We work closely with several local credit counselling agencies so it’s not unusual for clients to be referred to our offices from credit counsellors. Sometimes they are sent straight to our office because it’s obvious that their situation is severe enough that only a bankruptcy or consumer proposal will solve their debt problems. At other times, they come to us after a failed debt management plan.
Eric (not his real name) was one such client. Honestly wanting to repay his debts, Eric first went to see a credit counsellor and arranged a debt management plan to deal with roughly $30,000 in credit card debt and a line of credit. Through negotiation with his banks, the credit counsellor was able to solidify a five year repayment plan which would see Eric pay $575 a month or a total repayment over 60 months of $34,500 including fees to the credit counselling agency. This was a good deal for Eric. He received a break on interest costs and hoped to be debt free in 5 years.
The reason Eric had gone with a debt management program in the first place was that he was certain he could make it work. His fear was losing his home and the $12,000 equity he had built up and he wanted to feel like he had made every effort to repay what he owed. Eric and the credit counsellor crunched some numbers, and although the budget was tight, both felt it could work.
At first it was a success – it took a couple of months to get his creditors on board, but they did accept the deal. For a year things went well and Eric was able to keep up with his payments.
However 5 years on a very tight budget is hard to maintain and after the first year Eric started to feel the lack of flexibility in his budget. Living expenses inevitably rose and neither his raise nor overtime pay was enough to compensate for the extra outflow. He tried to cut back on even more spending, but despite his best efforts, his $575 debt management plan payment was just too high.
If you start to fall behind in a debt management plan, your credit counsellor will try and help you keep it going, but the creditors, the banks, won’t wait forever. Since a debt management plan doesn’t provide any creditor protection other than what they agree to voluntarily, once payments stop, all deals are off.
Seeing that things weren’t changing for Eric, his counsellor suggested he meet with a licensed insolvency trustee to look at other options.
A Better Solution
Eric and I met, reviewed his assets (like his house), his income and family size, and who he owed the money to. Based on my experience, I felt his creditors would likely accept a consumer proposal at payments of about $250 per month for 60 months – less than half of what he was paying into his debt management plan, and much easier on his budget. This amount would include all fees, and once he successfully pays the proposal, the balance of the unsecured debt will be waived.
What surprised Eric was three facts he hadn’t considered when he signed up for his debt management plan:
- In most cases, a consumer proposal is cheaper than a debt management plan. His payments in a consumer proposal would be half of what they were in his debt management plan for the extinguishment of the exact same debts;
- He was still able to keep his home and protect the equity he had accumulated; and
- The impact on his credit report of both a debt management plan and consumer proposal would be similar since both would remain on his credit report for a period of time after he completed his payments – 2 to 3 years in the case of a debt management plan depending on the credit bureau and 3 years for a consumer proposal.
In fact, Eric was now a little disappointed he hadn’t gone the consumer proposal route first since he had been making higher debt management plan payments for a year and he felt he had wasted an extra year now in which he credit report would state that he was in a repayment plan that didn’t work.
We filed his consumer proposal shortly after that first meeting. His creditors voted in favour of the proposal, and Eric has been maintaining his payments easily. Eric tells me that the credit counsellors were a tremendous help to him in terms of understanding his budget, but he feels he is in the correct option now and is much more confident of his ability to complete the process in 5 years.