Six years ago, Simon bought a mobile canteen for $110,000, and his father agreed to act as guarantor for the loan. Unfortunately, this decision would have serious consequences.
When Simon purchased his mobile canteen route (truck and location), he was very enthusiastic and happy to become his own boss. “I invested all my savings – $10,000 – and took out a loan to pay the balance of $100,000. The bank required a deposit, and my father Jacques was kind enough to endorse me,” he remembers.
At the time, business was going well, but the pandemic disrupted everything. After months of forced closure, and even though activities have since resumed, nothing is the same as before. “Many office workers are now working from home, which has caused a sharp drop in customers and revenue. I haven’t managed to get back on top financially,” laments Simon.
His difficulties are such that he is now struggling to make loan repayments. He tried to sell his business, but he was unsuccessful because it is now much less profitable than before. The loan having been refinanced twice to make repairs to the truck and inject funds into the business, the balance owed is now $78,000.
“However, in the case of a co-signed or guaranteed loan, all the signatories, here Simon and Jacques, are 100% responsible. The bank could therefore demand the total amount of the debt from each of them,” explains Pierre Fortin, president of Jean Fortin et Associés. The noose tightens around Simon, who realizes that he will no longer be able to postpone the problem.
A debt of $58,000
Simon hesitated before telling his father because he didn’t want to worry him. At an impasse, however, he had to resign himself to discussing it with him. Both then went to consult a personal finance advisor from Jean Fortin to find out what their options were.
Jacques is 69 years old and has been retired for several years. He is not rolling in gold: his income allows him to pay his minimum expenses, but little more. He has no savings or a house, only an RRSP of $20,000 which would be elusive in the event of bankruptcy or a consumer proposal.
As for Simon, he is single and has no assets or savings. Once his business closes, he hopes to find a job that would earn him around $50,000 per year.
“The truck is valued at approximately $20,000, which would leave the bank with a loss estimated at $58,000, which Jacques would be the only one to repay since his son is unable to do so,” underlines Pierre Fortin.
Two different solutions
After reviewing the advantages and disadvantages of bankruptcy and a consumer proposal, Jacques finally opted for bankruptcy. “Given his low income and since this is his first bankruptcy, he will have to make monthly payments of $170 for nine months. Subsequently, he will be freed from his debt and the stress that the situation causes,” mentions Pierre Fortin.
As for Simon, due to his younger age, he preferred the consumer proposal whose duration is spread over 60 months. The advisor at Jean Fortin negotiated with the bank and obtained its agreement for a sum of $14,500 payable in 60 monthly payments of $242. “With a salary of $50,000, if he had gone bankrupt, he would have had to repay a total of $5,500. It’s a smaller amount than with a proposal, but he rightly preferred to avoid bankruptcy,” concludes Pierre Fortin.
ADVICE
- Remember that your signature as guarantor or co-signer will bind you in the future in the event of default. Inform yourself of the risks and responsibilities before signing. In fact, you should only guarantee a loan for a friend or loved one if you have the means to repay it.
- Age is a determining factor when it comes to weighing the respective advantages and disadvantages of bankruptcy and the consumer proposal. Because the younger a person is, the more likely they are to experience financial difficulties later in life, following a divorce or job loss, for example.
- The best way to avoid a second bankruptcy? Not to make it a first! Bankruptcy should be considered a last resort, and when it is financially possible to do so, it is best to opt for a consumer proposal.