A Consumer Proposal is one of the most effective solutions for those struggling with overwhelming debt. Once you complete your final payments, you can finally put your debt behind you. However, life doesn’t always go as planned, and sometimes circumstances make it difficult to meet the terms of the Proposal.
What happens when you default on a Consumer Proposal? What can you do to fix the problem?
Defaulting on a Consumer Proposal
A Consumer Proposal is a formal agreement between you and your creditors, arranged through a Licensed Insolvency Trustee (LIT). It offers a structured way to repay a portion of your debt under more manageable terms. Creditors often accept these Proposals because they can recover at least part of what they’re owed, typically more than they would receive if you filed for Bankruptcy.
Borrowers and creditors have legal obligations to fulfill with an accepted Consumer Proposal. As a borrower, you must:
- Complete two credit counselling sessions with your LIT.
- Make your payments as agreed.
- Fulfill any other obligations that are part of the agreement.
In return, your creditors must:
- Stop all interest and fees related to your debt.
- Stop all contact, collection calls, and legal activities.
- Release any frozen bank accounts and stop any wage garnishments.
Once you’ve made all the required payments, you’ll receive a Certificate of Completion, your official confirmation of completion. This marks the end of your debt obligations under the Proposal. The insolvency will continue to be reported on your credit report for three years after completion of your payments.
Consumer Proposal Annulment
In an ideal world, you would make payments as agreed. Unfortunately, anyone’s situation can change. You may find yourself unable to pay your bills, even with the better terms offered by the Consumer Proposal.
Failed payments or missed payments can annull your Consumer Proposal. The Bankruptcy and Insolvency Act (BIA) allows a borrower to have two payments in arrears. Being behind two payments will not comprise a default on your proposal but you must catch up on those payments in order to complete your Consumer Proposal.
Once you fall behind by three payments, the Consumer Proposal is annulled. Missed payments don’t need to be consecutive. It is automatically deemed annulled the day you fall behind by a third payment.
If you have a different payment frequency, an annulment could occur if you miss one payment by more than three months.
What Happens When a Consumer Proposal is Annulled?
If you default after filing a Consumer Proposal, here’s what you can expect, and why it’s critical to stay on track:
- Reinstatement of debts: All the debts included in your proposal will be fully reinstated, along with any accumulated fees, interest, and penalties. While you’ll receive credit for what you’ve already paid, those payments are not refundable.
- Loss of protection: You’ll lose the safeguards the Proposal provided. This means creditors can resume collection efforts, take legal action, garnish your wages, and even freeze your bank accounts.
- Credit impact: Your credit rating could fall, indicating a serious default. That could damage your ability to access credit in the future.
How to Deal With an Annulment
If your Consumer Proposal is annulled, you have the option to revive it within 30 days. To do this, you must speak to your LIT, as there are administrator duties to follow. Your LIT will guide you through this revival process.
You may be able to amend your Consumer Proposal, and your LIT will work with you to determine if this is a possibility.
Another option is Bankruptcy. If your financial situation hasn’t improved enough, this may be the next best step.
Preventing Payment Problems
Setting up a payment plan that fits your budget is key to avoiding missed payments. Here are practical steps to help ensure your Consumer Proposal remains manageable:
- Assess whether a Proposal is the right fit: Start by having an honest conversation with your Licensed Insolvency Trustee (LIT). They’ll help you determine if a Consumer Proposal is truly the best long-term solution based on your financial situation. For example: Do you have a reliable source of income? Is your family situation stable?
- Review and align your budget: Before committing, review your monthly income and expenses to ensure the payment amount fits.
- Automate your payments: Set up on line payments timed with your paydays. This reduces the risk of missing a payment and helps you stay consistent.
- Make extra payments when possible: If you come into extra cash, consider making additional payments. These can act as a buffer if you face financial hardship later and may even help you pay off the Proposal early.
- Choose the longest term available: Select the maximum term to keep your monthly payments lower and more affordable. You can always pay it off faster if your financial situation improves. Keep in mind that the insolvency stays on your credit rating for the full term of the proposal, plus three more years.
- Communicate early if you’re struggling: If you’re having trouble making payments, don’t wait. Reach out to your LIT right away. Early, open communication can lead to adjustments and prevent your proposal from falling into default.
How We Support Our Clients
You chose a Consumer Proposal with the best intentions: to repay your creditors. Our Trustees at LC Taylor understand that circumstances change; we are here to support you. If you default on a Consumer Proposal, solutions are available to help you get back on track. We’ve been assisting clients for over 30 years, so contact us online or give us a call at 204-925-6400. We look forward to working with you.