Dangerous juggling act

Opinion

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This article was published 10/09/2011 (5141 days ago), so information in it may no longer be current.

Some people juggle tennis balls for kicks. Heck, some even try chainsaws for thrills, but Barry has become adept at juggling something that might even have those fearless freaks recoiling in terror: more than $32,000 in credit card debt.

“I’ve been carrying it with balance options on different cards, and I have several cards,” says the divorced father in his late 40s.

“I have seven active credit cards and when one period is expiring, I bounce it onto another card that has an introductory rate, and I’ve been doing that for about three years now.”

Overall, Barry has about $211,000 in debt, including a mortgage on his home and another on a rental property. But about $58,000 of the debt is unsecured consumer debt, including what he owes on credit cards.

Despite earning more than $107,000 a year, Barry is struggling to keep up with his normal expenses, let alone minimum payments. After taxes, he earns about $5,400 a month, but his expenses are about $6,600. Part of his problems stem from his work history over the last few years. He was a small-business owner before getting a job with the railway, earning less than $40,000 a year.

But even today with the higher income, he says his bills are tough to manage. Divorced with three children, he pays more than $1,500 a month in child support and more than $1,200 a month in loan payments and interest costs, not including his car loan and mortgages on his home and the rental property.

To compound his problems, his house has a leaky roof, he has an $8,500 builder’s lien against his home, and he worries about future lawyer fees because he plans to go to court to get his child-support payments reduced since he now has his children about 40 per cent of the time.

He says he’s considered selling the rental property. With the mortgage, property taxes, insurance and maintenance, he actually ends up losing $400 annually on the property, but he sees it as a retirement nest egg in 15 years.

Barry also has equity in the rental and his house, but he says he wasn’t able to get a line of credit from the bank because his debt-servicing ratio was too high.

“I need budgeting help, but it’s very hard for me to put together a budget because I’m so overwhelmed.”

Ivy Mannil, a debt counsellor with Community Financial Counselling Services, says Barry’s shortfall is likely worse than he realizes.

“One of the things that was really apparent for both of us is looking at his cost-of-living expenses — even at first glance — they really aren’t realistic,” says Mannil, who worked on Barry’s case with her colleague, Yvonne Neu.

“If he’s got his children 40 per cent of the time, there was nothing allocated there for clothing, entertainment and all those other costs associated with caring for children.”

Mannil says Barry’s first order of business should be coming up with a better budget estimate — even if he needs to guesstimate the missing costs. At the very least, it will provide a baseline number for his monthly expenses.

“We want to get a gauge to see if he can cover all of his fixed living expenses,” she says. Those include groceries, mortgage payments, utilities and even more discretionary costs like trips to the movie theatre.

After those are tallied, the remainder — if there is any — can be applied to his debt, but the most important part of the exercise is to provide him with perspective on his situation.

Then in the weeks to follow, he will have to track his expenses to see if his estimates actually match reality.

Still, given that he’s likely more than $1,200 short every month, Barry has to take action as soon as possible. Because he cannot consolidate his credit card debts for the time being under a home equity line of credit, he needs to find a way to eliminate most of his credit card debt relatively quickly.

The most logical choice is selling his investment property.

“If he was to sell the property for $85,000, then subtract the costs of selling, the penalty for breaking his mortgage and legal fees, he would be left with approximately $56,000,” she says, basing the sale price on the property’s assessed value.

After paying for his roof and a lien against his house, he would be left with about $36,000 that can be used to pay down more than half of his unsecured debt.

That would leave him owing about $23,000.

Given his current high salary, he’d be able to pay off the remaining debt over the next few years, but he would still likely need to cut costs in other areas to get additional breathing room in his budget, she says.

While he doesn’t want to sell the property, Mannil says Barry doesn’t have much choice.

“He could keep the rental property going, but that doesn’t negate the fact he’ll still have these debts, a leaky roof, a judgment and a lot of these credits will move to higher rates in the very near future.”

It would be a tough, long and risky path that could end in disaster.

“The reality is right now he’s in a much better position, at least from an income standpoint, than he has been for a number of years,” she says. “So he can consider that once he clears this issue up in a couple of years, he could then buy another rental property.”

Mannil says Barry has done a good job of managing his debt load over the last few years, given that he once earned much less. But his child-support payments will likely increase next year rather than decrease — as he hopes — because payments are based on his income from the previous year.

And his income this year is 25 per cent higher.

By staying on his current course, he’s making his life much harder than it needs to be.

“He’s in a better position than most of our clients,” she says. But even with selling the rental property, his budget will be very tight until the remaining debt is gone.

“Like he says, he’s overwhelmed and needs to get perspective, and that’s where we can help — to get him to look at the big picture.”

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Barry’s finances

• INCOME

Annual: $107,000 salary (monthly net $5,400); rental income $700 monthly ($8,400 a year)

 

• EXPENSES

Monthly: $6,624

 

• DEBTS

Credit cards: $32,920 (most of debt at zero per cent on one card)

Loans: $26,014 (8.5 per cent)

Car loan: $29,604 (zero interest)

Rental property: $13,075 owing at four per cent; valued at $85,000

Home mortgage: $110,534 owing at 3.5 per cent; valued at $150,000

Builder’s lien: $8,500

 

• ASSETS

Home equity: $39,446

Rental property equity: $71,025

Defined benefit pension: $1,252 a month at age 65