Credit can become a normal part of managing your finances for a working person. A consistent stream of income with salary increases and bonuses make using credit as an advance on these future earnings an easy way to cover immediate expenses when you do not have cash on hand. In contrast, retirees have income that is generally fixed and does not offer surplus income down the road.
Phasing credit habits out and switching to a financial plan that spends budgeted available cash on hand instead can be a challenging adjustment for many retirees. If your fixed income is low and your living expenses are high, the temptation to use credit to make up the difference might be tempting. When retirees acquire debt on a fixed income because they cannot afford to make purchases with their income they are putting themselves in a more precarious position in the future when they will be required to pay that money back plus interest. If they do not have funds today, tomorrow it will be even less likely because they now have a bill for the interest charged on borrowed funds.
According to Statistics Canada approximately 1 in 3 Canadian retirees holds some form of debt. The size of debt varies, but generally speaking, research indicates that seniors owe less than younger Canadians who are in debt. More than half of indebted retirees owe less than $25,000, however, Stats Can’s research also indicates that it doesn’t take much debt to have a negative impact on a senior’s tight budget: “it is not necessarily the size of debt that has the potential to strain a monthly budget, but the repayment amount in relation to other expenses and income.”
Seniors struggling with debts often have the challenge of making their budget balance because their basic monthly expenses exceed their income. It is difficult to help these individuals find their way clear of debt because they in fact rely on it to meet their monthly costs. Planning ahead is important to avoid this predicament. When planning for retirement consider:
Debts - Will you be debt free? If you are not going to be debt free is the interest on your debt affordable on your projected fixed income? Is repaying the debt plus interest realistic given your anticipated date of retirement?Income and Expenses – What do you project your income projected to be – does it allow for your current expenses, including debt repayment? How is your income going to change? Will you experience an increase or decrease? If your income will decrease what will do you to decrease your expenses? Will you need to downsize or re-locate to cut costs to repay your debts faster? Do you foresee increased expenses in your future due to health factors or the availability/non-availability of affordable senior residences/care in your area?
Housing – your house is usually your largest asset - are you planning on using your house as the nest egg to for a senior residence or do you need these funds to cover your monthly expenses? Do you need to move to a less expensive (smaller) place to minimize monthly expenses or access equity? Will your need for funds occur at the same time as your move to a seniors residence? If not, how will you pay your monthly expenses such as rent? What other resources do you have available to you besides your house?
Seniors, Debts & Home Ownership
Statistics Canada reports that 8 out of every 10 seniors in Canada own a home. Owning a home can make someone asset rich and also reduce monthly expenses as often by the time someone transitions to retirement. Their mortgage, if they have one, has been significantly reduced making their monthly mortgage payment is likely quite reasonable.
If you have considerable equity in your home you may be eligible for a CHIP mortgage that allows you to access the equity in your property without having to make any payments on the loan. This is a great option when you are elderly and struggling with debts because allows seniors the opportunity to stay in their homes longer while accessing the equity in their homes to resolve their debt issues without negatively impacting their monthly budget.
But if someone builds up their debt load and it becomes unmanageable, it can be difficult to access their nest egg when they need it for a few reasons:
- If they have failed to make their payments regularly their credit could be negatively impacted which will impair the ability to get a second mortgage – at a reasonable rate - to pay off those debts;
- Getting a second mortgage will result in an additional monthly expense as well so if they were struggling to pay their basic monthly expenses before this will exacerbate their monthly budget; and,
- Selling the property could result in additional monthly expenses if the cost of renting is more than their mortgage.
Failure to pay your debts though, is not an option - it is important to know that your house could be at risk if you fail to pay your creditors. Your unsecured creditors’ can seek a judgment in a Court of law and then place a writ on real property when you fail to repay your debts. With a writ on the property the creditor becomes effectively a secured creditor with an entitlement to equity in the property. These creditors can force the sale of the property to access the funds outstanding to them. This can further exacerbate a senior’s already precarious situation as the sale of the house prematurely can leave seniors struggling to pay high rental rates with minimal income prior to be ready to settle into a senior’s residence.
Seniors who are already facing creditor action may want to speak with a Licensed Insolvency Trustee to discuss options that may save your home from a forced sale because bankruptcy and proposals can remove the writ from the property.
Your Home, Bankruptcies & Consumer Proposals
In a bankruptcy or consumer proposal you can keep your home if you are in a position to afford to keep up with the monthly costs. A provincial exemption limit of up to $40,000 plus 50% of selling costs including mortgage penalty payouts are deducted from your equity in Alberta before it is determined how much “excess equity” your property has. The excess equity must be recovered either by selling the property or voluntarily paying for the equity to essentially “buy it back” from your bankrupt estate. To get a general idea of how this works, (excluding selling costs like legal fees, realty commissions etc.) a home worth $350,000 with a mortgage of $300,000 would have equity of approximately $50,000 of which $40,000 would be exempt leaving $10,000 to be repaid to creditors in a bankruptcy to keep the house. Provided that the bankrupt’s excess equity is paid to the bankrupt estate, the bankrupt would be able to keep the home.
In a proposal, you must offer your creditors more than in bankruptcy but you can term your payments out for up to 5 years to make it affordable on a monthly basis. Your assets do not vest with the Trustee either leaving you free to deal with your assets as you see fit.
If there is significant equity in the home then the cost of bankruptcy or a proposal may outweigh the benefits they provide – talking to a Licensed Insolvency Trustee will help you better understand where you stand.
Retiring is full of changes and it isn’t always easy. If you do not feel like you are living the golden life and are instead worrying about money and debts that are piling up give us a call. We can chat about how you can move from financial distress to financial success. Give us a call for a free initial consultation to gather some information on your options.
Rebecca Frederick, Licensed Insolvency Trustee
Frederick & Company