Consumer Proposals have become the go to alternative to bankruptcy for many Canadians looking for a way to get out of debt. Over half of all insolvencies in Ontario are now consumer proposals.
Providing many of the same benefits as filing bankruptcy, including creditor protection and elimination of overwhelming debts, by choosing a consumer proposal, people with severe debt problems gain several advantages over other forms of debt relief the most significant of which is dramatically lower monthly payments and avoiding bankruptcy.
Introduced into the Bankruptcy & Insolvency Act as a way for individuals to make a proposal to the creditors as a method of debt recovery, the details of how a consumer proposal works, who qualifies and what a proposal costs are still relatively unknown to many. For that reason we have put together a complete guide to consumer proposals so you can determine whether or not filing a proposal is the right option for you.
What Is A Consumer Proposal
As an alternative to bankruptcy, consumer proposals help 50,000 Canadians a year keep their assets, gain protection from their creditors but most importantly get out of debt.
A consumer proposal is a legal, binding, negotiated debt settlement with your creditors.
Filed under the Bankruptcy & Insolvency Act, a proposal is the only debt settlement program regulated by the federal government. A consumer proposal is regulated by because it can only be filed with a Trustee in Bankruptcy, who is licensed by the federal government. All the rules and procedures, including fees of the trustee, are defined by legislation.
Consumer proposals are a growing alternative in Canada with more than 4 in 10 Canadians choosing a consumer proposal over bankruptcy. The numbers are even higher in Ontario where more than half of all insolvencies are consumer proposals.
Why Is It The Best Bankruptcy Alternative?
The primary benefit of a consumer proposal is that you can still eliminate your debt, just like a bankruptcy, but you don’t lose your assets. Other benefits of a proposal include:
- you repay less than you owe;
- you consolidate your debt into one, lower, monthly payment,
- your creditors cannot garnish your wages or take any other legal action,
- all unsecured creditors are legally bound by the terms once accepted.
Because you settle your debts, it’s often possible to negotiate payments that can be 75% or more less than you were paying on your debts before. Settlements of 30 cents on the dollar are not uncommon however every debt proposal is different. Ultimate settlements depend upon you income and what you own. Every proposal to creditors is unique.
What Debts Are Include in a Proposal?
Just like a bankruptcy, almost all unsecured debt is eliminated when you file, and complete, a consumer proposal. This means your credit card debts, bank loans, payday loans and even income tax debts will be eliminated by making a proposal to your creditors.
A consumer proposal does NOT affect your mortgage or unsecured debt. And because you arrange to repay the equity value in your house (or car above any provincial exemption) as part of your proposal terms, you get to keep you home or car as long as you can keep up with the payments.
Like bankruptcy, proposals also do not eliminate support payments, student loans less than 7 years old (read here for our guide to student loan relief) or debts due to fraud or from fines.
Who Qualifies For A Consumer Proposal?
To file a consumer proposal you must be insolvent (in other words owe more than you own and be unable to repay your debts) and owe less than $250,000 (excluding your mortgage).
For a proposal to succeed you must also have sufficient income to be able to meet your monthly payments. Failure to make payments has specific consequences in a consumer proposal. When you miss 3 payments, your proposal is annulled (it’s like it didn’t happen) and you are not allowed to file another proposal. If during your proposal your circumstances change and it become difficult to keep up with your payments, it is possible to renegotiate new payment terms with your creditors and file what is called an amended proposal.
How Does A Consumer Proposal Work?
It’s a fairly simple process.
- You meet with your consumer proposal administrator (a trustee in bankruptcy) to determine if a proposal is the right option. They will ask questions about your income, assets and debts. By reviewing your financial situation, they will help you negotiate a settlement and payment plan that will work for you and be acceptable to your creditors.
- Your creditors then vote on the consumer proposal. Your trustee mails information on your terms to you creditors and they have 45 days to accept, or reject your terms. A majority (50% plus 1) of the dollar value of all your creditors must agree. If they do not accept the terms initially, it is possible to continue to negotiate until both you and your creditors agree. Agreement is almost always a possibility. At Hoyes, Michalos 99% of our negotiated proposals are accepted by creditors.
- Now that your proposal to creditors is in place, you make agreed upon payments to your trustee. Your trustee in turn, distributes those funds to your creditors on a prorated basis based on the dollar value of their claims. You must also attend two credit counselling sessions which will help you learn to budget and give you advice on how to rebuild your credit after your consumer proposal is finished.
- Once you have made all your payments you receive a Certificate of Completion and your debts are eliminated.
What Does A Formal Consumer Proposal under the BIA Cost?
Your payments are based on what you can afford. The total amount you would offer your creditors is usually a little more than they would expect to receive in a bankruptcy. This is their incentive for accepting your proposal. What they give you in return is a longer time frame to make these payments and the ability to keep your assets.
So if you would have to pay $9,000 in a 9 month bankruptcy because you have equity in your home, that would mean $1,000 a month if you wanted to keep your house. If those payments are too large, you could offer to pay $10,000 or $278 over 36 months.
Again, every single consumer proposal is different because every person’s financial situation is different. You can discuss what your proposal payments would like like with a trustee before you file.
Whatever you negotiate with your creditors, that is what you pay, Your trustee fees are included in your monthly payments, you don’t pay any extra or any up-front fees.
This is a basic summary of what a consumer proposal is and how it works. To discover for yourself whether a consumer proposal makes sense for you, contact any of our administrator for more information.