When you make a consumer proposal with your creditors, your trustee will work with you to make an affordable offer based on your financial situation upon filing. While most Canadians who have their consumer proposal accepted can complete the terms as negotiated, we know your finances can change. You may experience a drop in income due to a lost job or illness, which can cause you to miss some proposal payments. In this post, I’ll explain when a consumer proposal is deemed annulled and what a consumer proposal annulment means to you and your debts. I’ll also provide some advice on how you can avoid having your proposal annulled.
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Legal obligations of consumer proposals
A consumer proposal is a legal arrangement under the Bankruptcy and Insolvency Act. Under this agreement, you have specific responsibilities when you file a consumer proposal.
An approved consumer proposal requires that you:
- make regular required payments to your Licensed Insolvency Trustee
- attend two credit counselling sessions
- follow any extra conditions within the proposal
There are legal obligations for your creditors as well. Once your consumer proposal gets filed, your creditors must stop contacting you. All correspondence occurs through your Licensed Insolvency Trustee.
Interest and other penalties become frozen. Your consumer proposal legally protects you from further debt. But, to reap these benefits, you must make your required payments on time.
Missing payments on your consumer proposal
Your primary financial responsibility in a consumer proposal is to make your required payments. Late payments do not get reported to the credit bureau. However, missing payments on a consumer proposal do have consequences.
The Bankruptcy & Insolvency Act provides for some payment flexibility in the event of an unexpected event. You are allowed to defer up to a maximum of two monthly payments.
However, this deferral has limits.
- If you miss three consumer proposal payments, your agreement is automatically annulled.
- To complete your consumer proposal and obtain your Certificate of Full Performance, you must eventually make these payments. Simply not paying is not an option.
It’s also important to note that there is no penalty for making extra payments. I’ll talk more about that later when explaining ways to avoid a consumer proposal annulment.
When is a consumer proposal deemed annulled?
The most common reason for a consumer proposal annulment is missed payments.
A proposal is deemed annulled when you are three payments in arrears.
How does payment frequency affect this period?
If your proposal calls for monthly payments, your proposal is annulled when you fall behind a total of three monthly payments. If the terms of the proposal are for you to pay weekly, your proposal is annulled if you are behind a total of three weeks’ payments. Please note this is based on the payment frequency noted in your consumer proposal. If your terms say monthly, but you pay your trustee weekly you are in practice paying one quarter of your monthly payment each week. In this case, you are annulled when you are a total of three months’ payments in arrears.
Are missed proposal payments consecutive?
No, the determination is cumulative. You must be behind a total of three contractual payments for your proposal to be annulled.
For example, if you miss one payment, make the next, but miss the next two, you are behind three payments, so your proposal is annulled.
Conversely, extra payments early in your proposal put you ahead. These early payments offset any future missed payments. You are fine until your unpaid balance due totals the equivalent of three payments.
Is a consumer proposal annulment automatic?
Yes. A consumer proposal is automatically annulled the day your third payment is late. Your trustee has no control over this; it’s part of the Bankruptcy & Insolvency Act rules and regulations.
How else can a consumer proposal be annulled?
Payment default is the most common reason a consumer proposal is annulled. However, the court, upon application by a creditor or the trustee, can also annul a consumer proposal if:
- the debtor defaults on any provision in the consumer proposal
- the debtor was not eligible to file a consumer proposal
- the consumer proposal cannot continue without hardship
- court approval of the proposal was obtained by fraud
Consequences of a consumer proposal annulment
Deemed annulled means your consumer proposal is null and void, and annulment comes with severe consequences.
If your proposal is annulled:
- Any money you’ve already paid out will not get returned (as the funds will have been distributed to your creditors).
- Your financial situation goes back to owing the total debt, along with all fees, interest, and penalties (less any distributions to your creditors).
- You lose the creditor protection provided by the proposal.
- Your creditors can start contacting you again about your debt and begin legal collection proceedings.
- Your credit rating will be harmed even further. Creditors can begin reporting defaulted payments again.
Annulled proposal on your credit report
An annulment counts towards negative information on your credit report, and a deemed annulled proposal stays on your credit rating for six years.
During an active consumer proposal, your credit rating shows a score of R7. This means you are making regular payments under a formal payment arrangement.
When deemed annulled, the R7 status changes to R9. This is the lowest score possible on the rating system.
As mentioned, when a proposal is annulled, your debts are no longer in a proposal and become due and payable again. Creditors can report more late payments to the Canadian credit bureaus, further lowering your credit score. They may send your account to collection, and this too will be noted on your credit report.
Options When Your Proposal Is Annulled
What should you do if you default on a consumer proposal and it is annulled?
Unfortunately, you cannot file a second consumer proposal to cover debts included in an annulled proposal.
Your options after a consumer proposal is annulled include:
- Revive the proposal. A proposal can be revived through your trustee within 30 days of default or through the courts after 30 days.
- File bankruptcy. Going bankrupt is not an automatic process after a consumer proposal annulment. You must go through the process of making a bankruptcy application.
- Renegotiate with your creditors. A deemed annulment means your creditors can contact you regarding your debts. You can work with them to settle debts on your own.
- Ignore the debts. Another option is to ignore the debts and wait for them to fall off your credit report. This can be a good option if they are old debts and too small for a creditor to sue.
How to Revive an Annulled Consumer Proposal
Even if you default on your consumer proposal payments, it is possible to revive an annulled consumer proposal.
The Bankruptcy and Insolvency Act allows a deemed annulled proposal to be revived within 30 days without involvement by the court. Your creditors must agree to the revival, and you must be able to bring your payments current. Since this is a time-sensitive option, talk with your trustee right away. Your trustee will notify your creditors about your financial situation as well as how you plan to pay back your proposal arrears and keep up with future proposal payments.
If action is not taken within 30 days, you must apply to the bankruptcy court to revive a consumer proposal. This generally requires the assistance of an insolvency lawyer and can be costly. Again, you will be required to demonstrate how you will continue without further payment deferrals. Sometimes the court allows for submitting a new proposal, although your creditors can object.
How to Avoid Consumer Proposal Annulment
Your best course of action is to avoid having your proposal annulled. It is always best to work with your trustee to ensure your proposal payments fit within your monthly budget.
Here are some things you can do to avoid the risk of having your proposal deemed annulled:
- Do not start a consumer proposal unless you have the income to support the payments.
- Choose a longer repayment period to lower your monthly payments. A proposal can have a maximum payout period of five years or 60 months. You can always pay a proposal off sooner, even if you negotiate a longer term.
- Automate your payments with preauthorized payments, so you don’t forget any payments.
- Schedule your consumer proposal payments to fall in line with your paydays. This will decrease the chance of bouncing a payment with your trustee.
- Increase your payment frequency. Even if your proposal agreement requires a monthly payment, you can pay your trustee weekly. Paying ahead, and making an extra payment in a five-week month, can help you if you run short of funds temporarily.
- Make extra payments. Making extra payments when you have the funds, perhaps from some overtime or a bonus, can provide some cushion if you miss a later payment.
- Talk with your trustee about amending your consumer proposal. Your proposal is a legal agreement, but it is possible to request revised terms, both in terms of payment time and amount, from your creditors. Talk with your trustee about proactively asking for an amendment versus letting your proposal fail.
If you’ve filed a consumer proposal, you must meet your legal requirements to avoid getting deemed annulled. However, there is no shame in experiencing financial hardship. If you are struggling with your proposal payments, talk with your trustee sooner, rather than later.