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At a crossroad, and dealing with a pile of debt

ANDREW ALLENTUCK

March 1, 2008

In Ottawa, a woman we'll call Aisha is a mid-level civil servant with an annual salary of $97,000. That's a good income, and at the age of 60 her finances ought to be secure. Yet a large mortgage, a string of bank loans and a $55,000 stack of credit card bills - a total of $396,400 - make it hard for her to achieve one of her life goals, a pilgrimage to Mecca that is one of the pillars of Islam, her faith.

Aisha is a few months from retirement. Divorced, she has raised four children and now cares for her mother.She also provides financial assistance to one of her daughters.

"I feel that I am at a crossroad now," Aisha explains. "I want to retire and to be able to balance my life and still look after Mom. However, I am not sure that I can afford it.

WHAT OUR EXPERT SAYS

Facelift asked Gina Macdonald, a planner and portfolio manager with fee-only financial counsel Macdonald Shymko & Co. in Vancouver, to work with Aisha. "Expense management has to be part of this plan," Ms. Macdonald says. Aisha's credit card debts have interest rates as high as 24.5 per cent and her personal loans have interest rates as high as 12.75 per cent, the planner notes.

Her pile of debt is more than an obstacle to her pilgrimage. If she retires in a few months, as she would like, her monthly after-tax income will drop from its current level of $5,750 by as much as $2,000 per month. That would make it impossible for her to maintain her current total debt service charges of $3,900 per month. Now, she runs a deficit of $625 per month.

Cutting Aisha's debt load is the priority, Ms. Macdonald says. She has shuffled debt from one credit card to another to take advantage of introductory rates. It works for a short time, but is not a viable long-run strategy, Ms. Macdonald notes. She proposes that Aisha use the equity in her $350,000 home to raise cash for reducing her high interest debt. Her mortgage is $255,000. That's a loan-to-value ratio of about 73 per cent. If Aisha were to arrange to take equity out of her house by adding new debt to the mortgage, it would raise the loan-to-value ratio to 95 per cent. She would gain as much as $77,500, before appraisal costs, bank and legal fees of perhaps $1,500. That would leave her with net proceeds of $76,000 and enable her to pay off most of her $91,400 credit card and line of credit debt. As well, her daughter, to whom she has lent $12,200, is expected to pay her back in March. If that happens, most of Aisha's non-mortgage debt will be eliminated. However, Aisha will have to deal with a $6,000 outstanding tax bill for a $20,000 RRSP withdrawal made to stay afloat. She should pay off that bill before eliminating the residue of her line of credit and credit card debts, the planner advises.

More information:http://www.theglobeandmail.com/servlet/story/LAC.20080301.STFACELIFT01/TPStory/Business