments. Their unsecured debts consisted of a finance company loan related to some furnishings and their credit card debt which ballooned to $18,000 when Adam was off work.
With Adam now working, their combined household income would mean that if they were to declare bankruptcy they would be subject to the surplus income penalty. That would mean making payments of $715 a month for 21 months for a total cost of $15,000. Paying this much each month would continue to jeopardize their ability to keep up with the mortgage payment.
Adam and Lori chose instead to offer a consumer proposal to their creditors. They were able to offer $15,600 with payments of $325 for 48 months. The monthly cash flow savings compared to filing bankruptcy was something they preferred while they got on their feet financially.
In order to get ahead sooner, Adam and Lori decided to make biweekly payments instead of monthly payments. Making biweekly payments fit into Adam’s pay schedule and the result was that they were able to complete their proposal in just 3 years and 7 months, 5 months ahead of schedule.
At the end of their proposal, Lori sent an email expressing happiness with the fact that the proposal allowed them to rebuild their finances. “I am very excited to finally finish this chapter in our life, we have learned a lot about saving more for the unexpected. We are now doing very well financially, this was the best thing we could have done. Thank you for your help.”
Find You Debt Recovery Solution
Whether your right solution is a consumer proposal or bankruptcy we can help you eliminate debt and gain a fresh financial start. They trusted our team for help, so can you. Contact us today for a free consultation.