I’ve seen and heard many false comments about consumer proposals over the years. Despite these misconceptions, a consumer proposal has become the debt relief option of choice for people facing debt problems. Unfortunately, that doesn’t mean that everyone is aware of what is a myth and what is a fact.
Here are ten common myths I’ve come across on various websites, social media comments, and radio interviews.
Myth #1: “You have to pay a $1500 up-front fee to file a consumer proposal.”
This is a big myth perpetuated by many websites which claim that it costs around $1,500 to file a consumer proposal and is not true. There is NO initial setup fee to file a consumer proposal if you work directly with a reputable licensed insolvency trustee.
Where does this myth come from?
- Trustees get paid from the money that’s paid into the proposal. According to the government mandated tariff, the trustee keeps the first $1,500 in proposal payments that would otherwise go to your creditors, to cover administration costs. The debtor does not pay the trustee an extra fee. It could take up to 8 payments before a trustee earns this fee. After this, the trustee earns an additional 20% of your payments. Again, you don’t pay this – it comes out of the monies that would otherwise be distributed to your creditors.
- Unlicensed debt consultants like to charge a ‘fee for service’ to help you prepare the proposal documents. You should never pay anyone for consumer proposal help or advice. Work directly with a Licensed Insolvency Trustee and avoid this unnecessary cost.
- Lastly, some credit counselling agencies like to promote this number because trustees to get to keep the first $1,500, but in my opinion, it’s misleading to say it costs $1,500 to file.
Myth #2: “Trustees that file consumer proposals work for creditors.”
Not true. To be an administrator of consumer proposals, you must be a Licensed Insolvency Trustee. This license is issued by the government – the Office of the Superintendent of Bankruptcy. Trustees are appointed by the government (not the creditors) to administer the consumer proposal. The role of the consumer proposal administrator is to act as an impartial officer of the court. We don’t take sides.
Myth #3: “Trustees make more if your proposal is higher, so they have a conflict of interest.”
As I mentioned, a trustee is paid when money is distributed to the creditors, however, if the proposal fails, there is no money available to distribute. The trustee’s motivation in a consumer proposal is to find a common ‘sweet spot’ – a number high enough that the creditors will likely accept and a number low enough that it is affordable for you to pay each month. Knowing the sweet spot is based on a lot of experience working with both creditors and debtors, which consumer proposal administrators have. If the proposal does not work for either you or the creditors, the trustee won’t be paid. If you can’t complete your proposal payments because they are too high, the trustee won’t get paid.
Myth #4: “A consumer proposal is worse for your credit.”
It’s true that when you file a consumer proposal, a note will appear on your credit report and remain there for three years after the proposal was completed. However, a proposal is no worse for your credit that working with a credit counselling agency. Leaving out the fact that a debt management plan also gets reported on your credit score for up to three years after completion misleads people into believing that a consumer proposal is worse for your credit. I’ve seen many comments on Reddit and had calls from people who were unpleasantly surprised to find out that the debt consolidation program they entered into, with a credit counselling agency, appeared on their credit report. Don’t let lack of information sway your decision.
Related to this is the myth that ‘it’s the same as bankruptcy”. I’ll be the first to tell you it’s not significantly better on your credit, but it is different. Bankruptcy is rated as an R9 on your credit and stays there for six years after your discharge. A consumer proposal is reported as an R7 on your credit and remains for three years after you completed your proposal
The purpose of filing a consumer proposal is to get rid of problem debt so that you can start the process of rebuilding your credit debt-free. A consumer proposal is often the lowest cost way of achieving that objective. And I would argue that by paying less each month in a consumer proposal you have more money to save, which will help you rebuild credit much faster than any other debt relief option.
Myth #4: “A consumer proposal takes 5 years.”
A consumer proposal can last up to a maximum of 5 years. Proposals can range from 1 month to 60 months, and the length will depend on how quickly you think you can repay your proposal. Furthermore, you can pay off a consumer proposal as fast as you like – if you make extra payments at any time, it will reduce the length of the term of the proposal.
Myth #5: “Everyone will know you filed – it’s public.”
