December 2013 Questions & Answers


T Wrote: We are a one income family for the last 7 years, supporting 4 children. We currently owe:
$55, 000 on our LOC - which is consolidated credit card debt
$250,000 approx on mortgage. (4 bedroom 2100 sq ft house) Brooklin, Ontario
My husband has been laid off and will receive severance till August. We have struggled for years trying to manage this. Our marriage is on the brink. In fact, we just requested your divorce kit last week. This layoff notice has really pushed things into overdrive. Friday is his last day and he has been searching for employment for 5 months now. I suggested to my husband that we sell the house, pay the debt off and move into an apartment. That less is better. That we need to "start over" financially. All extra funds from the sale go into an income fund while we learn to live with less. That we could buy later, but for now it is quite obvious that the stress is too much. Is this a good idea? It seems like such a big step back. But a logical one. Help, please.

Gail Says: It may feel like a step back, but it is the most logical and financially sound thing to do. Keeping things as they are will mean digging a deeper debt hole. Adjusting to your changed circumstances is the absolute right thing to do.


K Wrote: I was at Inspiration to Women at the K-Rock Centre last week. I went just to hear you. What you said about Mortgage Insurance scared me enough to put a call into my insurance agent to get additional life insurance to cover the cost of the mortgage and also put a call into our bank to cancel the mortgage insurance. Here's my question: When I called my bank to cancel they asked why I was cancelling and I told them I was cancelling because I had learned I wasn't underwritten until a claim was made. They told me that was true but unless I had lied on my application I would be covered. Gail, please tell me if what they are telling me is true? All I want to do is make sure if I die after my husbands income gets cut in half that he's protected. (He's retired on disability and WSIB and in 7 years the wage portion disappears and my income becomes very important. I am 23 years younger then him. So I will be working for a long time after he's retired.

Gail Says: It's not just "if you lied"; it's also if they determine you have a "pre-existing condition." On top of which, the bank life insurance is considerably more expensive than private term insurance should be. You should notice a significant drop in your insurance costs.


Tina wrote: My question is how much is enough? I'll be 40 this year, I'll be debt free, have a good job making 67K per year, with benefits and pension (they match my contributions plus 1/2). I'm renting. I have savings of about $3000 in RRSP and $3000 in an emergency fund. I would like to boost my emergency fund to around $6000-8000. But then what?? How do I even begin to figure out whether to buy a house, or how much to contribute to my retirement?  I know the house is a big decision...but I've got to live somewhere, and does it make sense to keep paying rent...purchasing a house, is like prepping for your retirement is it not?


Gail says: If your dream is to own your own home and you have the means to do it then setting a goal of home ownership will be good for you. But if you're looking at home ownership as something you should do because it's the “smart” thing to do, you're going about this all wrong. Home ownership is expensive, comes with a lot of responsibility, and can be a royal pain in the ass. If you're happy renting then you would take the difference between what you spend to rent and what you would spend to own and use that to build up your retirement nest egg.

As for how much you should be saving, that depends. How much will you need when you retire? How much will your company pension provide? How about the government pensions? What's the gap you'll have to fill? You have to answer these questions. As for your plan to boost your emergency savings, I think that's a very good idea.  

Bianca wrote:  We have hit a wall. Our credit cards are maxed out with over $60,000 in debt, all our bills are current but only with the minimum payments.  We saw a consumer proposal company and that freaked us out. They want all our debts to go bad and let creditors call, etc.  We are also looking at a non-profit credit counseling to help us settle our debts.   Is it better to work with the counselor and settle the debt over time at full value without interest accumulating instead of the consumer proposal although it would settle the debt for much less? The prospect of creditors calling to collect on accounts rather than referring them to a credit counselor scares us.     
Gail says: A bankruptcy trustee (who handles consumer proposals) should not be asking you to let your debts go bad... that's a tactic used by debt settlement companies and it's one that can backfire. Going to credit counseling will only work for you if you actually change your behaviour: make and live on a budget, stop using credit to extend your spending, get your crap cleaned up. Know that if you choose any of these routes your credit history will be shot for a minimum of seven years. You could come up with a debt repayment plan yourself, calling creditors to negotiate and working out the payment system on your own. It’ll take some sweat, but it’d be worth not having your credit history go into the tank. And if you keep to the repayment plan, you wouldn’t have collection calls coming in.

