Are you self-employed and struggling with debt? A consumer proposal may be a good option for you. It’s a legal debt relief process intended for individuals who can’t pay the full amount of their debts, but don't want to file bankruptcy.
Awareness of consumer credit proposals has grown significantly in recent years as more and more people understand the benefits. Listed below are five things you should know if you’re self-employed and you're considering a consumer proposal.
#1 – Don’t assume that you are ineligible
Suppose that you have a friend, co-worker or family member who filed a consumer proposal and speaks very positively about how it helped get his or her debts under control. You, however, are self-employed. You are in business for yourself. But, does that mean that you are ineligible to file a consumer (ie. non-business) proposal? Not necessarily.
Assuming that you can’t pay your debts in full by selling assets like your house or investments, the biggest eligibility consideration is tied to the amount of your debt. You're eligible to file a consumer proposal if your consumer debt is more than $1,000 but less than $250,000. Consumer debt is defined as all debt except those debts that are secured against your residence. Huh - what does that mean? Add up all your debts, except for the mortgage if you have a house. If the total is less than $250,000, you are eligible to file a consumer proposal.
A consumer proposal is an effective means to gain control over virtually all kinds of unsecured debt, including amounts owed to Canada Revenue Agency. To ensure that you are eligible and to identify if there are any limitations, make sure that you disclose all of your debts to your licensed insolvency trustee.
Keep in mind that you are required to maintain payments on secured debts if you want to keep the related asset. Common examples of a secured debt are mortgages and car loans. Self-employed individuals may also have secured loans for tools or other specialized machinery and equipment.
#2 – You can continue to be self-employed, but should you?
A common concern is if you are permitted to be self-employed after filing a consumer proposal. The simple answer is yes. There are no legal restrictions that bar you from being self-employed if you file a consumer proposal.
The more important question is if you should continue to be self-employed. Some people look back in hindsight and realize that they would have made more money if they worked for somebody else as an employee, with far less stress and risk involved. It is important to take a step back and assess the overall viability of your business. Is there a chance for growth? Are there opportunities to reduce costs?
Filing a consumer proposal is about achieving a fresh start from debt problems. There is a high risk of future debt problems if you don’t see the business generating enough income to maintain your lifestyle, even without the full burden of the past debts. On the other hand, some people only need a chance to restructure the debts so that their business can take a significant leap forward in terms of growth and profitability.
#3 – Your assets are protected
Some people who are self-employed don’t have significant tangible assets. For others, there are specialized assets that are integral to making money. Creditors are blocked from seizing your assets after filing a consumer proposal.
Compare a consumer proposal to bankruptcy: bankruptcy can mean having to surrender some of your assets to be liquidated, with the funds going back to your creditors for partial compensation of the debt. With a consumer proposal, you are not required to relinquish any assets.
Think of it as a settlement of the debt, where the creditors will most times agree to it if they see you are offering to pay back more than if you had filed bankruptcy. That's how the payment amounts for a consumer proposal are determined. You get to retain your assets, but it’s viewed as a fair deal for both sides considering the alternative (ie. bankruptcy).
#4 – There will still be peaks and valleys
Most people who are self-employed do not have guaranteed income that is paid on a consistent, regular basis. Hustle is the name of the game to make sure you have enough work in the pipeline. Filing a consumer proposal obviously does not change this.
The nice part about a consumer proposal is that the debts are dealt with via one monthly payment. There’s no need to juggle the Canada Revenue Agency along with multiple credit cards and lines of credit. There is also some flexibility with respect to the payments. If you have a down month, you can make a reduced payment or skip it altogether with no immediate consequences. The key is that you don’t get behind by three months. If that happens, the consumer proposal is annulled and you are back to square one.
In the past, you would have relied on credit to get through the valleys. Access to credit will be limited after filing a consumer proposal. You may have viewed credit as a security blanket, but it wasn’t necessarily a good thing. Limited credit will really force you to manage your cash flow closely.
#5 – Beware the tax man
Finally, we come to the Canada Revenue Agency. The CRA. The Tax Man.
When somebody tells me that they are self-employed, my immediate concern is how much is owed to the CRA. Even though banks grant more credit than they should, there is no credit application process with the CRA. You don’t get pre-approved for credit (and therefore debt) with the government. And, the numbers can snowball out of control very quickly, especially when you add in the penalties and interest.
Luckily, CRA debts can be included in a consumer proposal. Full disclosure: it can sometimes be difficult to get the CRA on board with a consumer proposal when they are the largest creditor, even if it is a “fair deal” compared to bankruptcy.
One of the concerns I’ve heard from the CRA in the past, is the risk of future tax debts. They will often want to see the changes you’ve made to guard against new debt problems. This could mean having a professional bookkeeper help you with some of the paperwork and make your GST/HST payments on a more frequent basis. In my mind, these would be very positive changes to make since it is also in your interest to avoid further tax debts since they can’t be added to a proposal that has already been filed.
Ultimately, to determine if a consumer proposal is right for you, I recommend meeting with a licensed insolvency trustee. They can offer professional, honest advice to help you get back on your feet. Plus, the first meeting is free.