This is a favourite scare tactic of credit counselling agencies. They like to point out that when you file a consumer proposal, it is registered with the federal government and as such will appear on the government’s database of insolvency filers. While it is possible to search the bankruptcy and insolvency records, someone must think you filed first (to enter your name), and they must pay for the privilege. The details provided once you do a search are also very limited. No information about your proposal arrangement appears on this record.
By the way, the fact that your proposal is registered with the government is a benefit to you. This is what provides you with the legal stay of proceeding that stops creditors from pursuing you for collection. Credit counsellors can’t offer this protection.
Myth #6: “You will have to sell your house or other secured assets.”
Nothing could be farther from the truth than that statement. A consumer proposal does not deal with secured creditors. If you can keep up with your monthly mortgage, you can keep your home. The same applies to your car loan. No trustee will force you to sell your home or car. In fact, the number one advantage of a consumer proposal is that you get to keep all assets.
Filing a consumer proposal can make keeping up with your mortgage or car loan more affordable. This is because you’ve eliminated other debt payments. If you fall behind on your secured debt payments, lenders can enforce their security rights. However, it’s more likely that you could miss payments before you file a proposal. By filing a proposal, you have more cash flow each month, which means more money to make sure you don’t miss a loan payment.
If you still can’t afford to keep up with your secured debt payments, you can, if you want, choose to surrender the asset and let the creditor file a claim in your proposal for any shortfall. However, this choice is entirely up to you.
Myth #7: “If a proposal fails, you will be bankrupt.”
Another common misunderstanding. If your proposal is not accepted by your creditors, you are not declared bankrupt. You can work with creditors to negotiate an acceptable deal. At Hoyes, Michalos we have a 99% consumer proposal acceptance rate.
If you fall behind a total of three proposal payments, your proposal will be deemed to be annulled. You are still not bankrupt. An annulled proposal simply means you are back where you were, owing your creditors. At Hoyes Michalos, we work with you to help you catch up so the risk of an annulled proposal is small.
Myth #8: “People with assets shouldn’t file a consumer proposal.”
Not true. One big difference between a consumer proposal and bankruptcy is that in a proposal, you don’t assign control of your assets to the trustee. A consumer proposal makes a lot of sense if you have an asset that you’d lose in a bankruptcy that you don’t want to lose. Examples of assets you could lose in a bankruptcy include equity in your house, equity in your car, investments such as savings bonds, or an RESP.
Myth #9: “Some creditors don’t accept consumer proposals”
Not true. At Hoyes Michalos & Associates, approximately 99% of consumer proposals filed are accepted by the creditors. Although creditors have the right to reject a proposal if they see fit, it’s rare for them to do so if they’re satisfied the proposal is going to return them a greater financial benefit than they’d receive if you were to file bankruptcy instead. What creditors are increasingly not accepting is debt settlement offers put forward by unregulated, unlicensed debt consultants and debt settlement firms.
A consumer proposal deals with most unsecured debts, including tax debts owing to the Canada Revenue Agency and student loans if you have been out of school for seven years. Credit counselling cannot help with either of these debts.
Myth #10: “You can talk to a credit counsellor about a consumer proposal.”
You should only get consumer proposal advice from a Licensed Insolvency Trustee. Only a LIT is trained and licensed to provide consumer proposal services. The laws in the Bankruptcy & Insolvency Act are quite complicated. It takes years to train to be a Licensed Insolvency Trustee and even more years of experience to know what different creditors may accept and how best to approach specific situations.
Credit counsellors can only offer debt management plans. Creditors prefer debt management plans because they get back more of their money. Since credit counsellors get paid a contribution from creditors when you do a DMP, it is in their best interest to promote that solution. This is why credit counselling agencies are really debt collectors.
As a Licensed Insolvency Trustee, our job is to provide you with the best, and most affordable, option to get out of debt.
The key is that you consider all debt relief options when you have a debt problem. Don’t jump to conclusions and assume that because a family member, a friend or colleague picked one option that the same option must also be the best for you too. Do your research, call a professional, and make sure you feel confident that all your options have been explained to you before you decide what to do.