Debt is a part of life, even when you’re in a positive equity situation.
For example, when you buy a home, your mortgage lender will often offer you a secured line of credit. This way, you can borrow to make upgrades and increase its worth above the value of the loan.
This kind of good debt is more of an investment in your net worth, and still keeps you in a positive equity situation.
But what happens if you’re in that same situation and get into so much debt that you struggle to make monthly payments? Are there debt management solutions available that will provide debt relief when you have positive equity?
Yes, but there aren’t as many options available to you as there would be for someone whose debts are larger than their assets, putting them into negative equity.
Every day, consumers read, hear, and see advertisements that say you can keep your assets and get rid of your debt. It sounds easy in theory, but the truth is that while you may be able to technically keep your assets, you can’t keep the equity in the assets.
In other words, you can live in your house and hold the deed but if your net equity is positive, your lender or creditor can go to court and get an order to force the sale of your house if you can’t make your payments.
One of the toughest situations licensed insolvency trustees face is helping people who are solvent but believe their creditors should still accept a deal. We want to help but if you have enough in equity to pay your creditors, they will expect to be paid.
Mary* found herself in that exact situation when she visited our office.
Debt Repayment When You Have Positive Equity
Mary, a single mother with two kids, was in precarious financial straits. She had guaranteed the debts of her ex-husband’s failed business to the tune of $125,000. She also had about $25,000 in total credit card debt and owed Canada Revenue Agency $5,000. Total debt: $155,000.
She was supporting her family on $3,200 per month. An appraisal revealed that the condo she was living in with her children was valued at $675,000, for which she was carrying a mortgage worth $425,000. After making her mortgage payment and paying other family expenses, Mary had little cash flow at the end of every month, and could not afford to repay the $155,000 of bank and income tax debt.
Mary proposed offering the bank $30,000, which we explained was problematic. This was because her net worth was actually positive versus her debt load. Mary’s assets in total equalled $675,000, against her total debt of $580,000. Therefore, her creditors have a right to expect that they will be repaid in full because Mary is solvent.
When filing a consumer proposal, creditors are privy to your entire financial picture. In most cases, they accept the modified payments offered under the proposal when it’s clear that you’re in a negative equity, low asset, or insolvent situation.
Needless to say, Mary was desperate for a debt solution that would allow her to keep her home and still provide for her children. Fortunately, there was still an option that could help make repayments easier.
A Debt Consolidation Solution Can Help
When debt becomes insurmountable, but you still have equity you want to protect, a consumer proposal usually won’t absolve you of any debt because you still have the resources to pay in full. In Mary’s case, she would have to sell or divest herself of her equity before filing a consumer proposal – or even declaring bankruptcy – could even be considered.
However, a debt consolidation solution could work.
Debt consolidation gives you an opportunity to pay all or several of your creditors right away, which will keep them happy and protect you from any legal action they may be taking against you.
A debt consolidation solutions brings many overall benefits, including:
- Creditors and collections cease unwanted contact
- You pay a lower interest rate
- You pay only one creditor instead of several
- Your credit rating is protected
- You avoid bankruptcy, and the serious credit consequences that result
Getting a Debt Consolidation Loan
To secure the funds necessary to pay off her creditors all at once, Mary could take out a secured loan against her condo, apply for a second mortgage, or use her secured line of credit. With all of her original debts paid, she can then concentrate on making one monthly payment on her secured loan. Her interest rates will likely be lower than she had been paying, especially on her credit cards.
But if someone doesn’t have equity, and needs to borrow to consolidate debt, we can match them with a reputable lender who will quickly pay off their creditors. They would then simply pay the lender back, again at a lower interest rate than what they’re currently paying.
Whatever your situation is, there is a debt consolidation solution that would work for you and your family. The overall goal is to protect your credit rating, get your payments more affordable, and keep your creditors happy and more likely to extend you credit in the future.
You will need a licensed insolvency trustee to handle all the necessary paperwork and manage the debt consolidation process. If you have questions about debt consolidation or think it might be a good option for you, feel free to call my office. We’ll take a good look at your financial picture and explain every possible solution and outcome so you can make an informed decision.
Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.
For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped individuals, families, and businesses in Toronto move beyond debt towards financial health. Contact us today for a free consultation.
TIP : Sound financial health sounds easy in theory, but life tends to offer up sudden and unexpected surprises such as job loss, illness, and changes in family status. Any of these situations can hurt our pocketbook to the point where we’re overwhelmed with debt. Putting away money in a Tax Free Savings Account (TFSA) offers tax advantages and penalty-free withdrawals if you need to access funds quickly.
*Not a real person, but this scenario is based on real cases