Janine Starks looks at the case of a family man weighed down by a mortgage, debt and lack of income; says it's important always to count one's assets.

By Janine Starks* (email)

From my mail bag:

I’m a family man with three daughters and my youngest is at school.  We have a 2 bed house valued at $340,000 and a mortgage of $140,000.  My wife works 12 hours a week and I’m self employed with two small businesses.  My business insurance has lapsed and it has become difficult to make money.  Neither the business, nor returning to wages covers our expenses.  I went on the dole briefly, then work picked up, but it has died off again.   We seem to be getting further into debt.  At a guess I would say I owe $85,000 in tax, $14,000 to ACC and $12,000 to creditors.  On the personal front our hire purchases are $1,200 behind, we have $1,200 on a credit card which is no longer in use and owe $5,500 to relatives, school fees and swimming lessons.  Our car is worth $15,000 and we have Kiwi Saver accounts for my wife and two younger girls. We don’t have any major treats and we stay home in the school holidays.  The house is old, needs painting and major maintenance, but is nice on the inside.  Overall, my ‘mojo is burnt out’ and its hard to keep smiling. 

I bet it took some guts to put this in writing and I’m admiring you for that.  We had to abbreviate your letter, so what has been lost in the editing is that you sound like a fabulous father and husband and you really want to fix this.  So many people just keep bumbling along making the mess messier. 

Yes, I have to admit, you are in a pickle, but let me make one quick observation.  You still have more assets than liabilities.  There is roughly $215,000 in equity in your home and car, with just under $120,000 in debts.  That gives you $95,000 in assets which currently belong to you (less items on HP which you don’t give the value of).  So many people end up in situations where they are effectively bankrupt, because their position is negative.  Hang your ‘mojo’ on the $95,000 as it gives you something to smile about and makes you very lucky.  But, every day that you and your wife do nothing, is a day that eats into your $95,000. 

Debt is like a cancer and thanks to interest and tax penalties, it can eat away everything.  Lack of cash-flow, just makes the debt grind higher, so your job needs sorting urgently.     

One thing I will say is that this is not just ‘your’ problem.  It’s a ‘couple’ problem and it can’t be fixed by one person. 

You might feel personally responsible for your books getting out of order and the debts building, but do not try and create the solution on your own.  I would find it difficult to believe that your wife had no idea about the tax situation. 

Anyone with a small business has a separate account for tax and carves off part of every payment into that account.  As a couple, you have been spending your gross earnings and as a couple you have to repay that money.  Your weakness is book keeping, but as a couple you’ve chosen to ignore that.  You have so much respect for your wife and wish you could be as organised as her, so use her strengths.  You two really need to become a team and fill the gaps for each other. 

As you are ‘self employed’, I’m guessing you operate as a sole trader, so the debts are no different than household debts.  The worst creditor in the world is the IRD – they are terribly black and white and they won’t go away.  To clock up an $85,000 debt, you need to have earned over $250,000. 

I gather this isn’t a one-year problem and involves not paying tax for several years?  With the help of an accountant you need to approach the IRD, before they approach you.  They could force you to remortgage to recover their money, or sell your home if you don’t have the income to afford a higher mortgage.  If your business is within a company, you may have more protection, but could face bankruptcy proceedings. 

This is really serious stuff, but taking action now can keep you in control.  Don’t lose sight of the fact that after all debts, you have $95,000, a wife and three daughters to hang that mojo on.  Forgive me repeating this point, but it’s something to be proud of.

There are three things which need to happen fairly quickly:

1. Get your accounts prepared by an accountant.  You have to know the exact size of this tax debt, ACC and creditors.  Keep your fees down by turning off the telly every evening and lock yourselves in a room to do as much book work as possible.  Re-order bank statements if you’ve lost them.  No matter how big the mess in your office, accounts are just a jigsaw puzzle that can be pieced together.  You need your wife’s help on this.  You could nail it in a few weeks and boy would it feel good.  Get your accountant to look at the merits of using a service such as www.taxdebtbrokers.co.nz – they negotiate with the IRD.
2. Get yourselves to a budget advice service as quickly as possible.  Make the appointment tomorrow – 0508 BUDGETLINE is a free service with 1200 staff around New Zealand.  Tell them everything and take as much paperwork along as possible. 
3. Think about confiding in a family member.  You owe money to family and this can cause awful problems.  Of all creditors, family have the most heart.  If they can see you are about to turn your life upside down to solve this, they might choose to stand at the end of the queue on their own debt or help out in softer ways, by taking your girls to events or making sure family life is fun.    

The facts of your situation are that you don’t have enough income coming through your front door to keep a family of five, as well as meet your debt repayments, let alone find an $85,000 lump-sum to pay the IRD.  In the absence of a genie in a bottle, the budget adviser is going to need you to think about collating debts, remortgaging your home and extending the term of your mortgage. 

In order to do that, you both need steady incomes and up to date accounts, to get the bank’s approval.  You will have to take a long hard look at your job situation and whether you are the right person to run a business. 

With your wife doing the books it might work.  But otherwise you need wages – they may be lower, but they are regular and banks like that.  Your wife also needs to think about how she can help the team.  Your youngest is at school, which gives 30 hours a week to work.  She is working 12 hours. It’s a tough conversation, but you need to have it.  You might not like what you hear from the budget adviser, but stick together and be determined for each other. 

Email questionsto starkadvice@gmail.com, subject line: Financial Agony Aunt.  Anonymity is guaranteed.   

*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer.  These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.