Consumer proposals are often described as a win-win scenario for both the debtor and the creditor. Doug Hoyes and Ted Michalos explain how a consumer proposal works and why creditors would agree to a proposal or a bankruptcy.
Dave: Now before the break we talked about Consumer Proposals. They sound like a good idea, but people probably asking, “All right, so what’s the catch? This is going to be expensive isn’t it?”
Ted: You want to try it?
Douglas: Well, yeah. I mean Ted alluded to this before the break, that you hear all these adds from debt consultants saying, “We can get rid of your debts for, you know, ten cents on the dollar.” Or something like that. A Consumer Proposal is more expensive. That’s kind of what they’re selling. And my answer to that is, “No. It’s a total myth.”
So let’s look at an example. Let’s say you’ve got $40,000 worth of debts. You’ve got credit cards, bank loans, payday loans, maybe even some income taxes. You’ve got a job so you’ve got money coming in, but you’re just not making enough to pay everything off in full. Maybe your overtime has been cut back. The money just isn’t coming in like it used to be. You’re starting to fall behind. You’re getting collection calls. You’re afraid of having your wages garnished. You don’t know what to do.
So you pick up the phone like you said, Dave. You dial 310 Plan or Helpline. We talk to you. We kind of walk you through what can be done. And perhaps, in your case – and I’m just giving an example – every case is different. But maybe in your case you’d have to pay something like let’s say $15,000. That would be the settlement that you would make to get rid of your $40,000 worth of debt. So that would be $250 a month for 5 years or $500 a month for 2 ½ years – something in that range for these kind of debts. If the creditors – the people you owe money to say yes to the deal, then your debts are gone. Now I did the math. I wrote it on a piece of paper here – if you don’t file a proposal and if you owe $40,000 in credit cards.
Ted: You’re not going to like this folks.
Douglas: With a 19% interest rate and if were to pay $750 a month on them, you know, around the minimum payments, it’ll take almost 10 years to pay them off in full. Obviously, if you’re paying less than that, it’s going to take even longer. Now in my example, you’re only paying $250 a month which is a third as much and you’re only paying for five years, not ten. So in many cases, a Consumer Proposal is far cheaper than any other option.
Ted: Now what people have to keep in mind is, a Consumer Proposal is not a solution for the guy that doesn’t have any trouble paying his debts. So a lot of people hear some of this stuff and just catch part of it, I can pay less than what I owe. Well, it’s an alternative to filing bankruptcy. So the idea with the proposal is you’ve got some sort of financial difficulty. There’s some trouble. You can’t pay your debts in full and so you’re looking for alternatives. So it’s not for the guy who can afford to repay everything. It’s for the guy that’s got a problem and we’ve got to solve that problem.
Douglas: Well, and Ted raises a good point. So let’s talk about some of the downsides to this – because Ted’s right. It’s not like, “Oh, great. I’ve got 40,000 debts, I’ll just pay back 15 and everything will be great.” Well, no. If you file a Consumer Proposal, it’s a legal process – that’s why you have to come to some who’s licensed by the Federal government to do this.
Ted: We’re going to keep saying that because these guys drive me nuts, everybody.
Douglas: It drives us crazy. There will be a note on your credit report that says you filed a Consumer Proposal and that note will stay there – if you’re look at your Equifax credit report – for three years after all the proposal payments are made. So in the future it will be more difficult to finance a car, buy a house than if you hadn’t filed a Consumer Proposal than if you’d been able to pay your debts in full. So I agree completely with what Ted said.
Ted: But, you know, there’s a flip side to that. If you’re not paying your debts now and it’s gone into collections, your credit rating is actually lower than it would be if you filed a Consumer Proposal. And so – and that, the negative mark on your credit will stay for up to six years. So what Doug was just saying is right. We don’t want people to think that this a great end- all to everything, but it’s actually better than doing nothing.
Douglas: And that’s why you have to look at your situation. You got to talk to someone who can walk you through the different options. So I spoke to a guy yesterday who owns a house that has lots of equity in it. And so I said to him, “You know what? A Consumer Proposal or a bankruptcy isn’t the right answer for you.” I gave him the name of a reputable guy who does mortgages and I said, “You know what? In your case you can get a mortgage, a second mortgage, a secured line of credit, interest rates are very low right now. You’ve got a good job. You’re not behind on your debts. Use that money to pay off the debts. You’ve got a much smaller payment. That’s going to get you out of your trouble.”
