Consumer Proposals: How Does It Work?

Posted in Consumer Proposals
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

consumer-proposals-how-does-it-workWith each passing year consumer proposals are gaining in popularity as a strategy for dealing with your debts while avoiding bankruptcy. In fact, in the twelve months ended August 31, 2010, while the number of bankruptcy filings in Ontario decreased by almost 17%, the number of consumer proposals filed increased by 26%.

A consumer proposal is a settlement negotiated with your creditors. Here’s a simple example:

Orville and Mary Smith owe $50,000 on their credit cards, an unsecured line of credit, and a payday loan. They have jobs, but cannot afford to make all of their minimum payments each month, and they are falling behind. They don’t want to file bankruptcy, so instead they decide to file a consumer proposal, where they will offer to pay $400 per month for 50 months, for a total of $20,000. If the creditors accept the proposal, they have one affordable monthly payment, and at the end of the 50 months, their debts are officially discharged.

Sounds great! One monthly payment, the calls from bill collectors stop, you don’t have to worry about a wage garnishment, and you get a fresh start! How does it work?

The process starts by contacting the professionals at Hoyes, Michalos & Associates Inc. I suggest you start by completing our on-line, free, anonymous debt options calculator. It only takes a few seconds. If the calculator shows that a consumer proposal may be an option for you, you can contact us to arrange a no charge initial consultation.

At your initial consultation we will review what you own, who you owe, and what you earn and spend each month. Based on that information we will help you decide whether or not a consumer proposal is the correct option for you and your family. (If you want to speed up the process you can download our fresh start application before our first meeting).

Explaining How Consumer Proposals Work

If you decide to file a consumer proposal, we prepare the necessary documents, and you meet with us to sign them. Prior to filing the proposal, in addition to meeting with one of our client services specialists, you will also meet with one of our trustees, who are also licensed proposal administrators. They will review the process with you, and answer any further questions you may have.

As soon as you have signed the proposal paperwork, and before you leave our office, we electronically transmit your file to the government, so that we can give you your government-assigned file number. With that file number you can direct all calls from creditors to our office. As soon as you file your proposal, we talk to your creditors. In other words, once the creditors are notified of your proposal, the collection calls stop!

By law the creditors have 45 days to vote on your proposal. Each creditor gets one vote for every dollar they can prove that you owe. If 50% + 1 of your creditors vote in favour of your proposal, the proposal is approved, and all creditors are bound by it. That means that even if some creditors vote against your proposal, if a majority in dollar value accept it, the proposal is accepted.

What happens if more than half of my creditors vote “no”?

If more than half of the creditors vote against the proposal, we will contact them to confirm that they understood the terms of the proposal (since the proposal you offered should generate more money for the creditors than if you filed bankruptcy). We will also ask them if they wish to propose alternate terms. For example, if you offered $300 per month for 50 months, they may counter by asking for $300 per month for 60 months. You can then either reject or accept their counter offer.

At some point in 2011 Hoyes Michalos will file our 10,000th proposal, so obviously our longevity indicates that we have a very high success rate when filing proposals. In the vast majority of cases, if the proposal is reasonable, and if there are no unusual circumstances, your proposal should be accepted.

From your point of view, you have two important duties:

First, you will attend two credit counselling sessions. These sessions are designed to teach you some money management techniques, to help you avoid money problems in the future. The first session will occur within the first two months after filing, and the second session will generally occur between the third and seventh month. Each of the two sessions lasts for between 45 minutes and one hour, and they are all private sessions.

Second, you are required to make the agreed upon payment each month. We will set up your payments using our pre-authorized payment system, so your payments will be debited directly from your bank account, so you have no worries about bringing in cheques or making cash payments. We even let you decide the payment schedule. For example, if your proposal is for $400 per month, we can set it up so that you are paying $100 per week (if you get paid weekly), or $200 bi-weekly (if you get paid bi-weekly). I personally encourage weekly or bi-weekly payments, if it matches your pay schedule, because then in a month when you get your extra paycheque, you are making an extra payment in your proposal, and your proposal gets paid off faster.

In summary, for many people a proposal is a great way to have one manageable monthly payment to deal with their debts.

Contact us today so we can help you decide if a consumer proposal is right for you.