Choosing to file a consumer proposal to eliminate your debts can be a difficult decision. The first step is to understand the outcomes of a consumer proposal – both good and bad. We review some of the most commonly asked questions and concerns we hear during our consultation with people considering a consumer proposal.
- Pros and Cons of a Consumer Proposal
- What Happens in a Consumer Proposal?
- How Does a Consumer Proposal Work?
- What Happens to Your Assets in a Consumer Proposal?
- How Are Debts Eliminated with a Consumer Proposal?
- Life After a Consumer Proposal
- Consumer Proposal Reviews
Pros and Cons of a Consumer Proposal
The best upside of filing a consumer proposal is that once it is completed you are debt-free. If you have significant credit card and other unsecured debts, the monthly cost of a proposal will be much less than what you are paying today. A proposal can often result in savings of up to 70% of your current unsecured debts.
While the benefits of filing a consumer proposal allow you to get out of debt sooner than other debt relief options, there is still a cost. Creditors expect to receive a little more in total than they would receive if you were to file bankruptcy. In addition, you have a note that appears on your credit report that states that you have filed a consumer proposal.
What Happens in a Consumer Proposal?
In a consumer proposal, you offer to repay your creditors a settlement amount that is less than what you owe. You offer to make payments of this fixed amount over a period of time, but up to a maximum of five years.
Let’s look at an example. Let’s assume you owe different creditors a total of $45,000 in unsecured debts. You may be able to propose to repay your creditors a total of $15,750 in exchange for the elimination of all your debt. You could propose to make payments over 36 months which would result in a payment of $437.50 a month. Alternatively, if your budget requires a lower payment, you could extend your repayment plan to a maximum of 60 months. That would result in a monthly payment of $262.50. Either way, you save $29,250 plus interest.
If you would like to estimate how much your proposal payments might be, try our consumer proposal calculator.
Once a majority of your creditors, by dollar value, agree to the terms of your proposal, the proposal is binding on all creditors. Even ones that did not agree to your proposal. This means that all creditors must abide by the terms of the proposal and all debts will be eliminated once you have completed your payments.
During your proposal, your only obligations are to keep up with your payments, attend two credit counselling sessions and notify your trustee of any personal changes like changes in your banking arrangements or address.
How Does a Consumer Proposal Work?
Making and filing a consumer proposal is a simple process. The basic steps are as follows:
- Assessment and Planning: Book a free consultation with a Licensed Insolvency Trustee to review your situation. If a consumer proposal is the right solution, your trustee will help you develop a repayment proposal that you can afford.
- Filing and Approval: The trustee will prepare all necessary paperwork to submit your proposal to both the government and your creditors. Once this paperwork is signed it will be filed electronically and your creditors will be notified. Your creditors will then vote to accept or reject your proposal or they may make a counter-offer. At Hoyes Michalos we have a 99% acceptance rate so we are confident we can help you create a plan that works for you and will be accepted by your creditors.
- Completion of Proposal Terms: Once accepted, your responsibility is to make payments and attend two mandatory counselling sessions.
- Begin Repairing your Credit: After you have made your final payment you will receive a Certificate of Full Performance. You are now debt-free and can begin the process of rebuilding your credit history. In actual fact, most clients begin the process of rebuilding while they are still in a proposal. It is possible to obtain a secured credit card while you are in a proposal and, because you are no longer making such large debt payments you can begin to build some savings.
For details on what happens when you file a consumer proposal read our article: How a Consumer Proposal Works.
What Happens to Your Assets in a Consumer Proposal?
One of the biggest advantages of a consumer proposal is the fact that your assets are protected. This can be particularly important if you have equity in your home, own a car or would like to preserve savings like your children’s RESP.
Your creditors will generally accept your consumer proposal if you offer more than they would receive in a bankruptcy. Your Hoyes Michalos Consumer Proposal Administrator will calculate any equity (or value) you have in your house, car or investments, and will ensure that the proposal you offer will be greater than the value of those assets.
For example, if you have $10,000 in equity in your house and that’s your only asset, a viable proposal might be $200 per month for 60 months, or $12,000. With that proposal, the creditors are happy because they received more than the $10,000 they would have received if you had declared bankruptcy and the trustee sold your house, but you are happy because you get to keep your house and only pay $200 per month in your proposal.
The following provides some information on how filing a consumer proposal affects these different assets.
How a Consumer Proposal Affects Your House & Mortgage
When you file a consumer proposal you can keep your home if you continue to make monthly mortgage payments.
