If you feel overwhelmed by debt and live in Canada, a consumer proposal might be a good solution to your financial problems. Alleviating your stress from debt can help you achieve your financial goals that may have seemed at one time unreachable.
Consumer proposals are formal agreements between the consumer and the creditors made through a Licensed Insolvency Trustee, utilizing the powers of the insolvency legislation in Canada. This agreement typically results in a partial payment to creditors to settle the consumer’s debt instead of filing bankruptcy. A consumer proposal helps the consumer pay less and keep all their assets.
The Canadian Bankruptcy and Insolvency Act was established to help Canadians achieve successful consumer proposals and become debt-free. The Act strikes a balance between the rights of consumers and creditors and is a powerful tool you can use to ensure that you get the most help and be financially successful. Read on to see how consumer proposals can help you even become free of student loan debt!
The Creation of a Consumer Proposal
So, you have decided a consumer proposal is the best option for you. To get started, you need to know how to file a consumer proposal.
When you meet with a Licensed Insolvency Trustee (LIT), they will work with you to evaluate your financial situation, review your options with you, and if you decide that a consumer proposal is right for you, help you determine what you can pay each month to your creditor(s). The LIT will then prepare the necessary documents for you to sign and proceed with the filing of the proposal. The proposal documents set out your offer of what you can pay each month to your creditors. If accepted, your unsecured debts could be reduced by 80% of what your original debt was. In most cases, your proposal provides you with the opportunity to pay off your debt in manageable monthly installments. In addition, there is no penalty for prepaying your proposal, so you are free to accelerate your payments and finish your proposal sooner.
The amount of time you have to pay your proposal depends on your offer but the terms cannot extend longer than five years. This allows you to become debt free sooner than if you were to pay back 100% of your debt plus interest by way of a consolidation loan, or by simply making your monthly payments on your debts.
What Happens After Creating a Consumer Proposal?
There is a clear order of events that takes place after your creditor receives your consumer proposal offer. After sending the proposal to the creditors, you can expect the following to take place:
- Your debt will stop collecting interest. This means you will no longer be paying extra money on money you already owe!
- You stop paying money directly to your creditors. Once the LIT submits the proposal to the Superintendent of Bankruptcy Office, you will pay your money to the LIT. The stay of proceedings created by the proposal filing protects you from collection action and legal action by your creditors.
- Creditors have 45 days to submit their votes and request a meeting to discuss your offer if they do not agree with it. If 25% or more of your creditors do not request a meeting within 45 days, your offer will be automatically accepted. If the majority of your creditors (over 50% in dollar value) agree to accept your offer, your proposal will be approved.
- If your initial offer is not accepted by the majority of your creditors, you will be able to adjust your terms and negotiate with your creditors through the LIT.
- After the proposal is submitted and accepted, you must attend two financial counselling sessions. The purpose of the counselling sessions is to help you build the skills necessary to ensure you are able to manage your finances effectively in the future.
- You will proceed to pay off your debt in accordance with the details of your accepted offer.
Once you fulfill the requirements laid out in your offer, you will be debt-free and receive a Certificate of Full Performance! This has the effect of extinguishing the debts included in your proposal and allowing you to become debt-free. Your credit score may take a hit, but you get to keep your assets (e.g., house, mortgage, etc.), which is not always the case in bankruptcy.
Eligibility Requirements for a Consumer Proposal
Although advantageous, not everyone can file a consumer proposal. In order to be eligible for a consumer proposal, you will generally have to meet these requirements:
- Ability to make the monthly payment outlined in your proposal to settle your debts.
- In most cases, your debts must be larger than the value of any of your assets
- You can no longer keep up with your monthly debt payments
- The amount of debt, excluding the mortgage on your residence, is under $250,000
- Be a citizen or resident of Canada or own property in Canada
An effective consumer proposal relies on your ability to convince your creditors that you can afford your proposal payments and that you are financially responsible. Without these qualifications, the creditors may see you as a liability and find it more difficult to accept your credit proposal. However, creditors generally prefer consumer proposals to bankruptcies as they provide for a greater recovery and reduce the losses incurred by the creditors.
