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Too Good To Be True

There’s a very old saying that if something sounds too good to be true, then it probably is.

Recently I’ve met with quite a few people that have managed to get themselves into far more debt than their income and assets (things that they own) justify.  Here’s a recent example:

I got behind on my payments for my mortgage and tried to borrow money from the bank.  I was declined.  I saw an ad in the paper (or an ad on a sign, or a flyer) for a company that promised to help people with bad credit get a loan.  I called the number and was told they could help get me additional credit, but the cost would be 50% of the money received.

I was desperate so I agreed and then we went about applying for credit cards directly from loans officer at different banks.  Over the course of a couple of weeks I was approved for 3 or 4 new cards, a couple of lines of credit and a loan.  I immediately took advances for 50% of what was granted to pay the “fee’ to the company that was helping me and paid them in cash as instructed.

I used what was left of the new credit to live off for the next 6 months or so, but now the credit has run out and I can’t make the payments on the $50,000 (or $75,000 or $100,000) that I owe.  I am starting to miss my mortgage payments again and I don’t know what to do…

It sounds pretty incredible, but this person that was only looking for help to save their house has somehow ended up thousands of dollars deeper in debt and six months later they are once again worried about losing their house.

The solution the company that helped them suggests is that they should file for bankruptcy.  The problem with this solution is that bankruptcy laws were created to help the “honest, but unfortunate debtor” – it is not at all clear in this case that the debt was incurred honestly.

If you knowingly incur debt that you cannot repay, or incur debt with the intention of filing for bankruptcy (or a proposal) then these debts are not dischargeable by the bankruptcy.   Even worse, the activity may be criminal.  Of course everyone reading this knows that – you wouldn’t borrow $1,000 from your mother knowing that you’ll never pay her back.  Why would you consider borrowing from a bank?  What’s wrong is still wrong.

Some of the warning signs include a ridiculously high fee (50% is outrageous and if you weren’t desperate you’d never agree to it), the same banks that rejected you by yourself now approve you with the company’s help (doesn’t that sound fishy to you?), the company suggests you can file for bankruptcy later if you can’t handle the debts, and the most obvious warning – they want to be paid only in cash.

If you find yourself considering this kind of arrangement we strongly suggest you take a few days to think things through.  The person in our story just wanted to keep their house and six months later they are back were they started only now they are a further $50,000 in debt with nothing to show for it.

It may very well be that there is no way to save your house – if you can’t afford the mortgage payments then the reality is you can’t afford the house, BUT there may be ways to reduce your  other expenses and debts that won’t get you into trouble.

Before you agree to an expensive and possibly illegal solution, consult a Canadian bankruptcy trustee for a free consultation, so you can understand all of your options.