Since you don't say what your income is, or what your debt is made up of, I can't offer any more advice than this. If you don’t think you can manage on your own, go and see a reputable bankruptcy trustee before you make a decision. 


S Wrote: On the Kat and Josh episode of Money Moron Kat had a debt of $14,000.00, and did a "credit arrangement" to lower that debt to $4000.00. She then continued to accrue debt to $8,274.00. My question is how does one get a credit arrangement such as she received that allows one to continue using credit cards? How does this happen? What are the negative credit implications? And if this is possible why do we pay for our credit card purchases in full?

Gail Says: She should NOT have had access to the new credit. It's a testament to how stupid our lenders are that she got more credit, and more rope to hang herself.


J wrote: My question is about my student debt. I am currently working on obtaining a 2nd university degree in nursing and on a daily basis I find myself stressing about the debt I am in. I enjoy watching your show Till Debt Do Us Part and I've noticed that you have mentioned several times about 'consumer debt' people are in being the more serious issue (I only have 1 credit card that I pay off on a regular basis). So to sum this up, my question is, how much should I worry about my student debt while I am still in school? Should I be making payments on it while I am working during the summer or should I stop stressing and worry about it when I am finished school and working?   
Gail says: Since you're in school full time, no interest is accruing on your student debt. It makes more sense to use your earnings to minimize how much further you go into debt than to pay off existing debt on which there is no interest cost. Whatever you may have that's extra can then go towards the debt.

As for worrying, as long as you don't graduate with so much debt that the payments eat your life, you're fine. So look at how much debt you currently have, and figure out what the monthly payments will be to get that debt paid off when you finish school. If it looks like the debt will be manageable, assuming you're paying it off in 5 years or less, then sleep easy. If it looks like your debt is racking up at a wicked clip, slow down on the debt accumulation so you don't end up desperate when you do finally graduate. 


Patsy wrote: I just bought my first home a year ago and took advantage of the first time homebuyers plan where I was able to take out 12,000$ from my RRSP to put towards the house. I now have to pay back this $12,000 to my RRSP within 15 years. My question for you is, does this repayment count as a debt or as investment/savings into an RRSP? Can it be both?   
Gail says: Since the money you put into the RRSP is not earning any return because you took it out in an interest free loan, it is NOT an investment. And since you're repaying what you borrowed, it IS debt. 


V wrote: Gail I love your show and your blunt honesty, you really make me laugh and I respect you and all your experience and knowledge. I have been struggling with a question for a while and I am really worried about making a major decision regarding bankruptcy. I just completed a three-year consumer proposal in December 2009. The only debts I have now are my student loans, which were not included in the proposal because they were not yet 10 years old. During my proposal the number of years required to be out of school for student loans to be discharged changed from 10 to 7 years. Now that my proposal is finished I still owe 36000 in student loans and can declare bankruptcy as they are over seven years  old. I have to decide weather or not to declare bankruptcy now or try to pay the student loans off. I am married and we have three small children and my main goal is to get a mortgage as soon as possible. I am at a crossroads and don't know what to do. I think I could pay the loans off in about three years or I could declare bankruptcy and be done in 9 months but I am worried about my credit rating. I have heard I can rebuild my credit rating quickly with secured credit cards but am still skeptical that anyone will consider me for a mortgage after having declared. 
Gail says: I'm sorry to be the bearer of sad tidings but you've already buggered up your credit history by doing a consumer proposal. While the proposal registers as an R7 and the bankruptcy as an R9 on your credit history, lenders treat both virtually the same and so your history is already sunk. Of course, if you go bankrupt now, you'll have to live through the bankruptcy and then the countdown to restoring your credit begins. Go and talk to a trustee and see what he or see says would be your best option. If you can repay the student loans in three years, you should. You owe that money, after all. But if it’s too much of a struggle, while bankruptcy will totally annihilate your credit history, at least if you're free of the debt you can start stashing away the money to make a great down-payment on a home. And if your partner hasn't also destroyed his or her credit history, you might have some wiggle room by having a big down-payment and applying for the mortgage in your partner's name.