Consumer Proposal

An Alternative to Bankruptcy: Consumer Proposal

  • By Leigh C. Taylor, LIT

You may be wondering ‘how did it get this crazy?’ Your debts have become unmanageable and you might be thinking that bankruptcy is your only option. The good news is, that there is an alternative that works for many people. A Consumer Proposal might be the solution to your debt problems.

What is a Consumer Proposal?

It is a legal process provided by the Bankruptcy and Insolvency act of Canada that can provide you protection from your creditors. It is the number one alternative to a personal bankruptcy and one you should seriously consider.

A Consumer Proposal represents a proactive approach to dealing with your debt problems. It enables you, with the help of a Licensed Insolvency Trustee, to propose a direct debt settlement with your creditors.co

In this article we will cover:

  1. The Benefits of a Consumer Proposal
  2. The Costs of a Consumer Proposal
  3. Consumer Proposal vs Bankruptcy
  4. Eligibility for Filing a Consumer Proposal

Along the way we’ll also answer some of the most commonly asked questions about the topic.

1. Benefits of a Consumer Proposal

Here is a quick list of some of the most important benefits a Consumer Proposal offers:

  • It’s a legally binding settlement with your creditors. Once it is accepted by the majority of your creditors (based on the amounts owed), it will be binding on all of your unsecured creditors.
  • You can negotiate to pay100% of your unsecured debt, or just a portion of your debt. Either way, all of the debt will be eliminated. This makes a Consumer Proposal a more achievable option than a consolidation loan, where you would have to pay the full amount, plus interest.
  • Interest is frozen as soon as you file the proposal.
  • All debt collection activities stop (letters, phone calls etc.) This kicks in immediately as soon as you file the proposal
  • You make a single monthly payment which is based on your ability to pay, rather than how much you owe.
  • Wage garnishment stops
  • The process will last no longer than five years

It sounds almost too good to be true, doesn’t it? But the legislation that makes a Consumer Proposal possible, was specifically designed to enable people just like you to get a fresh start. You might even be wondering why it took you so long to find this out.

Literally, you can take a significant step toward reducing the amount you owe, arrange manageable monthly payments to repay the amount remaining and receive legal protection from collection agencies while all of this happens. You should probably make that call to‐day.

2. The Costs of a Consumer Proposal

The secret to a successful Consumer Proposal is that it must be acceptable to, and work for, both the debtor and creditors. The creditors need to be sure that they would receive more through a Consumer Proposal, than they would if you were to file bankruptcy.

The fees for a Consumer Proposal are included in your monthly payment. For example if your proposal involves a payment of $200 per month for 36 months, then that’s what you pay. No fee or charge is applied in addition to that amount. The Trustee is paid out of that amount, so in effect the creditors are absorbing the cost of your Consumer Proposal.

Once in place, the proposal enables you to make one single monthly payment to the Trustee.

Features of the Consumer Proposal payment:

  • The principal owed can be reduced substantially, in some cases by as much as 80% or 90%.
  • The proposal can be designed to range in length from a few months up to five years
  • Lump sums can be paid
  • The entire amount of the proposal can be paid off early if you wish
  • Payments can be weekly, biweekly, or monthly

So, a Consumer Proposal can be an excellent alternative to bankruptcy in creating a workable solution to your problem debt.

What Assets Can I keep with a Consumer Proposal?

Probably the most significant benefit of the Consumer Proposal is that it enables you to protect your assets.  This can be particularly significant if you have realizable equity in your home,  your car, or would like to protect a RESP.

Within a Consumer Proposal you’re entitled to keep your home as long as you can make your monthly mortgage payments.  The mortgage lender is not entitled to foreclose on your home unless you have defaulted on your payments.  Nor can they change the terms of the mortgage because of the Consumer Proposal.  It may be more difficult to change mortgage lenders during the Consumer Proposal, so you will probably have to accept whatever interest rates the original lender is willing to offer.

And as far as your car is concerned, as long as you continue to make your payments as agreed, you’re allowed to keep your car. If you cannot afford your car lease you also have the opportunity to cancel the lease. In this instance any amounts owed as a result of canceling the lease can be folded into the unsecured debt within the Consumer Proposal. That decision must be made at the beginning of the proposal, before the creditors have voted on it.

How will my credit rating be affected by a Consumer Proposal?

Credit agencies in Canada will place a note on your file to indicate that you have filed a Consumer Proposal. This note will stay on your file for three years after you have completed the proposal payments.

Your credit report will be coded as an R9 during the proposal, and then changed to an R7 once the proposal is successfully completed. This indicates that you have completed an arrangement to settle your debts with your creditors. R1 is the reading for perfect credit, and R9 is the code for bankruptcy.

So a Consumer Proposal is considered to be slightly less detrimental than bankruptcy for your credit rating. This is another advantage of the Consumer Proposal, particularly shorter proposals. With a shorter proposal (3 years or less) it should be somewhat easier and quicker to build your credit score back up after dealing with your debts. Keep in mind though, that this advantage decreases with a longer proposal, say 5 years. A bankruptcy might have been completed in 9 months, and listed on your credit rating as an R9 for 6 years — total: under 7 years. A 5 year proposal, you will have an R9 for 5 years, and an R7 for another 3 years — total: 8 years. In that case, rebuilding credit will not be quicker than it would have been after a bankruptcy.