Before meeting with an LIT, knowing if you are eligible for a consumer proposal can make the process easier and faster! If you are not eligible, they will show you other options such as bankruptcy to help you become debt-free.
Positives and Negatives with Consumer Proposals
As with any financial avenue, there are positives and negatives that come with consumer proposals. Remember that there are other options when it comes to managing your debt. One of those other options to address a debt problem is bankruptcy. However, that option can come with some severe drawbacks. Consumer proposals, on the other hand, are typically less hassle than bankruptcy and can make life much easier. Let’s look at some of the positive aspects of opting for a consumer proposal.
Many of the advantages of consumer proposals allow you to keep your lifestyle and manage your debt. These five advantages all ensure you have protection from creditors and can continue your daily life. Here they are:
- Keeping your assets: A consumer proposal allows you to protect your assets, such as the equity in your home. As long as you can make your payments on your secured debts (mortgage, car loan, etc.) and finance your proposal payments, you are likely to retain all your assets.
- Fixed monthly payments: Instead of your payment depending on how much money you make that month, it is a fixed rate decided at the time of your offer. That payment will not change the entire time you are under a consumer proposal.
- Reduced debt and no interest: The vast majority of consumer proposals filed result in only a portion of the debt being paid. In addition, there is no interest in a consumer proposal, resulting in substantial savings to the consumer.
- Lower monthly payments: Without a consumer proposal, you could be paying high monthly payments, regardless of your income. A consumer proposal is based on what you can afford, forcing that monthly payment to be lower.
- Protection from creditors: Creditors will not be able to badger you with collection calls or take money directly from your wages. The consumer proposal ensures that a contract exists between you and the creditors, keeping both sides aware of their responsibilities.
- Avoiding bankruptcy: Bankruptcy can result in the loss of your assets and you may have to pay substantial payments towards your debts, especially if your income increases during the bankruptcy. In addition, you are required to report your income and expenses to the Trustee during a bankruptcy. A consumer proposal allows you to avoid all of this.
- Peace of mind: A consumer proposal allows you to feel comfortable with your situation and know that you will soon be out of debt. This takes some of your stress away!
While there are plenty of positives to consumer proposals, there are negatives as well. Knowing about these downsides will be just as important in your decision-making process.
Unfortunately, the negatives can make a consumer proposal seem like a daunting choice for a consumer. But if you can become knowledgeable about these negatives, it will be less difficult to decide what is best for you.
- Amount of time: A consumer proposal can take longer to resolve than declaring bankruptcy. Instead of forfeiting assets and making payments over a relatively short period of time (9 or 21 months), a consumer proposal can result in payments over the span of up to five years.
- Lower credit rating: The consumer proposal will stay on your credit report for up to six years. Because the filing of a proposal essentially breaches all your existing contracts with your creditors, your credit score will be lower than it would be if you had paid off your debts in full. As such, it may make it difficult to access future lines of credit and other credit products until the record of the consumer proposal is purged from your credit report.
- Strict rules: If you do not adhere to the terms of the proposal and the Bankruptcy and Insolvency Act, your proposal can be annulled or cancelled and the creditors can resume collecting the full amount of the debt from you directly. Falling three payments in arrears on your proposal payments would be one example of this.
For most, the advantages of filing a proposal outnumber the negatives. However, it is up to you to determine if a consumer proposal is the right choice for you. As such, it is important to know all the information before making your decision on how to deal with your debt. Speaking with an LIT is the best way to get this information.
If you think that a consumer proposal might be right for you, your next step is to find a Licensed Insolvency Trustee. Get a free debt evaluation and be connected with an LIT near you. These professionals are ready to help you determine the best way to get out of debt and achieve financial success.
Professionally Reviewed & Approved By:
Brian F. Williams, CIRP, CPA, CMA
Licensed Insolvency Trustee