At 40, Fabien decided to put his finances in order. And it is time, because he is drowning in debt and moreover has to face a separation.
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Since finishing his studies and entering the workforce as a physiotherapist, Fabien cannot remember a single month when his credit card balances were at zero. For years, he has been filling the shortfall with credit, and the amounts keep piling up. His cards now show amounts over $ 15,000.
Six months ago, after 11 years together, he separated and now has to pay their rent of $ 1,100 per month on his own. His loans were joint, but his ex-girlfriend went bankrupt. So here he is alone to repay a car loan with a monthly payment of $ 650 for another three years, and a personal loan of $ 6,000. Fabien notices that he is rushing straight into a wall and realizes that he must find help.
A chronic budget deficit
To find out what solutions are available to him, he went to consult a licensed insolvency trustee. Fabien fears the repercussions of a bankruptcy or a consumer proposal on his credit.
“Their impact on the credit file remains the first source of concern for people who come to consult us,” notes Pierre Fortin, licensed insolvency trustee and president of Jean Fortin et Associés.
During his first meeting with Fabien, the trustee began by measuring his level of indebtedness with a tool called the debt ratio. The ratio compares disposable income with the total amount of debt and housing costs. By performing this calculation, we obtain a rate that provides a clear indicator of its ability to meet its financial obligations.
“Even with a salary of $ 64,000 per year, Fabien’s debt level is 48%, which exceeds the 40% limit set by financial institutions for obtaining a consolidation loan. This scenario is therefore excluded from the possibilities in his case, ”explains Pierre Fortin.
In addition, the preliminary budget prepared by the trustee shows that there is a deficit of $ 650 per month, which explains why Fabien is always going into more debt to succeed in making ends meet.
Impact of the proposal
Under these conditions, the status quo is obviously not the right solution and we must act.
Preferring to avoid bankruptcy, Fabien opted for the consumer proposal. This consists of offering creditors a sum less than the initial debt. Personal loans and credit cards will be included in the proposal. Fabien also chose to return his vehicle to the creditor, because the monthly payments are too high for his financial capacities. This debt was therefore integrated into the overall offer, and in return, he was able to rent a car for $ 340 per month, which represents a saving of $ 310 compared to what he was paying previously.
The creditors have accepted a proposal of $ 18,000 which will be paid for five years at the rate of $ 300 monthly.
The trustee also suggested that Fabien find a cheaper apartment, which would allow him to repay the proposal more quickly thanks to the savings made.
Throughout the life of the proposal, their credit report will show an R-9, the worst, and then drop to R-7 for three more years.
“But as soon as Fabien has completed his proposal, he will benefit from a budget surplus since he will no longer have debts. Its debt ratio will drop to only 29% and its credit report will also be on the mend, ”says Pierre Fortin.
This will give him the motivation to achieve his goal.
Advice
- Regularly measure your debt ratio to see if it is increasing or decreasing. This real-time photo will help you take stock of the state of your finances. Several tools are available online, including JeanFortin.com/ratio, as well as that of the Financial Consumer Agency of Canada: www.itools-ioutils.fcac-acfc.gc.ca/yft-vof/fra/credit-1-7.aspx.
- Research has shown that in the context of a bankruptcy or a consumer proposal, after a drop in the credit score, it ends up rising unlike people who have not taken the bull by the horns and have tried to get by on their own. This better score also translates into a 15% higher credit acceptance rate for individuals who have filed for bankruptcy or a proposal, compared to those who have remained in the status quo and allowed their situation to deteriorate.
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