Homeowner With $230,000 of Consumer Debt Settles for $78,000 and Keeps His Home

Homeowner With $230,000 of Consumer Debt Settles for $78,000 and Keeps His Home

S.D. approached us with approximately $230,000 in consumer debt. We’ll call him S.D. to protect his privacy.

He was married with four children and earned a very good income. His spouse also worked, and for some time the family had been able to manage their debts reasonably well despite carrying some high-interest balances.

Then their financial circumstances changed.

S.D.’s spouse was laid off.

She remained unemployed for an extended period, leaving the family trying to support a six-person household on substantially less income.

The bills didn’t disappear when the second income did.

To cover their regular living expenses, the couple increasingly relied on credit.

Eventually, S.D.’s spouse found work again, but only on a part-time basis.

By then, the damage had been done.

Their consumer debt had grown to approximately $230,000.

$230,000 of Debt Was Becoming Impossible to Pay Down

S.D. had a good income and wasn’t necessarily unable to make payments.

The problem was what those payments were accomplishing.

With approximately $230,000 owing, much of it at high interest rates, paying down the debt within a reasonable period had become extremely difficult.

Even after his spouse returned to work part-time, the family’s income also had to support four children, their mortgage and normal household expenses.

Continuing to service the existing debts could mean spending years directing substantial amounts of money toward interest while making relatively slow progress on the balances themselves.

S.D. knew something had to change.

But he had another major concern.

Would Filing a Consumer Proposal Mean Losing Their Home?

S.D. and his spouse owned their family home.

Like many homeowners considering speaking with a Licensed Insolvency Trustee, they were worried that filing a consumer proposal — or any type of insolvency proceeding — might automatically mean having to sell their house.

That wasn’t the case.

The treatment of a home depends on factors including its value, the mortgages and other secured claims against it, and the resulting equity.

In S.D.’s circumstances, there was no realizable equity in the home.

We explained that a consumer proposal did not require him to surrender the property. Provided the mortgage payments remained affordable and continued to be made, the proposal itself did not force S.D. to give up his home.

That changed the conversation considerably.

The family could focus on solving the $230,000 unsecured debt problem without assuming that doing so meant losing their house.

Comparing the Options

We reviewed the family’s income and household expenses to determine what S.D. could realistically afford.

There was sufficient money remaining each month to make a consumer proposal payment while continuing to meet the family’s mortgage and normal living expenses.

Here’s how the alternatives compared:

The treatment of a home in a bankruptcy or consumer proposal depends on factors including the property’s value, secured debt and available equity. The figures above reflect S.D.’s circumstances at the time.

Settling $230,000 of Debt for $78,000

A consumer proposal gave S.D. a way to address the family’s unsecured debts without giving up their home.

The proposal consolidated the unsecured debts included in the filing into a structured repayment plan and stopped further interest from accumulating on those debts.

Most importantly, S.D. was able to settle approximately $230,000 of unsecured debt for $78,000.

That’s approximately 34% of the original debt.

Put another way, approximately $152,000 of the original unsecured debt would not have to be repaid upon successful completion of the proposal.

Instead of trying to pay $230,000 plus continuing interest, S.D. had a defined amount to repay and a clear end point.

Why the Consumer Proposal Worked

S.D.’s situation illustrates an important distinction between having a good income and having a manageable amount of debt.

His income was strong.

But supporting a spouse and four children while servicing approximately $230,000 of high-interest debt made paying the balances down within a reasonable period extremely difficult.

The family’s budget showed that S.D. could afford to make a meaningful monthly payment.

What he needed was a structure that would stop the interest and turn that affordable monthly amount into a realistic path out of debt.

The consumer proposal accomplished that.

It also addressed one of the family’s biggest fears: they did not have to automatically surrender their home simply because they sought help from a Licensed Insolvency Trustee.

The Outcome

S.D. went from approximately $230,000 in high-interest consumer debt to a $78,000 settlement through his consumer proposal.

Interest on the unsecured debts included in the proposal stopped.

The family continued living in their home and making their mortgage payments.

And instead of facing an open-ended struggle to repay $230,000 plus interest, S.D. now had a defined repayment amount that fit within the family’s monthly budget.

The period of unemployment had created a debt problem that could have followed the family for many years.

The consumer proposal gave them a manageable way forward without requiring them to give up the home they were trying to protect.

Consumer proposal and bankruptcy outcomes depend on individual circumstances. The treatment of a home depends in part on its equity and applicable provincial exemptions and insolvency rules. The results described here reflect S.D.’s particular circumstances and should not be interpreted as a guarantee of similar results.