Carrying some extra credit card debt is not as devastating in your 20s as it can be in your 40s. This is the stage in life when you should be building assets that will help you transition into retirement. If you carry a lot of high-interest consumer debt, building any amount of wealth is next to impossible. Instead, you are struggling to keep up with debt payments and pay for everyday living expenses.
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How much debt is too much debt in your 40s?
From our most recent study, we know that the average debtor in their 40s is filing insolvency to gain debt relief from more than $64,700 in consumer credit. This debt does not include their home mortgage.
Debts the average 40 to 49-year-old wipes out through a bankruptcy or consumer proposal include:
- $17,800 in credit cards, on which they are barely making minimum payments
- $20,000 in bank loans, installment loans, lines of credit and overdrafts
- 2 in 4 walk away from almost $7,400 in payday loan debt
- Many file because they struggle with a high-interest installment loan paying 39% to 59% interest
- 15% typically eliminate an average of $15,100 in student debt
- One-third erase an average of $19,900 in tax debts
Your debt does not have to be that high for it to be a problem or for a bankruptcy or consumer proposal to make sense.
There are common warning signs that you are carrying excessive debt:
- You have difficulty paying your bills on time
- Your debt is increasing because you are using an overdraft, a line of credit or taking on new credit like payday loans or cash advances to make ends meet
- You are only paying the minimum balance on your credit cards and cannot afford more than that
- You are receiving calls and collection letters from collection agencies.
These are all signs that you should talk with a Licensed Insolvency Trustee about options like a consumer proposal or declaring bankruptcy.
Even worse, this level of debt prevents you from saving for a home, paying down your mortgage, or putting money aside for your retirement.
How long will it take me to recover?
We understand the pressures you are under. You are living paycheque to paycheque, trying to manage your everyday living costs and raise a family. You may want to buy a home or simply keep the home you have. You feel you need credit to survive, and right now, that’s true. You are literally using debt to survive. But that’s not a long-term solution and will only grow worse as you enter your 50s and 60s. A bankruptcy or consumer proposal is meant as a fresh start.
To understand how long the process may take, I’ll review two different insolvency options available to deal with problem debt: a bankruptcy or consumer proposal.
How long you will be bankrupt depends on how much you earn and whether you have filed bankruptcy before.
- For a first time bankrupt with no surplus income, you can complete your bankruptcy in nine months.
- If you earn above the government income threshold, a first-time bankruptcy lasts 21 months.
During that time, you will make monthly payments to the trustee. A basic bankruptcy will cost a minimum of $200 a month. If you have surplus income, you will be required by bankruptcy law to pay more.
The average person filing bankruptcy in their 40s has a monthly after-tax income of just over $2,900 for a family of 2. Based on that income level, he will be required to pay an additional $80 into his bankruptcy each month, and his bankruptcy will last for 21 months. NOTE: This is an example and may not include allowable expenses based on your circumstances. Your trustee will review your income and expenses to give you an estimate of the cost of bankruptcy in your unique situation.
It is possible to get a secured credit card while bankrupt, but otherwise, you will find your access to new credit limited during your bankruptcy proceeding. However, once completed, you can continue to take steps to rebuild your credit score. The credit impact of your bankruptcy will decline over time and is completely removed seven years after your bankruptcy discharge.
Most people in their 40s are earning enough to trigger surplus income payments. Since this can result in high monthly payments, people often choose to file a consumer proposal to avoid this penalty. Based on our data, 4 out of 5 debtors in their 40s file a consumer proposal as an alternative to bankruptcy.
A consumer proposal is a negotiated debt settlement agreement between you and your creditors to pay a portion of what you owe, in exchange for which they agree to forgive the remainder of your debts. Your consumer proposal payments are based on how much your creditors will accept and how quickly you wish to pay this settlement.
Generally, creditors expect to receive at least what they would get if you filed bankruptcy. This means the more you make, the more they will expect you to contribute to your proposal. If you have any assets, like equity in your home, they will expect a higher percentage as well.
The maximum a consumer proposal can last is 60 months (five years). You can negotiate your monthly payments based on five years but pay your proposal off sooner if you wish. On average, we have found that most people complete their proposal in 42 months.
So, if your consumer proposal will last five years, when will it be removed from your credit report? One year later. That is because a consumer proposal is removed the EARLIER of:
- Three years from the date of completion or,
- Six years from the date of filing.
Will filing insolvency affect my ability to own a home?
In 2020, 6% of insolvency filers owned a home at the time they filed. While the remainder were renters, most had the desire to own a home.
Carrying an excessive amount of credit card debt and other unsecured debt makes homeownership difficult. High monthly debt payments may mean you can’t afford to pay your mortgage. If you are not yet a homeowner, too much debt prevents you from saving for a down payment, and your debt-to-income ratio will be too high for any mortgage lender to accept the risk.
In most cases, an existing homeowner will file a consumer proposal to eliminate unsecured debt. Filing a proposal allows you to keep assets like your home equity. A consumer proposal will not usually impact your existing mortgage if you keep your mortgage payments current.
If you wish to buy a home, you should be able to qualify for a mortgage two years after completion, assuming you have established two or more new credit facilities of $2,500 each and you meet any other income and down payment qualifications.
Filing a bankruptcy or consumer proposal is not right for every financial situation. However, if you are carrying a lot of unsecured debt, and this debt is preventing you from taking control of your future, consider talking to a Licensed Insolvency Trustee about these options.