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.
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.