Most of people who call us don’t end up filing a bankruptcy or a proposal. We end up referring them to a credit counsellor like Mosaic Family Counselling. We refer them to a mortgage broker. Perhaps they need to talk to a tax accountant. Maybe they just need to cut a few expenses and get their debts dealt with that on their own. But Ted’s right. In a lot of cases, the proposal is the right option. And if it is, then that’s what you’ve –
Ted: Well, and the trick with all of this is actually talking to somebody that’s got the right knowledge. So I mean if you’re dealing with your finances and you really don’t know what your options are, well, your choices could be to call Mosaic here in town. They’re great people. They’re very friendly. Guelph Family Counselling in Guelph – or a firm like a ours. I mean not only are we obligated to do so, but it’s what we do. We want to find the right solution for you and your family. We’re not going to tell you to file you a proposal if the correct answer is to refinance your house. We’re not going to tell you to file a Consumer Proposal if you really can’t afford it either. I mean we’re talking about these things because right now – is it seven out of eight people that talk to us are finally filing them. I mean that’s the way it’s going. If you’re going to, they’re the buzzword in the industry right now. But we’re going to look at all the options to make sure what you’re doing is going to be the correct thing for you.
Douglas: Yeah. You need to know what is going to work in your situation. In a lot of cases there are a little facts that need to be brought out so you’re going to come to the right decision. My example of the guy who owned a house with lots of equity, well, okay, that takes certain options off the table, but gives you other ones, so let’s make sure we’ve gone through all the options and then you can make an informed decision. When you come in to meet with us for the first time, we’re not going to say, “Sign here, sign here.” We’re going to say, “Here’s some information. Here’s the numbers we’ve crunched. Go away and think about it. Go to our Web site at Hoyes.com and read up on this. We’re going to give you some brochures. Take your time, talk to your spouse, talk to your friends, talk to your family and then when you’re ready to make a decision come back and we’ll get it finalized at that point in time.”
Ted: And the sad fact is that one out of every nine Canadians at some point in their life is going to file bankruptcy or Consumer Proposal now. It’s a lot more common than anybody realizes, but it’s not something that anybody ever wants to discuss.
Dave: I don’t think that the details surrounding Consumer Proposals are as widely known as what people think they know about bankruptcy. And so when they’ve got people calling them day and night trying to collect they think, “Well, I have to file bankruptcy to get this person to stop.” The proposal will do that too.
Ted: That’s exactly right. It’s a legal process. So as soon as it’s filed, the collection activity, lawsuits, wage garnishments stop. There’s what’s called a 45 day stay period. So for 45 days everybody you owe money gets to consider the proposal. Then they all vote. Everybody gets one vote for every dollar you owe and if more than half of the dollars say yes, everybody has to take the deal. It becomes a legally binding settlement. So you actually do get relief from your debts and you know that you’ve gotten relief. A debt consultant can phone somebody up and make a deal with them, how do you know they’re not changing the deal six months later? Most of the time, they don’t. What if you’ve got five or six different people that you owe money to and four of them except the deal from the debt consultant? The other two people take you to court and sue you. You haven’t really solved all of your problems. That’s the beauty of the Consumer Proposal. Everything gets dealt with together.
Dave: And why would a creditor take less than you already owe them? Why are they going to say yes?
Ted: I alluded to this earlier. So the proposal is designed for the folks that are in financial difficulty. And so if your option is, as a creditor, to take less than 100 cents on the dollar, the reason you do that is because if I don’t, maybe you’ll file bankruptcy and they’ll get even less money. And one of the conditions that’s on a proposal is you’re going to offer your creditors a better deal than a bankruptcy. Now better deal, it simply means more money. So let’s go back to the example Doug was using earlier where you’ve got $40,000 worth of debt and talk about this guy some more.
Let’s say that he’s single and his take home pay is about $2000 a month. That’s an awful lot of people these days. In fact, there a lot of people that think that would be pretty good. At $2000 a month, the bankruptcy is not going to generate any money for his creditors. It’s going to cover the legal costs. The $40,000 is going to be written off. Well, the same guy turns around and offers to pay $15,000 because that’s what he can do. It makes him feel better that he’s dealing with the debt and it’s what he can afford in his budget. All right, well, nothing - $15,000. Not complicated. You know why the creditors are agreeing – because it’s a better deal.
Douglas: And that’s the beauty of it. Everybody wins in that scenario. The guy who’s got the debts feels good because he’s worked out a plan. He’s been proactive. He’s dealt with it so his debts are taken care of, but he’s got an affordable payment plan and the people you owe the money to are happy because as Ted says, they’re getting more than what they’d get if you went bankruptcy. It’s win/win for everybody.