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. It’s not. A consumer proposal might be the solution to your debt problems.
To discover if it is a fit for you, read on.
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 without having to file for bankruptcy. This is why 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.
In this article we will cover:
- The Benefits of a Consumer Proposal
- The Costs of a Consumer Proposal
- Consumer Proposal vs Bankruptcy
- Am I Eligible for 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 that kicks in immediately when you file the proposal
- You can negotiate to pay all or just a portion of your total debts.
- Interest is frozen as soon as you file.
- All debt collection agency activities stop (letters, phone calls etc.)
- You can make a single monthly manageable payment
- 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.
Do I Get to Reduce the Sum Owed?
The great news is that you do. Using a consumer proposal you may be able to reduce your debts substantially. This can make the process of eliminating your debt so much easier than debt consolidation, where you will be obliged to pay the full amount plus interest, of course.
Another feature of a proposal is that it enables you to make a single, fair and affordable monthly payment that goes towards eliminating your debt completely. Many people have gone the debt consolidation route, only to find themselves back at square one years later, and then discovered the consumer proposal option. Maybe you should be grateful that you have discovered it now, it could save you a lot hassle and disappointment.
2. The Costs of a Consumer Proposal
The secret of successful consumer proposal is that it must be acceptable and work for both the debtor and creditors. The creditors need to ensure that they would receive more of the amount owed through a consumer proposal, than they would if you were to file for 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 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:
- Principle owed can be reduced substantially
- Can extent up to five years
- Lump sums can be paid
- Entire amount of proposal can be paid off early
- Payments can be weekly, biweekly, or monthly
So if you don’t have to file for personal bankruptcy, a consumer proposal can be an excellent option for creating a definitive 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 equity in your home, your car, or would like to protect savings like 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, as long as that decision is made at the beginning, before the creditors have voted on the proposal.
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 R7 and indicates that you have made an arrangement to settle your debts with your creditors. R1 is the reading for perfect credit, and R9 is the code for bankruptcy. It must be noted that the rating for a consumer proposal is R9 until it has been completed, and it only goes to R7 once the proposal is completed, and the debt discharged.
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. It will be somewhat easier and quicker to build your credit score back up after dealing with your debts.
Your Trustee and his/her team can guide you in the ways to recover your credit score from the effects of consumer proposal or bankruptcy.
Debts that are not eliminated within a consumer proposal are:
- payments for child care or alimony
- court fines and penalties
- debts due to fraud
- student loans that are less than seven years old
3. Consumer Proposal vs Bankruptcy
In a bankruptcy the process you lose your tax refund, usually for two years, depending upon when you file. You will also forfeit certain assets such as or RESPs (Registered Education savings Plan)
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, and you qualify, a consumer proposal could be a better option.
What if I Have More Than One Type of Debt?
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
- tax owed
A consumer proposal can reduce the overall amount owed. It can also enable you to make one manageable monthly payment.
4. Am I Eligible for Consumer Proposal?
There are certain conditions that you must be able to meet to qualify for proposal.
- You must be able to pay a portion of the debt you owe
- Your debts must exceed the value of what you own (your assets)
- Unsecured debts cannot exceed $250,000 (excluding any mortgages)
- You must be able to make monthly payments, or alternatively, you can make payments in lump sums
How Do I Qualify for a Consumer Proposal?
To qualify for a consumer proposal you must owe at least $1,000 and no more than $250,000 (excluding mortgages) and you must be able to honor those debts in full as they normally come due.
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.
If a consumer proposal is deemed to be the 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 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:
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.