Corporate Executive With Over $790,000 in Consumer Debt Avoids a Financial Cliff

Corporate Executive With Over $790,000 in Consumer Debt Avoids a Financial Cliff

N.P. approached us with more than $790,000 in consumer debt. We’ll call him N.P. to protect his privacy.

He was a corporate executive with a strong professional income. He lived with his wife, and his children were grown and no longer living at home.

From the outside, his financial situation may not have appeared particularly unusual.

But over time, N.P. had accumulated a very substantial amount of consumer debt.

How the Debt Grew to More Than $790,000

There wasn’t one single event that caused N.P.’s financial difficulties.

Instead, the debt developed gradually through an ongoing over-extension of credit.

A significant portion of the money had been used to help pay for his children’s education. At the same time, the family’s overall spending had exceeded what N.P. could sustainably afford.

One of the biggest problems was how the debt was being managed.

Rather than reducing the balances, N.P. was primarily making the minimum required payments on his various credit facilities.

With large balances and high interest rates, much of his monthly cash flow was therefore being consumed by simply servicing the existing debt.

By the time N.P. came to see us, he was still making his payments — but barely.

He hadn’t reached the edge of the financial cliff yet.

But he could see it approaching.

Without a significant change, it was only a matter of time before he would begin missing payments and potentially defaulting on some of his debts.

Bankruptcy or a Division I Proposal?

With more than $790,000 in consumer debt, N.P. needed a solution that addressed the underlying problem rather than simply finding another way to continue making minimum payments.

Because of the size of his debts, a consumer proposal was not available to him. Two of the options we considered were bankruptcy and a Division I Proposal.

Here is how those options compared based on N.P.’s circumstances:

Bankruptcy and proposal outcomes depend on factors including income, assets, family size, creditor claims and applicable government standards. The figures above reflect N.P.’s circumstances and the estimates considered in his case.

Why Bankruptcy Wasn’t Necessarily the Best Option

At first glance, bankruptcy might seem like the obvious solution to more than $790,000 of consumer debt.

For N.P., however, his high income and wish to avoid bankruptcy changed the equation.

Under Canada’s bankruptcy system, individuals whose household income exceeds the applicable government standards may be required to make surplus income payments.

For N.P., those payments were expected to be significant.

He also would have lost a small portion of his RRSPs that was not protected in bankruptcy.

As well, in a bankruptcy, creditors can require a bankrupt individual to appear in bankruptcy court, and the court may order additional payments or keep the individual in bankruptcy longer than initially expected.

Bankruptcy therefore wasn’t necessarily the simple or inexpensive solution it might initially appear to be.

Why the More Expensive Option Made Sense

A Division I Proposal was expected to cost N.P. more overall than bankruptcy.

But total cost wasn’t the only consideration.

The proposal offered something that was extremely important given his circumstances:

Certainty through a manageable and predictable monthly payment.

N.P.’s immediate problem wasn’t simply the $790,000-plus balance.

It was cash flow.

He was already barely able to keep up with the minimum payments required by his creditors. A bankruptcy that required substantial monthly surplus income payments could therefore create another significant strain on his household finances.

The Division I Proposal allowed N.P. to make an offer to his creditors based on a monthly payment he could realistically manage.

Once the proposal was accepted, he knew what he needed to pay and when the process would end.

And unlike bankruptcy surplus income payments, his proposal payments would not increase simply because his income subsequently improved.

For N.P., accepting a potentially higher overall repayment in exchange for a manageable monthly obligation made the proposal the more practical solution for his circumstances.

The Outcome

Most importantly, N.P. was able to deal with his financial situation before he began defaulting on his debts.

The Division I Proposal allowed him to step away from the cycle of making minimum payments on more than $790,000 of consumer debt and move onto a structured repayment plan.

Instead of wondering how long he could continue keeping up with his creditors, N.P. now had a defined payment and a fixed end point.

As his cash flow improved over time, N.P. was even able to complete the proposal early.

The proposal didn’t simply address the debt that had accumulated over the years.

It allowed N.P. to avoid the financial cliff that was approaching and gave him a realistic path toward putting the debt behind him.