Existing mortgage: A mortgage lender cannot foreclose on your home unless you are behind on your payments. They also cannot change the terms of your mortgage just because you filed a consumer proposal.
Consumer proposal mortgage renewal: It is usually possible to renew a mortgage during a consumer proposal with your existing lender if you have a good payment history with them (i.e. all mortgage payments are current). During the consumer proposal process, it can be much more difficult to switch mortgage lenders so this may affect the interest rate on a potential refinance.
A Consumer Proposal and Car Loans and Leases
The same treatment is applied to other secured assets like a vehicle. If your loan payments are up to date and you continue to make your car loan or lease payments, you can continue to keep your vehicle.
If you have an expensive car lease and do not want to continue with that lease, you also have the option to cancel the lease as part of your proposal. Any amount owing because of the cancellation will be included as an unsecured debt in the proposal.
Consumer Proposals and RRSP’s, RESP’s and Investments
Under bankruptcy law, an RRSP is not seizable by a Licensed Insolvency Trustee except for contributions made in the last year. In a consumer proposal, even those contributions are yours to keep.
In a bankruptcy, RESP’s and other investments are assets that you would have to hand over to a Licensed Insolvency Trustee. By filing a consumer proposal, you can keep these assets.
How Are Debts Eliminated with a Consumer Proposal?
The purpose of filing a proposal is to become debt-free. An individual can file a consumer proposal to eliminate their debts if their total liabilities do not exceed $250,000. This does not include mortgages on a principal residence. Your debts are eliminated (discharged) once you complete your proposal terms and receive your Certificate of Completion.
What Debts Are Included in a Proposal?
Consumer proposals eliminate most unsecured debts. An unsecured debt is simply a debt with no security against it. Consumer proposals are an excellent way to consolidate credit card debt, payday loans, outstanding bills and other unsecured credit.
Unsecured debts that can be included in a consumer proposal include:
- Credit card debt
- Lines of credit
- Personal loans
- Payday loans
- Income tax debts
- Certain student debt (see our section below)
How are Secured Debts Treated in a Debt Proposal?
Secured debts are guaranteed by an asset. If you stop making payments on a secured debt, then the creditor has the legal right to take possession of the agreed asset and can resell it to recover their loan.
Some examples of secured debts are:
- Car loans - secured by the car
- Mortgages - secured by the house
Secured creditors are notified if you file a consumer proposal, but they do not receive any money from the actual proposal. If you file a consumer proposal you can choose to either continue paying your secured creditors, and can keep the asset, or stop payments and surrender the asset to the creditor.
Can I Include Student Loan Debt in My Proposal?
Just like in a bankruptcy, student loans will be automatically discharged in a consumer proposal if you have been out of school for at least seven years. If so, your student loan debt is included with your proposal and will be eliminated upon completion of all your payments.
Even if you have not stopped studying at least seven years ago, you may still find relief from student loan debt by filing a consumer proposal:
- Since your other debts will be eliminated by filing a consumer proposal, your cash flow may improve enough to make meeting your student loan payments easier;
- While you are in a proposal or a bankruptcy there is a stay of proceedings, so creditors are not able to pursue you for any debt, including consumer proposal student loans even if they are less than seven years old. Your choices are to continue paying, or to stop making payments against your student loans during your proposal. Be aware however that not paying will let the interest and payments accumulate, so you will potentially owe more when the proposal is completed.
What Debts are Not Eliminated by Filing a Proposal?
A consumer proposal deals with most unsecured debts however it will not:
- Eliminate support payments or alimony obligations;
- Eliminate court fines and penalties;
- Eliminate debts due to fraud;
- Automatically discharge student loans if you have been a student within the last seven years.
Life After a Consumer Proposal
After a consumer proposal, you have a fresh financial start. Your debts are eliminated which makes it easier to balance your budget moving forward. Many clients find they are even able to save money before their proposal is completed since their proposal payments are much lower than their old debt payments.
How Does a Consumer Proposal Affect my Credit?
A consumer proposal will remain on your credit report for three years after you have completed your payments. Your debts will be coded as an R7 which means that you have entered a debt settlement arrangement with your creditors. For more on how your credit is affected by filing a proposal and how to rebuild after a consumer proposal read our article about consumer proposals and your credit rating.
Ready to File a Consumer Proposal?
Hopefully we have answered many of your questions about the effects of filing a consumer proposal. If you would like to read some success stories, read some of our consumer proposal reviews and testimonials from our clients.
If you are ready to see if a consumer proposal is the right choice to eliminate your debts, the first step is to speak with a Licensed Insolvency Trustee.