Hi all,
I'm interested in different opinions on how to plan for an uncertain, but potentially costly, future liability. I apologize in advance for the vagueness, but it concerns a legal issue. I read the forums a lot and respect the community but have chosen not to post often. I'm electing to post this because I'm looking for different lenses or angles to look at a financial situation I have little experience with.
Suppose that an individual entered into a transaction to sell a property in good faith. The new owners had a problem due to the environment and it did or will cost them some money. The new owners initiate a lawsuit (Canadian legal system). The original owners had no knowledge or expectation that the issue would occur and their lawyers tell them not to worry about it - but be prepared for a protracted period of uncertainty.
So, I'm looking at a potential, but unlikely future liability (low six figures) in the near term (say, less than two years). Plus associated costs.
My net worth is positive, but I'm not financially independent at our current spending levels. A loss would be painful, and would certainly influence our long-term financial plans, but definitely not crippling.
I have never kept large emergency funds because my job is rock-solid, my spouse's is less secure for the very long term (on contract, several years at a time), but very secure in the short term and we could live on my income alone if need be.
We have a large mortgage at a low variable rate on a new house - we started building a house before we knew of the lawsuit, but finalized our mortgage after it began. It is at a low variable rate (2.05%). When we finalized, much was still unknown and we elected to retain a large cash buffer and take a larger mortgage.
So now I have a large amount of cash earning from 1-2.25% across various taxable and tax deferred (TFSA) accounts. We have significant equity in the new house and could establish a HELOC against it. For additional flexibility we took our a 30 year amortization even though we pay at a 15 year amortization rate (remember, Canadian system) and we can cut our mortgage payments almost in half tomorrow by reverting to the longer repayment period.
How would you think through our situation? I'm going to refrain from suggesting any options we've considered to see what the community comes up with. Likewise, I've left out a lot of specific numbers because I'm more interested in how you would think it through (so we can do so for ourselves based on our own risk tolerance and values) and I'd rather not have it clouded by interpretations based on assumptions of how we should live (i.e. if my net worth were 10K, 100K, 1M or the house were worth $200K or $1M - none of which are true). I'm really looking for your process of thinking it through rather than specific advice. "Sell your house, get rid of all debt, rent, cut the budget and retire" - this may or may not be a viable financial option, but it's not on the table right now.
Thank you in advance.