This student cannot handle credit

Img ScaleThis student  cannot handle credit

Josh was entering first year university when I first met him six years ago. His parents had recently applied for bankruptcy, and money was very tight in the family. They had still not adapted to a life without easy access to credit, and they prevailed upon their son to borrow money on their behalf “just until things get better”.

Josh applied for a large line of credit from one of the major banks, and was approved very easily for a staggering $50,000. A few credit cards followed soon thereafter and within a year, Josh was sporting available credit of over $100,000.

Some of the money was used to secure his entrance into University, but most of it was used by his parents to support their lifestyle – which was still beyond their means, and in total denial of their actual financial circumstances.

Within a couple of years, the money was all gone. Seeing the writing on the wall, Josh applied successfully for OSAP, and was able to eke his way through his undergraduate program on fumes, OSAP, and part time work as a security guard.

The monthly payments on his accumulated debts were crippling, and neither he nor his parents could service the debts. They all came back to me looking for a miracle. Bankruptcy was the cleanest option, however, they were deathly afraid this would prevent Josh from being admitted to medical school eventually.

It seems the general financial plan for the family was to live on credit for years just long enough for Josh to begin making mega bucks as a doctor – at which time he could carry the load for everyone on the back of his earnings.

We never could get a satisfactory answer as to the risks of med school admittance if Josh declared bankruptcy, so the family decided a consumer proposal was the safer route.

At that time, the Bankruptcy Act stated that any proposal where the debts were greater than $75,000 was called a Division I proposal – somewhat more complex, and expensive to administer. (Today, the threshold for Division I proposals is $250,000)

Josh agreed to pay $440 per month for five years. Actually, his parents agreed in essence; Josh went along for the ride, having little say or choice in the matter.

Fast forward to 2010, and Josh was admitted to medical school in Grenada. Bursting with pride, he called me again to ask for my help arranging a student line of credit to help finance the next few years of expensive off shore education.

Canada’s major chartered banks offer some excellent programs for young professionals embarking an a long course of education in pursuit of becoming doctors, dentists, lawyers, etc. But these doors were all closed to Josh. Sorry, you have an incomplete proposal – we cannot help you. His parents offered to co-sign – this changed nothing – their credit bureau reports still reflected their discharges from bankruptcy five years previous – the banks did not like their covenant.

A fair amount of equity had since built up in his parents’ house by this time, and they were quite willing to use this equity to pay off the proposal and help out with his education costs.

But in today’s austere lending environment, no reasonable mortgage lender was willing to allow an equity take out on the parents’ home – so they remained house rich but cash poor.

Things went quiet for a few months, and Josh reached out to me again before Christmas. His parents had somehow put the money together to prepay the balance of his proposal – the proposal had been paid off completely, and this news had been updated in his credit report. He was optimistic the banks would now finance his education.

There is no happy ending to this story. The banks now said they would still not lend him money, nor would OSAP, as a Division I proposal is (their words) almost as bad as a bankruptcy in their eyes, and he is not considered a good candidate for new credit.

I suppose his parents could sell the family home, move into something smaller like a rental apartment, and free up their home equity to cover his future needs – but they cannot or will not bring themselves to do that. (One reason is his parents run a mildly successful home based business which could not continue to operate if they no longer live in the house)

So here we are, as he approaches the completion of his first year in med school – he has the desire, and the smarts and the tenacity to go all the way to finish his education, but no money to pay for it.

Poor credit decisions made years ago are haunting this family big time. If only his parents had truly learned the lessons of bankruptcy when they first tilted six years previously, Josh would be well on his way to financing his dream.

Here is the link to  part two of this story : This student is really good with money

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