Self-Employed Homeowner With $137,000 of Debt Keeps His Home Despite Having Equity

Self-Employed Homeowner With $137,000 of Debt Keeps His Home Despite Having Equity

M.B. approached us with approximately $137,000 in high-interest consumer debt. We’ll call him M.B. to protect his privacy.

He was married with one child. M.B. was self-employed, while his spouse was employed. Both earned relatively modest incomes.

The couple also owned their family home.

When we reviewed the estimated value of the property and the outstanding mortgage, we determined that selling the house could potentially generate approximately $40,000 after taking the relevant costs and obligations into account.

That presented an important issue.

M.B. had significant unsecured debt and limited household income, but he also had an asset with equity that could potentially be available to creditors in a bankruptcy.

From the beginning, however, M.B. was clear about one thing:

He and his family did not want to sell their home.

Why the $40,000 of Home Equity Mattered

Owning a home doesn’t automatically prevent someone from filing a consumer proposal, nor does it mean you have to sell the home.

But the amount of equity in the property can be very important when determining what creditors may be willing to accept in a settlement.

If M.B. filed for bankruptcy, the approximately $40,000 that could potentially be realized from the property would have to be considered.

A consumer proposal offered another possibility.

Rather than surrendering the home, M.B. could make an offer to his unsecured creditors that took into account what they might otherwise expect to receive if he became bankrupt.

The challenge was finding a proposal that creditors could reasonably accept and M.B. could afford.

His Current Income Wasn’t Enough

We reviewed M.B.’s household income and expenses.

The numbers presented a problem.

At his current level of self-employment income, there wasn’t enough room in the family’s monthly budget to support the consumer proposal that would be required.

M.B. believed his business income could improve over time.

But a future increase in income wasn’t guaranteed, and the family’s immediate debt problem still needed to be addressed.

That’s when another option became available.

A family member was willing to provide financial assistance to help M.B. make the proposal payments.

That additional support made it possible to put forward a consumer proposal while giving M.B. time to work toward increasing his self-employment income.

Comparing M.B.’s Options

The decision wasn’t simply a choice between repaying $137,000 in full or filing a proposal.

His home equity, modest household income and desire to keep the property all needed to be considered.

The treatment of home equity in bankruptcy and the amount required in a consumer proposal depend on individual circumstances and applicable insolvency rules. The figures above reflect M.B.’s circumstances at the time.

Settling $137,000 of Debt for $42,300

Ultimately, M.B. was able to make a consumer proposal that settled approximately $137,000 of high-interest debt for $42,300.

That’s approximately 31% of the original debt.

Upon successful completion of the proposal, approximately $94,700 of the original unsecured debt would not have to be repaid.

But the amount of debt reduction tells only part of the story.

M.B. also accomplished the goal that had been important to him from his first meeting with us:

His family was able to keep their home.

The approximately $40,000 of realizable value in the property wasn’t ignored. It was an important consideration in determining what needed to be offered to creditors.

Instead of dealing with that value through a bankruptcy, however, the consumer proposal provided a way to address his creditors while retaining the property.

How Family Assistance Made the Proposal Possible

There was another important element to M.B.’s case.

Based solely on the family’s income at the time, the proposal payments weren’t affordable.

M.B. expected his self-employment income to improve, but he needed a solution before that happened.

A family member’s willingness to provide financial assistance helped bridge that gap.

This allowed M.B. to deal with his creditors immediately while giving him time to improve his business income.

It demonstrates that the source of funds for a proposal doesn’t always have to come exclusively from the debtor’s existing monthly income.

Depending on the circumstances, assistance from family or another available source of funds can sometimes make a proposal possible where the household budget alone would not.

The Outcome

M.B. entered the process facing three competing realities.

He had approximately $137,000 of high-interest debt.

His home had approximately $40,000 of realizable value.

And his household income wasn’t sufficient at the time to support the proposal on its own.

Selling the family home was something M.B. strongly wanted to avoid.

With financial assistance from a family member, a consumer proposal provided another path.

M.B. was able to settle approximately $137,000 of debt for $42,300, stop further interest on the unsecured debts included in the proposal and retain his family home.

Instead of being forced to choose between an unsustainable debt load and selling the home, M.B. was able to create a repayment arrangement that took the home’s equity into account while allowing his family to remain there.

Consumer proposal and bankruptcy outcomes depend on individual circumstances. Home equity can affect both the treatment of assets in bankruptcy and the amount creditors may expect under a proposal. The results described here reflect M.B.’s circumstances and should not be interpreted as a guarantee of similar results.