Avoid Being Overextended on Credit

I’m not so naive think that the majority of us will go through life without debt.  Nor have I personally been privileged or frugal enough to live debt free.  So assuming one is fortunate enough to avoid a crisis like job loss or health issues, how much can one really afford to borrow?

 The answer to that question will vary depending on whether you’re the lender or the borrower.  Among other tools, lenders use a Total Debt Service Ratio to calculate how much they are willing to lend.  To calculate your ratio, add up how much you pay per month for your rent or mortgage, property taxes, heating costs, loan payments, car loan payments and minimum credit card payments.  The total should be no more than 40% of your gross monthly income.

If a lender turns you down because your debt service ratio is too high then put on the brakes – it’s time to pay down your existing debt before you borrow more money.  Also, keep in mind that the 40% ratio is the maximum guideline and is almost always more than most of us can comfortably manage.  In addition, the Total Debt Service Ratio considers only rent or mortgage, property taxes, heat and minimum monthly debt payments.  We all know that this does not reflect the true reality of our expenses.  If you want to sit and stare at the four walls of your empty, unfurnished new house, or never be able to put gas in your new car, order a pizza, or take a family vacation then maybe the 40% maximum is for you.  If; however, you want to take a different path then you must ask, “Does this fit comfortably into my budget?”

To calculate whether or not borrowing money fits into your budget you must first determine your true cost of living.  Incorporate the cost of your groceries, daycare, gas, car insurance, phone, cable and all of your other regular monthly bills.  Moreover, factor in “irregular expenses”, that is, expenses that happen maybe once a year or once every few months for example:

Medical and dental expenses
Clothing
Sports Programs
Christmas & Birthdays
Back to school items
Car Repairs
Vacations
Vet Bills

Calculating irregular expenses can be complex and it won’t be perfect since life will throw curve balls, but estimating something is better than pretending these expenses don’t exist.  Once you estimate how much your irregular expenses cost in the year, divide that amount by 12 and add it to your regular, ongoing monthly expenses to arrive at your true cost of living.  This will help you more accurately calculate how much debt you can comfortably service.

And speaking of those curve balls, it’s also important to ask yourself:

Is my job stable?
How is my health?
Do we plan on expanding our family?
Will I still be able to save for retirement?
Will I still be able to afford this if interest rates go up?
Will this debt impair my ability to borrow or save for something that is more important to me?

In addition to the above, don’t forget the basics like calculating the true cost of borrowing by considering the interest rate, additional fees and length of time to pay it off.

I’m not trying to be an alarmist by posing these questions.  Financial maturity means making financial decisions with your eyes wide open.  You must consider all the factors to limit your risk and hopefully maintain financial stability.  This exercise may prove to be overwhelming and disheartening because you may discover a need to make changes to your budget or that you have to delay or modify your goal.  Even though it can be scary, consider the alternative.  The alternative is to make the really big financial decisions in life by looking at only half the picture.  The alternative is to let a ratio that can’t possibly factor in human nature or what is important to you and your family calculate how much you can afford!  The financial decision you make in a few minutes can affect the next 5-25 years of your life so isn’t it worth spending some time to do the math?

By:  Brenda D.  Owens, Trustee in Bankruptcy


Brenda works for James R. Yanch, Trustee in Bankruptcy
215 Simcoe St. N.
Oshawa, Ontario
L1G 4T1
905-721-7506
www.jamesryanch.com

What is Personal Bankruptcy?

Over the years, I have met with many people who are struggling to pay their debts.  Their financial difficulty is usually a result of a combination of factors: Some things beyond their control and maybe some things they could have done better.  Some people may fall at either end of the spectrum but most fall somewhere in the middle.  No matter what the cause, there is usually a common theme.  The people are honest, hardworking individuals who would pay their creditors if they could.  They hang on for as long as possible, sometimes prolonging the inevitable,  hoping life will turn around and give them the opportunity to pay their debts.  If you’re faced with this situation, you may wonder what options are available to regain control.

