A consumer proposal is an arrangement made with your creditors to settle your debts for less than you owe. Most people make monthly proposal payments over a period of up to five years. However, what happens when you receive a lump sum of money perhaps due to a lawsuit, severance, inheritance or gift from a family member? How might this affect the cost of a consumer proposal, how much to offer and the terms of repayment?
First, lump sums received while you are in a consumer proposal do not affect your existing proposal payments. Once you have an approved proposal, those terms are fixed through the life of the proposal. Additional earned income or monies received are yours to keep.
If you are considering a proposal to deal with debts, you have options if you have a lump sum available up front. One of the advantages of a consumer proposal is the flexibility it allows in making a repayment plan. In cases where you receive a lump sum of money, but not enough to deal with your debts, a consumer proposal can be the right answer. We explain how to make a lump sum offer or an extended payment proposal.
Converting a lump sum to an extended payment plan
One option when you receive a lump sum of cash and need debt relief is to offer your creditors a repayment plan over a period of up to five years, allowing you to keep your money for living expenses going forward.
A common scenario we see is someone who receives a severance package after a job loss. In most cases the severance isn’t enough to repay all their debts and they are often counting on the severance money to pay for groceries and their rent or mortgage for the next while until they find a new job.
When you file for bankruptcy, the basic idea is that in exchange for walking away from your debts, you have to turn over your assets to your trustee, and then the trustee uses those assets to pay your creditors. There are certain assets you can keep, like your clothing and household items. What is not covered is this lump sum payment we are faced with here that the lady required to live off. Clearly, bankruptcy was not the right option in this case.
If you file a consumer proposal instead, you can keep your severance package, or whatever lump sum of money you have, while at the same time paying your creditors a monthly amount over a longer period of time (up to 60 months). The total amount you need to offer must be slightly larger than the cash money you have since you are paying over five years, however you get the advantage of keeping this money for living costs.
Making an up-front, lump sum consumer proposal
Consumer proposals are a very flexible debt management tool. If you have access to a lump sum of money it is also possible to offer a one-time debt settlement amount to your creditors to deal with your debts.
Common examples of lump sums might be receiving a large severance pay from your employer, borrowing from a friend or family or perhaps cashing in some savings or a pension or RRSP. Be aware however, that we generally do not recommend using RRSPs to pay down excessive debt as there are ways to protect your RRSP or pension assets.
It is even possible to offer a combination of up-front and monthly payments. Consumer proposal payments can be negotiated and arranged in almost any way that suits both you and your creditors.
If you are struggling with debts and have to possibility of receiving a large sum of cash, the key is to maximize the benefits of that money in terms of debt relief and structure a deal that works for you.