Driving in red ink
Jim saw his financial life spiraling out of control.
While he had made a decent living in the trucking industry for 10 years, the owner/operator found himself staring at a rent bill that he couldn’t pay. His last cheque was soaked up by minimum payments on credit cards, and his wife was upset at the growing number of calls from collection agencies.
Bankruptcy, it seemed, was the only option.
It may be appropriate that we’re withholding Jim’s real name. After all, a growing number of truckers are finding themselves in the same situation. Fuel prices are high (Jim recorded a 40 per cent increase in his fuel costs over a period of two years), and U.S.-bound drivers are feeling the impact of a crippling exchange rate.
In the first three months of this year, 193 truck-related businesses declared bankruptcy, compared to 136 during the same period in 1999. The provinces accounting for most of the 42 per cent increase were Alberta, with 59 bankruptcies, Ontario, with 39, and Quebec, with 30. During the same period in 1999, they accounted for 47, 35 and 22, respectively.
“I’d say that if I had to identify one trade, profession, industry that’s seeing an increase (in bankruptcies), it’s probably the only problem industry right now,” says Jeremy Kroll of A. Farber and Partners, the southern Ontario-based bankruptcy trustees who saw Jim walk through the door. “Forty per cent of the people I’m seeing, trucking is in the picture … last year, it would probably be no better or worse than another population.”
That doesn’t only include truckers, of course. But it can include people who were relying on a trucker to pay a rent cheque.
Many owner/operators who work the margins can be caught by surprise by unexpected expenses, such as the need to rebuild an engine. But such things as high fuel costs can affect an entire sector at once.
“It (the high cost of fuel) is another straw on the camel’s back. There’s no getting around it. You can’t fill your tank without a credit card or folding money,” Kroll says.
It’s a problem that doesn’t occur overnight. An owner/operator can turn to use credit to bridge the gap, but that source of cash will eventually run out. “They don’t think this will last forever. But what do you do when you have a truck payment of $2,500 a month. You’ve got to have something to drive. You’ve got to pay for that truck.”
Unfortunately, many of the people walking through his door are arriving too late. “They just hope that somehow it will sort out.”
The trick is to spot trouble before you sink too deep.
Know your cost per mile, the income you can expect, and the amount of money you need to break even, Kroll notes. “If you’re in a negative, and that negative happens twice in a row, and you don’t see that getting better, there’s a problem.
“If what caused the unusual month was an unforeseen event, tires shredding in the same month when you replaced them three months ago, you don’t expect that to happen again. You know you can pay back that debt. There’s no need to panic.”
Even if the balance sheet returns to zero in four months, there still has to be an end in sight.
When Jim walked through the door, he had already missed two payments on his truck lease, hadn’t filed income tax or GST returns for the past few years, his mechanic wouldn’t do anything else on the truck until arrears were paid up, and his fuel card was at its maximum. To compound matters, he needed new tires, owed money on credit cards for everything from living expenses to truck maintenance, and worked for a broker who was often late with his pay.
And his problems didn’t happen overnight. Jim’s take-home pay had been dropping for five years, even though he was working longer hours than ever. Since he was working for a flat rate paid in Canadian dollars, he was being killed by the exchange on expenses charged in U.S. dollars. Nor was there any more money for down time linked to such things as late loads. Promised loads simply weren’t materializing soon enough to justify waits.
But there were alternatives.
One of his greatest fears was the thought of a bailiff repossessing his truck, potentially putting him out of business. With the help of A. Farber and Partners, the truck lease was renegotiated so that arrears were spread over the lease, with the overall term extended, leading to a $500 drop in monthly payments.
As a director of the company (changed to a sole proprietorship), Jim was responsible for all his debts except for diesel cards and truck repairs. He shouldered GST liability as a director of the company. He needed protection from his creditors.
But that didn’t mean bankruptcy was the only option. That choice would have cost $1,384 over eight months (the process was recently made more expensive), and he would lose his only other asset — a 1994 car that was worth $3,750, although he could arrange to buy the car back from the trustee for a fair value. The bankruptcy, meanwhile, would remain on his credit rating for six years after it was discharged.
And forever would he have to answer the question “Have you ever been bankrupt?” with a yes.
Instead, a consumer proposal was the best bet. Through this, his creditors were offered less than a full payment, but more than they would receive if he went bankrupt. And it could be paid over time, or in a lump sum if he found a friend or relative that could advance him the cash.
It was particularly attractive since he hoped to be able pay back the amount as soon as possible, once his wife returned to work. And that would help him clear his credit record in about half the time of a bankruptcy, while keeping his car and any income tax refunds.
The difference between those who choose bankruptcy and those who choose a formal proposal with creditors tends to come to values. “It’s despite (the fact) that I can’t pay you in full, I want to do the best I can. I don’t just want to give up,” Kroll said.
And Jim’s creditors opted to accept $250 per month for three years, clearing the $53,000 debt that he owed to them.
“Remember,” says Kroll, “The sooner you address financial problems, the more options you have.” n
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