A consumer proposal is just one option for dealing with debt. As a debt relief approach it has it’s own advantages and disadvantages over other programs that help you get out of debt. For example:
- it can be better than bankruptcy if you have enough income to trigger surplus income payments or have assets that you would like to keep like RESPs or some equity in your home;
- it can be better than a debt management plan because you can offer to repay less than you owe, often up to 85% less, which results in a significantly lower monthly payment;
- it is better than an informal debt settlement program because it provides legal protection from creditor actions (like wage garnishments and collection calls) right from the beginning.
Having said all that, a consumer proposal is not the right option for everyone. The best way to tell if a consumer proposal is a good idea for you is to get a debt assessment with a licensed insolvency trustee. It is important to know that this initial assessment is free and you are not committed to anything by talking with a trustee about your situation.
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Conducting A Consumer Proposal Assessment
Assessing Your Financial Situation
Initially you will meet with a consumer proposal administrator to evaluate your situation and determine if a consumer proposal is the right option for you. Your trustee will look at your assets, your income and your family situation to see how a consumer proposal would compare to other options for you. The purpose of this first step is to see if you have the ability to make a proposal to your creditors and to see if the benefits of a consumer proposal, like the ability to keep certain assets or avoid surplus income, apply in your particular situation.
It is very important that both you and your trustee are confident that you can afford your proposal terms.
- You want to be sure you can complete your proposal successfully so it eliminates your debts.
- Your trustee is required by law to submit a report to the Office of the Superintendent of Bankruptcy stating that they think the proposal is fair to all parties and that you, as the debtor, will be able to meet the agreed upon terms.
Determining The Proposal Payment Amount
When determining the cost of a consumer proposal and how much you will need to pay back to your creditors, your trustee will look at who you owe money to and how much, what type of assets you have, as well as your budget. These factors will be used to determine an affordable monthly payment for you that will also be agreeable to your creditors.
Your trustee will begin by calculating what a bankruptcy would cost. This is because your creditors would expect to receive at least that amount in total. Your trustee will then look at who you owe money to. Certain creditors have a minimum expected recovery and that must be taken into consideration.
Most proposals can be made for between 30 and 35 cents on the dollar. Sometimes less is possible, and occasionally a higher payout is required if you have very high income or assets, but that is the norm.
Deciding on the Number of Payments
In a consumer proposal, you pay off your proposal by making payments for up to 5 years or 60 months. To achieve the lowest monthly payments, you would spread your total proposal amount over the full 60 months.
Proposals are also interest free so the calculation for your monthly payments would simply be the total amount you are offering your creditor divided by the number of months you will be making payments.
However, if you can afford more each month, you can shorten your proposal term or offer a lump sum payment.
Debt Reduction At a Lower Cost
The reason to file a consumer proposal is to eliminate debts you cannot repay on your own. A proposal allows you to repay a portion of what you owe. In most cases people find that their proposal payments are much lower than even the minimum payments they are making today.
If you decide to proceed with a consumer proposal, documents will be prepared and signed by you. These documents include the proposal terms determined during the assessment stage, along with information about your creditors, your debts and your assets.
If you cannot afford to make a proposal, then filing bankruptcy is an option your trustee will explain as a last resort.