Your Trustee and his/her team can guide you in the ways to recover your credit score from the effects of a Consumer Proposal or a bankruptcy.

3. Consumer Proposal vs Bankruptcy

In a bankruptcy process you lose your tax refund for the year in which you file the bankruptcy, and for any outstanding prior years. You may also forfeit certain assets such as or RESPs (Registered Education savings Plan). Note that RRSP;s (Registered Retirement Plans) are protected under both a Proposal and a Bankruptcy.

Within the bankruptcy process, the more you earn, the more you pay. This is not the case with the Consumer Proposal, where you will make a fixed payment that never changes. Therefore if you expect your income to go up in the future, a Consumer Proposal could be a better option. On the other hand, if your income fluctuates up and down, a proposal can be a hardship for you when your income is down. In that case, a bankruptcy would be more responsive to your changing situation.

A Bankruptcy will generally be shorter, and cheaper than a proposal. That is because the proposal should pay more to the creditors than they would receive in a bankruptcy. This is where assets become something to consider carefully. If you have a recreational vehicle (like a boat or Ski-doo) that you want to protect, then a proposal will do that. Generally, other assets such as your home, your vehicle (if used to get to work), tools of the trade and household furnishings and personal effects are all protected in both a bankruptcy or a proposal.

Debts that are not eliminated within a Consumer Proposal or a bankruptcy are:

  • payments for child support or alimony
  • court fines and penalties
  • debts due to fraud
  • student loans that are less than seven years old

Many Types of Debt are Included in Both a Consumer Proposal and a Bankruptcy

It is very common for people with unmanageable debt to have several forms of money owed.

  • credit cards
  • payday loans
  • lines of credit
  • unpaid bills
  • taxes owed

4. Eligibility for a Consumer Proposal

There are certain conditions that you must be able to meet to qualify for a Consumer Proposal.

  • You must be able to pay a portion of the debt you owe, and have a reliable source of income that you are confident will continue for the duration of the proposal
  • Your debts must exceed the value of what you own (your assets) In other words, you must be insolvent
  • Unsecured debts cannot exceed $250,000 (excluding any mortgages)
  • You must be able to make monthly payments, or alternatively, you must be able to make payments in lump sums
  • You must owe a minimum of $1000 and be unable to pay your debts as they become due.

How Do I Qualify for a Consumer Proposal?

To properly assess whether a Consumer Proposal is in your best interests, talk to a Licensed Insolvency Trustee and allow them to assess your specific situation.  They are the most qualified debt specialists in Canada and licensed by the federal government to assist people with problem debt. They are also the ONLY debt specialists in Canada who are licensed to administer Consumer Proposals.

If you decide that a Consumer Proposal is your best option, the Trustee will make the proposal to your creditors on your behalf.  That proposal will outline payments to be made, and the timeframe of the proposal.  If a majority of the dollar value of the creditors’ claims accepts the proposal, then it becomes binding on all the creditors.

If you stop making payments towards the Consumer Proposal, the proposal will be automatically canceled.  In this instance the creditors would again be able to pursue you for the original amount owed.  Once all the proposal payments are made, which must happen within the agreed upon time period, the proposal is complete.  You will be given a certificate that states that the terms of the Consumer Proposal have been met and that all your debts are satisfied.

What if I Don’t Qualify for a Consumer Proposal?

If you don’t qualify for a Consumer Proposal it’s not the end of the world.  There are other alternatives. Your Licensed Insolvency Trustee will give you a complete picture of all the various options that could work for you.

Where Do You Go From Here?

If you are beginning to think a Consumer Proposal might be the right solution for you, then the next logical step is to talk to one of our Licensed Insolvency Trustees. We can assess your specific circumstances and guide you toward the most realistic option.

Since 1992 LCTaylor has helped over 50,000 people manage their debt in Manitoba and North-Western Ontario. You can be assured of complete confidentiality, a nonjudgmental approach and a customized, achievable solution to your problem debt.

Bad debt can happen to anyone. We’ll help you get back on track so you can get on with the rest of your life.

 

Free Consultation!

Contact us for a free consultation to see how we can help you get out of debt.

 

Leigh C. Taylor, LIT

Leigh has been working in the insolvency field since 1975. He is a graduate of the University of Manitoba. Leigh began his career as an Official Receiver with the Office of the Superintendent of Bankruptcy. He is a Certified Professional Accountant, and he attained his license as a Licensed Insolven Read More Leigh has been working in the insolvency field since 1975. He is a graduate of the University of Manitoba. Leigh began his career as an Official Receiver with the Office of the Superintendent of Bankruptcy. He is a Certified Professional Accountant, and he attained his license as a Licensed Insolvency Trustee in 1980.Leigh has been a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) since its inception. He is a Past President of several organizations, including the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP), the Armstrong Point’s Association, and the Manitoba Opera. In addition, he has served for numerous years in leadership roles in Winnipeg churches. Close

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