Starting over after a divorce

Question

I am a 50-year-old male who has recently divorced. I arranged with my ex that turning over the family home and vehicles would relieve me of any ongoing financial responsibilities to her or our child. I have also just come out of an expensive civil case against a former business partner. In short, I have lost all assets. I have a great job that pays $120,000 per year, but I have a combined credit card and line of credit debt of $50,000 due to the legal costs I incurred. I pay $1,500 in rent to be near my former house in an expensive part of the city and I have a $300 car payment. I would love to hear all creative options of retiring my debt, as I want to start a new business. I am also considering buying a residential or commercial property and would like to know if I can roll existing short-term debt into longer-term mortgage debt?

Answer

You have been through a lot in the past few years. It has clearly taken a toll on your bank account, but I can imagine it has also taken a toll on your emotional health, too. Not to get all “Oprah” on you, but I wouldn’t ignore that part of the equation. You have lots of enthusiasm and passion for your ideas, but at the same time you sound unfocused, frenetic and disconnected from reality. I also suspect there are some details you’re leaving out that would explain why you didn’t get your half of the house and other assets in the divorce.

Stop. Breathe. Focus.

My first piece of advice is to: Stop. Breathe. Focus. Regardless of why your life unraveled, the consequences are dramatic and you are effectively starting over. Before you try to figure out your plan for the future, I highly recommend you start by identifying what went wrong in the past. Ask some close friends who know you well to chime in, and go to see a counsellor or therapist. Then write what you learned down. Focusing on self-awareness will be invaluable to you as you rebuild your life.

Debt repayment comes first

All your energy at this stage should be centered on retiring your debt, not thinking about a new business or real estate. Those options sound delusional in the short term. Debt repayment, however, is doable.

Let’s say your take home pay is about $60,000 per year. If you keep your expenses low you’ll have about $2,500 to put to your debt every month, allowing you to dig yourself out in two years or so, depending on the interest rates you pay. Here is a six-step process to help you get done with debt. It would also be worth your time to have a meeting with a non-profit credit counsellor to help you develop a budget and keep you on track.

I know this isn’t a creative option, which is what you asked for; in fact, it is a boring one. But in this case boring is best.

Lenders like stability

You said you are interested in starting a business and buying property, but unless you have some secret funding source you haven’t mentioned, you’re going to need a lender to get on board. And lenders like stability. Showing them that you have a consistent income and that you’ve been able to retire your debt quickly will help get you into their good books.

It is indeed possible to roll short-term debt into a long-term mortgage, but you need an asset to act as security. Say you owned a $300,000 house and you had built up $200,000 in equity. You could roll your line of credit debt into that mortgage by refinancing, because the lender would know that if you couldn’t pay they would be able to foreclose on your house to get most of their money back.

In your case, you don’t have any assets to secure debt against. That is why you need to focus on repaying the debt and saving for a down payment on property or to seed the new business.

In the meantime, you should order a credit report from either Equifax or TransUnion to see if there are any other matters on your file that you need to address.

Prove me wrong

Unless you make some real changes in the way you live your life, my fear is that you’re going to end up in exactly this situation again: Tattered relationships and no assets.

Please, go out there and prove me wrong.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.