Bankruptcy is a legal process under the Bankruptcy and Insolvency Act and is one of the many options available to provide you with a fresh start.  The side effects of financial difficulty aren’t minor and filing for bankruptcy is not an easy decision.  It may help to remember that your situation is temporary and that, with help, you can start over.   That’s where a licensed Trustee in Bankruptcy comes in.  A trustee will give advice on all of your options and will make you aware of your rights and responsibilities under the Bankruptcy and Insolvency Act as well as the rights of your creditors.  If Bankruptcy is not an option for you, the trustee will tell you outright, suggest an alternative or refer you to another credible professional.

Who can file a bankruptcy?

You are eligible to file for bankruptcy if you owe at least $1,000.00 and are insolvent, meaning you are unable to pay your debts as they become due and if your property is sold it would not be sufficient to pay your creditors.   One of the objectives of the Bankruptcy and Insolvency Act is to provide you with relief from the burden of your debts, so that means once a bankruptcy is filed, the trustee will notify your creditors and most action and garnishment against you will stop.  The creditors can’t call or collect from you.   Bankruptcy however, will not protect you from the collection of certain debts such as child support, alimony, some student loans, and traffic tickets.

What happens to my stuff?

When you file for bankruptcy you assign your assets to the trustee and cease to be able to deal with your own property.   The trustee must decide if you have any assets that can be sold and the proceeds distributed to your creditors.   This may imply that you lose everything you own but that is simply not true.  There are many assets, such as your basic household goods, most pension plans, tools of trade and a vehicle up to a certain value, for example, that are exempt from seizure by the trustee for your creditors.  These exemptions differ from province to province.  If you have an asset that is not exempt from seizure, you may have the option of purchasing it back from your own bankrupt estate.  You would simply pay the value of the nonexempt asset into your bankruptcy by making a monthly payment and you get to keep it rather than the trustee selling it to someone else.  So it’s not all doom and gloom - even if you have an asset that isn’t exempt, you have the opportunity to keep it as long as you pay for it.  Also, if there is no value to an asset beyond what is owing for it for example, your house, you may continue to pay the mortgage company and remain in your home.   In future posts we will write in greater detail about how assets are handled.


What do I have to do in a Bankruptcy?

During a bankruptcy you are obligated to perform certain duties, including but not limited to: making disclosure of all your assets and liabilities, turning over all credit cards, attending for two counselling sessions, submitting monthly statements of income and expense and usually making a monthly payment out of which your trustee will take a fee and distribute the balance to your creditors.

How long will I be bankrupt?

Typically, if you’ve never been bankrupt before,  the process is either 9 or 21 months depending on your level of income.  If you’ve been bankrupt once before it is either a 24 or 36-month proceeding.  At the end, if no party objects, you are entitled to receive an Automatic Discharge which legally extinguishes your personal liability for the debts incurred prior to your date of bankruptcy and will allow you to once again acquire assets.  As previously stated, some debts, such as child support, alimony or some student loans for example, survive bankruptcy and you will be required to pay those debts.

What do I do Now?

No one ever wants to file for bankruptcy but, for some, it is the last chance to regain financial control and it doesn't need to be an embarrassing prospect or the end of your financial future.  I’m not trying to imply that bankruptcy is a cure-all  but the process is available, under the law, for a reason.  It presents an opportunity to get back on your feet, to make lifestyle changes, to deal with the personal problems, marital issues or misfortunes that may have caused your bankruptcy.  It will allow you to re-establish your credit, obtain assets again and to contribute back into the economy with well functioning finances.  Sometimes you just need to be pointed in the right direction.

By:  Brenda D.  Owens, Trustee in Bankruptcy


Brenda works for James R. Yanch, Trustee in Bankruptcy
215 Simcoe St. N.
Oshawa, Ontario
L1G 4T1
905-721-7506
www.jamesryanch.com