The Problem
You are getting behind on your bills. Credit card debt is building up with interest, and in this era of inflation, likely new charges as well. You are uncomfortable with this growing debt and starting to be concerned that you might not be able to catch up. With the demands of your current job, and your family commitments, a second job is not feasible. You’ve tried cutting back on household expenses, but inflation just keeps those expenses on the rise. You know that if you keep on this path, you will face Bankruptcy.
The Solution
The first step to take when you find yourself in a financial “hole”, is to evaluate your situation in detail. The first rule of getting out of a hole is to stop digging. That means knowing where your money is going, and planning your expenditures carefully.
Do a detailed budget that shows what it costs you and your family to live each month. Be realistic. (You might need to keep track of where you are spending your money for a month or two, in order to really know where the money is going.) Once you have a budget for basic living, you will know how much money you have left over to pay debts. Be sure to include money for emergencies, so that you can be confident that the funds you set aside to pay debts will be available every month.
Once you have done that, do a long term budget for the debt recovery. Your total unsecured debt (not including a mortgage), how much you have to pay monthly, and how long it will take to pay off the debt using your available monthly amount. Remember that interest will continue to accumulate during the months or years while you are making payments. Can you keep ahead of the interest cost? How will paying this debt off for the next 5 or 10 years affect your ability to achieve other long-term goals?
If your budgeting exercise shows that you are too far in debt to recover on your own within a practical time period, you may need some help to get back on your feet. This is where a Consumer Proposal might be the right solution for you.
What is a Consumer Proposal?
A Consumer Proposal is a “statutory option” (it is law under the Bankruptcy and Insolvency Act of Canada). It allows you, through a Licensed Insolvency Trustee, to make an offer to pay your debts based on what you can afford rather than on how much you owe. You may be able to pay only a portion of the debt (sometimes as little as 10%), but the entire debt is eliminated, with no interest accumulating.
Creditors are given the opportunity to vote for or against a Consumer Proposal. They generally accept a Consumer Proposal because it will pay them more than what they would receive in a Bankruptcy (which is often the only other reasonable solution for the debtor).
Once the Consumer Proposal is accepted by a majority of the creditors, it is binding on all unsecured creditors. A Stay of Proceedings goes into place, and the creditors can no longer take collection practices, including wage garnishments, against the debtor. When the proposal is completed, 100% of the unsecured debt is discharged, so none of the creditors can resume collection after the proposal’s completion.
Should you file a Consumer Proposal? This podcast looks at this popular debt relief option.
Is this too good to be true?
While a Consumer Proposal is a great option, there are a few limitations. Some debts cannot be included in a Proposal – fines/penalties, fraud, secured debts like a mortgage or car loan, child support or alimony. If you want to keep your car or your home, you will need to continue those payments outside of the Consumer Proposal. However, if you are under water with the car or the home (owe more than they are worth), the filing of a Consumer Proposal can be a great opportunity to let them go.
What is needed to make a Consumer Proposal work?
For a Consumer Proposal to work there are two basic considerations:
- The Consumer Proposal must allow for payments that are sustainable over the course of the proposal. The maximum length of a Consumer Proposal is five years. Most are for a lesser time period. If the payments are too difficult and cannot be kept up, you may default at some point. If that happens, Bankruptcy is likely.
- The creditors (or at least a majority of them) that vote on the acceptance or rejection of the proposal, have to be satisfied that it will be the best option for them (usually meaning that it will pay them more than they would receive in a Bankruptcy). That means that if you have secured assets that have significant equity in them, the value of any realizable equity will need to be taken into account when designing the proposal.
How do creditors know if the Consumer Proposal is in their best interest?
This is why ONLY a Licensed Insolvency Trustee can file a Consumer Proposal for you. The LIT will audit the information you provide (ie. verify assets and income) and provide all that certified information to the creditors so that they can properly evaluate the Consumer Proposal. Because LIT’s are professionals who are licensed and overseen by the federal government, creditors can be confident that the information they provide is correct.
Do Consumer Proposals always get accepted by the creditors?
A Consumer Proposal that is well documented and designed by a Licensed Insolvency Trustee will most often be accepted by the creditors. Because of their experience and expertise in this field, an LIT will know what specific creditors look for in a proposal, and be able to design a proposal with you that is likely to be accepted.
There is a lot of variance in proposals, depending on the nature of the debt and the creditors involved. The amount to be paid through the proposal (the percentage of the debt), and the period of time (maximum 5 years) that the payments are spread over will both be taken into account by the creditors.
Do I need a formal Consumer Proposal, or can I just do an informal one myself or through a credit counsellor?
If your debt situation is fairly simple (just a couple of creditors) you may be able to negotiate an informal proposal yourself. However, with both a do-it-yourself proposal and one done through someone like a credit counsellor, you will have none of the legal protections provided by the formal Consumer Proposal.
Only a Licensed Insolvency Trustee can issue a stay of proceedings to stop collections and garnishments, and only a formal Consumer Proposal is binding on all creditors. With an informal proposal, nothing stops a creditor from resuming collections once you have completed the payments under your informal proposal.
In Conclusion
In the right circumstances, and with the help of a Licensed Insolvency Trustee, a Consumer Proposal can be a very effective way to eliminate debt. It puts you back in control of your situation, reduces that amount of debt you must repay, eliminates interest, and lets you get back to planning your future.
If your debt is becoming unmanageable, then be proactive and contact us or call us at 204-925-6400 today to find out if a Consumer Proposal could be the best solution for you.
Leigh C. Taylor, LIT
