Not just anyone can file a consumer proposal. And a trustee does not recommend a proposal to everyone struggling with debt.
A consumer proposal helps you manage your debt by allowing you to make a settlement offer with your unsecured creditors. If the majority of creditors accept the proposal, it is legally binding with all unsecured creditors.
It is, however, a legal process that must be filed with a Licensed Insolvency Trustee. The trustee’s role is to review with you both the technical requirements and practical reasons to determine when a consumer proposal is appropriate.
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Are you eligible to file a consumer proposal?
The Bankruptcy & Insolvency Act outlines the legal requirements to file a consumer proposal in Canada:
- You must be an individual and reside, carry on business, or have property in Canada.
- You must be insolvent. Insolvent means you have ceased paying your debts as they come due, you are unable to pay your debts as they come due, or your assets are worth less than your unsecured debts.
- You must owe more than $1,000 and less than $250,000, not including the mortgage debt you owe on your primary residence. The government sets a debt limit to be eligible to file a consumer proposal. If your debts exceed this limit, you can file a Division I proposal.
- You can file a joint consumer proposal if the debts of the individuals are substantially the same.
- You can file a proposal while bankrupt. However, the effective date of the consumer proposal is the date of bankruptcy. Therefore, debt incurred after your date of bankruptcy would not be able to be added.
The Canadian government offers a debt relief program called a consumer proposal. How do you know if you qualify? I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos.
A consumer proposal is designed to help the person who has a stable income but doesn’t have enough money coming in every month to pay all of their bills. You might be making your minimum payments, but a lot of that goes towards interest and you don’t see any chance that your debt balances will go down. If this sounds like your financial situation, a consumer proposal is worth exploring.
A consumer proposal is an arrangement to pay your creditors a portion of what you owe and give you time to make those payments. To qualify for the program, you must be at least 18 years old and live in Canada or have property in Canada. A consumer proposal is a Canadian debt relief program for people who owe debts in Canada.
There is a debt limit for a consumer proposal. You must owe a minimum of $1,000 but not more than $250,000, not including your mortgage on your home. While the lower limit is $1,000, practically speaking, a consumer proposal works best if you owe at least $10,000 in unsecured debts or have multiple creditors. This makes sense when you think about the fact that a consumer proposal is a legally-binding debt settlement program.
Let’s say you can afford to pay your creditors 30 cents on the dollar. If you only owe $4,000 on one old credit card and your debt collector is willing to take a lump-sum payment of $1,200, it might make more sense to make a deal with them directly. If however you have four creditors totalling $12,000, a consumer proposal allows you to bind all four creditors to a deal if at least half of the dollar value, or in this example over $6,000 of your debt, vote in favour of your 30 cents on the dollar offer.
With a proposal your settlement offer can be spread out over a maximum of five years. This makes the monthly payments very affordable. However, you’ll still need to have enough income to afford those payments so you can successfully complete the program. If your employment is uncertain or you’re only working part time, you may be better off considering bankruptcy.
A consumer proposal can only be filed and administered by a Licensed Insolvency Trustee. As part of the process, your trustee will conduct an initial assessment to determine whether you qualify, but also to help you decide whether or not a proposal is the right solution for you. If you have more questions about a consumer proposal you can watch our video about common consumer proposal questions or contact us at Hoyes.com.
What types of debts do I need to file a proposal?
A consumer proposal allows you to consolidate and settled unsecured debts. Debts eligible for discharge through a proposal include credit card debts, unsecured loans or lines of credit, payday loans, monies owing to CRA, accounts in collection or outstanding bill payments.
Government student loans are eligible as long as you have been out of school for seven years.
Your mortgage or car loan is a secured debt, and debts from secured creditors are not eligible to be settled through a consumer proposal unless you hand back the underlying asset. If you surrender your vehicle or house, any balance owing is forgiven through your proposal.
As with all insolvency proceedings, some debts cannot be discharged, including support payments, court fines or penalties or debts due to fraud. These debts don’t make you ineligible to file a proposal, but they remain after completion.
What are some practical requirements to file a consumer proposal?
OK, we now know the technicalities that your Licensed Insolvency Trustee will review. However, even if you can file a consumer proposal, that does not mean it is the right debt solution for you.
Part of the debt assessment process conducted during your consultation will be to review your budget and financial situation to see if you meet some practical requirements.
Based on my experience, if you:
- have assets that you might lose if you were to file for personal bankruptcy
- have a high income that might trigger a surplus income penalty in a bankruptcy
- have enough income that you can make some monthly payment to your creditors
then a consumer proposal may be right for you.
Many people can afford to make some payments to their creditors. However, if all you can afford are the minimum payments on your credit cards and other debts, you will remain in debt for life. Generally, if it takes you about ten years to pay off your debt, you will have paid back at least twice the amount you owed because of interest.
A consumer proposal provides needed debt relief. It allows you to pay back your creditors less than what you owe, at an agreed-upon amount that you can afford, with no interest, within five years.
Is a consumer proposal or bankruptcy more suitable?
Except for the debt limit, the recommendation to file a consumer proposal versus bankruptcy often comes down to the practical, financial considerations.
Here are some common financial situations that demonstrate eligibility for a consumer proposal.
High home equity
If you own a home with some equity and file for bankruptcy, you would have to either pay the trustee the equity in your home to avoid the trustee selling your home for the benefit of your creditors. Most people cannot afford to do this. Assuming you do not want to lose your home, you could file a consumer proposal instead, paying that equity over a maximum of five years.
If you can sell an asset, refinance, or a family member can provide you with some money to pay a portion of your debts, but not all, you could attempt a lump sum proposal. Just remember, you must be insolvent to file. If you have way more assets that you owe, you will not qualify. It is a good idea to speak to a Licensed Insolvency Trustee to discuss all your options before taking your next steps.
You may be earning a high income, but not enough to make the minimum monthly payments on your credit card debt. High household income will trigger large monthly surplus income payments in bankruptcy. You can lower these monthly payments by filing a consumer proposal instead.
If you file a second bankruptcy, you will be bankrupt for 36 months if you also have surplus income. A second bankruptcy will affect your credit rating for 14 years from the date of discharge. Through a Licensed Insolvency Trustee, you could offer a proposal. Instead of 17 years (14+3), you can see your credit history cleared from your credit report in a maximum of 8 years.
As you can see from the above, there are several instances where it would be more suitable to file a consumer proposal to deal with overwhelming debts.
If you are struggling with debt, contact us today to see if a consumer proposal is the right debt relief solution for you.