Debt Relief Experts
Consumer proposals have become an increasingly popular debt relief option for Canadians struggling with overwhelming debt. As a legally binding debt settlement agreement between you and your creditors, a consumer proposal offers a way to reduce your debt and make manageable payments. However, just like no two individuals’ debt problems are the same, no two consumer proposals will ever be exactly the same either. The success of your proposal largely depends on how well it’s structured. Understanding the various terms and options available can help you create a proposal that meets creditor expectations and aligns with your financial situation.
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Key Factors Influencing Consumer Proposal Settlements
Several factors come into play when determining the terms of a consumer proposal.
Type of Debt and Amount: The total amount of debt you owe and the types of debts can impact your proposal. Unsecured debts like credit cards, personal loans, and lines of credit are included in a proposal, while secured debts like mortgages are not. While minimum payouts of around 20 cents on the dollar are typical, your actual proposal offer is more commonly impacted by your budget and assets.
Income and Assets: Your current income and assets determine how much you can reasonably afford to pay each month. It’s important to strike a balance between offering enough to satisfy your creditors and ensuring the payments are sustainable for you in the long term. Consumer proposals are a common way of dealing with high surplus income, lowering your monthly payment compared to bankruptcy.
Creditor Expectations: All consumer proposals must provide a greater benefit to unsecured creditors than they’d receive in a possible bankruptcy scenario. There’d be no sense in a creditor accepting a consumer proposal if they’d likely see a higher repayment from a bankruptcy. Certain creditors, including some banks, also have minimum recovery rate targets. Your trustee will have experience dealing with different creditors and can help you propose terms you can afford but will also likely be accepted.
Future income changes: If you anticipate a salary increase or decrease, or if your employment situation is unstable, this should be factored into the proposal structure to ensure it remains feasible throughout its duration.
The factors in determining what a consumer proposal will cost are the same for everyone; however, the end result of the calculation may be different. All negotiations are based on what you own and how much you make. How you structure your consumer proposal terms, however, will depend on how fast you want to pay off your proposal and what your budget looks like.
Consumer Proposal Terms – Payment Options
When it comes to structuring your consumer proposal payments, you have several options to tailor them to your specific needs and budget.
Fixed Payments: While monthly payments are the most common, you can also opt for bi-weekly payments that align with your pay periods. This can make budgeting easier and ensure funds are available when payments are due.
Lump Sum Payments: If you have access to a lump sum of money – perhaps from the sale of an asset or a gift from family – you might consider offering a lump-sum payment. This can sometimes result in a greater reduction of your overall debt. You could also offer a partial one-time payment based on projected earnings, such as a bonus or inheritance.
Stepped Payments: This is where the amount you pay increases or decreases over time. This can be useful if you expect your income to change in the future. For instance, if you’re currently underemployed but expect to find better work soon, you might start with lower payments that increase over time.
Proposal length: The length of your proposal is another important consideration. A consumer proposal may be offered over a period of up to five years. A longer period of time allows for lower monthly payments but means you’ll be in debt longer. A shorter term means higher payments but you will be debt-free sooner.
The beauty of a consumer proposal lies in its flexibility. You can work with your Licensed Insolvency Trustee to create a proposal that fits your unique circumstances. This might involve a combination of the payment terms mentioned above.
For example, you might propose a four-year term with bi-weekly payments that increase slightly each year, anticipating gradual income growth. Or you could offer a lump sum payment upfront to reduce the total debt, followed by lower monthly payments for the remaining term.
Negotiation plays a key role in this process. Your trustee will help you craft an initial proposal, but creditors may counter with their own terms as part of the voting process.
Considering a consumer proposal?
The Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee is crucial in structuring your consumer proposal. They bring extensive knowledge of the process and understand what creditors typically accept.
Only if you’re insolvent do you qualify to be eligible to file a consumer proposal. All consumer proposals filed in Canada must be made by a licensed insolvency trustee (LIT) and must comply with the rules and regulations outlined in the Bankruptcy and Insolvency Act. Your trustee will also help you compare the cost of all possible debt solutions, including debt consolidation, credit counselling and personal bankruptcy.
You may hear claims that a consumer proposal can reduce your debt by 80%. That may be true in some cases, but not all. Someone who has no assets and low income may benefit from such a sizable reduction. However, someone who has a moderate or high income or assets to their name may be expected to offer to repay a larger portion of their debt.
If you are dealing with debt and considering a proposal to creditors, get free debt advice from our caring team of Licensed Insolvency Trustees. We are more than happy to answer any questions you have.
