Razor’s edge.

Winnipeg Free Press, Saturday April 9, 2011. Reproduced with permission.
By: Joel Schlesinger 

Single mother needs plan to escape mountain of debt

Razor's edge: single mother needs help to escape a mountain of debt.

Image courtesy of the Winnipeg Free Press.

Valerie is a single mother who has been robbing Peter to pay Paul to keep on top of her many debts.

A recent university graduate, the 36-year-old provincial government employee owes more than $20,000 on eight credit cards, which are all over or near their limits.

On top of that, she owes about $38,000 on a line of credit.

“The credit line paid off my student loan, and the credit cards are pretty much what I lived on for four years while going to school and raising a child.”

Earning about $46,000 annually before deductions, as well as receiving child support, Valerie says she is often juggling debt payments, using one source of credit to cover the minimum on another to keep afloat.

She also owns a home on which she owes about $218,000. Assessed at $250,000, she fought to have its value lowered from $275,000 to reduce her property taxes.

Valerie has no savings for emergencies and says she is one missed paycheque from financial disaster.

“I can’t declare a second bankruptcy,” she says, adding she declared bankruptcy when she was married.

Ironically, her parents are well-off and have contributed substantially to her 10-year-old child’s RESP, but Valerie is reluctant to ask for help.

“They’re supportive in that they’ll always be there for me and my son, but I was also raised (to believe) you make your own mistakes, so you get out of them yourself,” she says.

“I know I can get through this. I just need a plan.”

Dawn Masters is a debt counsellor at Community Financial Counselling Services in Winnipeg, a not-for-profit, United Way-funded organization.

She says Valerie’s first step is to compare her monthly cost of living against her monthly net income. Cost-of-living expenses include mortgage payments, groceries, utilities and other necessities, but exclude payments on debts, such as interest costs.

“Currently, her net income, which includes pay, child maintenance and tax benefits, is $3,267,” Masters says. “And her total monthly expenses are $3,129, which basically leaves her with a very small surplus of $138.”

That amount isn’t even enough to cover the interest charges of $165 a month on her line of credit.

And it gets worse. Overall, her minimum payments on all her debts are close to $1,100 a month.

“The cost-of-living amount is really important because she has to have enough left to pay for her debts, and if she doesn’t have it in her cost of living, she’s going to continue to fall behind.”

The good news is Valerie can still get herself out of this financial bind without declaring bankruptcy, Masters says.

The solution is easy to understand, yet difficult to execute: She needs to increase her monthly surplus to pay down her debt.

“One way to do that is to increase her income,” Masters says. “The problem there is Valerie works full-time and has a 10-year-old son, so she doesn’t have a whole lot of time for a part-time job.”

She can also ask for a raise, but that might be a long shot, too.

Another strategy is to examine her expenses and try to trim costs. Valerie is already on a lean budget, so this will be difficult.

“She needs to take a look at it in any case,” Masters says. “Once amounts are verified, then she can make a decision about whether or not she wants to spend her money in specific areas.”

Valerie should also look into how much tax is deducted at source when she gets paid by her employer. She likely gets a sizable tax refund every year from a variety of tax credits and she may be able to realize some tax savings immediately on each paycheque.

“It will mean she will not get as significant a refund when she does her taxes, but it would increase her cash flow on a monthly basis.”

At the same time, Valerie can try a few strategies to reduce her debt costs.

“Several of her credit cards are over limit,” Masters says. Generally, credit card companies charge a $25 monthly fee as a penalty for over-limit accounts. She could be paying as much as $200 a month in fees for being a total of $600 over on all her cards. And those fees are added to the balances, accumulating more fees and interest.

With about $7,000 of room left on her line of credit, she should transfer the $600 to get rid of those fees right away.

Valerie should also ask her bank to increase her credit-line limit so she could move all her credit card debt, with interest charges as high as 28.99 per cent, to the credit line, which bears a 5.5 per cent rate.

Masters says Valerie doesn’t have any equity left in her home at this point, based on the assessed value. But financial institutions typically lend on lines of credit up to 75 per cent of a home’s market value, which tends to be higher than the city assessment. In her case, the home’s value may be considerably higher since she had its assessment lowered by $25,000 for property tax reasons.

Furthermore, Valerie could try to renegotiate the mortgage to extend the amortization and consolidate debt, creating one easy payment that may not be much higher than her current mortgage payment.

Yet Valerie’s best chance at getting out of debt may be the one she is very reluctant to consider — asking for her parents’ help. They could pay her debts and she would pay them back at a lower cost than she could find at any financial institution.

“They can do a formal agreement stating that she pledges to pay ‘X’ number of dollars a month, but with no interest or minimal interest,” Masters says.

In the end, it may be that Valerie will use a combination of all these strategies to get herself in a cash-flow position where she can cover both living expenses and debts. But regardless of how she does it, Masters says Valerie should at least do one thing to make sure she stays on track: Cut up all but one of her credit cards and leave the one card at home for emergencies only.

“We always caution people that once the cards get paid off, there’s a tendency for people to think they don’t owe anything and they slip back into using the cards.”