Debt Relief Experts
Raising a child on a single income is challenging enough, and the financial impact of job loss for single parents can be catastrophic. Without an adequate emergency fund, a job loss increases the likelihood that a sole income earner will turn to debt to pay for every day living expenses. This can result in debts that are too large to be repaid, even after returning to work. This exact situation has been told by one of our clients on last week’s podcast.
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No Rainy Day Fund
A single mother from a young age, Samantha (Not her real name), had a good job as a senior web designer. Samantha earned enough to support her and her son Charlie, who she raised on her own. Samantha’s paycheque covered the high cost of rent in downtown Toronto, after-school care for Charlie and she had money leftover. She used the surplus for essentials and miscellaneous purchases.
Although Samantha had some money leftover she wasn’t putting money away. No money allocated for personal savings, and minimal contributions to an RESP for Charlie.
Single Parents and Sudden Job Loss
One day, Samantha’s boss surprised everyone with an announcement that the company was being sold. Unfortunately not everyone was kept on afterwards, and Samantha was one of the employees who would soon be out of a job. There was a small severance package, but after that, nothing.
Samantha picked up several contract jobs with decent, but inconsistent pay. This helped pay some of the bills, but Samantha soon found herself running out of money at the end of most months.
Using Debt to Pay Bills
Panicked, Samantha took out cash advances on her credit card. She missed some student loan payments and made late payments when funds ran tight. Her debt levels continued to rise including these newfound interest fees and late payment charges.
Even after finding another secure job, Samantha continued to experience financial difficulty. The problem was her monthly payments on the $35,000 of past due bills and credit card debt – not to mention her student loans.
Retreating into denial, Samantha began dodging debt collector calls and eventually stopped paying even her minimum payments.
Why Bankruptcy Was The Right Option
Financial problems don’t only affect your bank account, but your stress levels as well. When the stress became so overwhelming that Samantha’s son Charlie started to notice her change in attitude, Samantha made the decision to call a Licensed Insolvency Trustee,
When I met with Samantha, we talked about her options. Samantha chose to file bankruptcy based on a few deciding factors:
- She now had a stable income and, with one dependent, she wouldn’t have any surplus income payments. That meant she could afford her monthly bankruptcy payments.
- Since this was her first bankruptcy, Samantha could be eligible for discharge in just nine months.
- Since she had been out of school for nine years, Samantha’s remaining student loans would be eliminated through bankruptcy.
- Samantha was surprised to find that she could “buy back” the realizable value of her RESP for Charlie from the trustee by adding a small amount to her monthly bankruptcy payment each month. Thus protecting the government grant portion she had earned.
Samantha didn’t even care about not having a credit card for the nine months while she was bankrupt. After her previous experience dealing with the loss of her income and racking up debt, she was quite happy not to take that risk again. What she really wanted to do was balance her budget so she could start saving money.
Steps to Better Money Management
According to our Joe Debtor study, single parents are one of the core at-risk groups for filing insolvency. Single parents account for 43% of all insolvent debtors with a dependent who file a bankruptcy or consumer proposal.
For someone like Samantha, good money management may have helped her avoid bankruptcy altogether. Money management comes down to planning a personal budget that is both simple and realistic but, most importantly, includes a savings component. This is especially important if you’re only relying on one household income.
The follow are five key components to creating a savings budget:
- Write down the amount of your entire income per month. This includes not only your pay, but any outside income like child support, or alimony.
- Determine the total amount of all of your expenses. Be sure to include items that may not have scheduled payments like school trips, lunch out, and gifts. When you have children, it’s especially important to account for unexpected costs as expenses related to your child can sometimes be unpredictable.
- Budget for debt repayment whether that includes student loans, a car loan or paying down credit card bills.
- Set a savings goal. If you are a single parent, don’t just focus on your child’s RESP. It’s a great long-term savings goal for your child, but don’t lost sight of your personal financial security. Plan to build a small emergency fund, and then move onto saving for your retirement.
- Make debt repayment and savings a priority. It is possible to build a small emergency fund while paying down debt. Don’t spend money on extras at the expense off either reducing your debt, or building financial security.
If existing debt is standing in your way of starting over, as it did for Samantha, talk to a Licensed Insolvency Trustee about your options like a bankruptcy or consumer proposal.
