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Consumer Proposal Cost: How Much Can You Save?
A consumer proposal is a negotiated debt settlement arrangement arranged through a Licensed Insolvency Trustee. A consumer proposal can result in savings of as much as 70-80% however, the consumer proposal’s cost is based on your personal situation.
The golden rule of a successful consumer proposal is that the cost of a consumer proposal must work for both the debtor and the creditor.
For creditors to accept a debt proposal, they will want to receive more than they would recover if you file bankruptcy.
For a debtor to succeed with a proposal, the payments must be affordable and reasonable, given your financial situation.
How Much Do You Pay in a Consumer Proposal?
The amount you will have to repay in a consumer proposal will depend on three factors:
- your income and any surplus income you would pay in a bankruptcy;
- assets you own that would be surrendered in a bankruptcy, and
- who you owe money to because different creditors expect different consumer proposal percentage recoveries.
While every situation is unique, a consumer proposal can commonly reduce principal repayment to as low as 25% of the original amount owing.
Watch our video below to understand how the cost of a consumer proposal is typically calculated when you meet with a Licensed Insolvency Trustee.
A consumer proposal allows you to settle your debts for less than you owe. What you pay in a consumer proposal is based on what you and your trustee can negotiate with your creditors. The golden rule of a successful proposal is that it must work for both you and your creditors.
You have to be able to afford the payments and your creditors have to feel they are getting enough to vote yes. Typically, this means your creditors want a little more than they would receive in a bankruptcy. This would include any payments you have to make based on your income, any equity in your home, any other assets you might lose in a bankruptcy. Once all this is added up, you will talk to the trustee about how much you can afford to pay each month.
A proposal can last up to five years, so you can spread out your payments over a maximum of 60 months; Let’s look at an example. Mark meets his trustee and finds a bankruptcy would cost him $475 a month for 21 months, or almost $10,000. He decides to offer his creditors $200 a month for 60 months or $12,000 in a consumer proposal. Mark is happy because he pays less each month than in a bankruptcy, and can keep his assets. His creditors vote yes because they earn a little more over time. And Mark pays only what he agrees to in his proposal. He doesn’t pay extra trustee fees. They come out of his negotiated payments. In effect, Mark’s creditors are paying to administer the proposal.
Each situation is different. At Hoyes Michalos we provide you with all of the necessary information to help you calculate the potential cost of a consumer proposal given your specific circumstances.
Call us today and we’ll calculate a payment plan for you.
Let’s look at a typical consumer proposal payment plan:
A client who owes $40,000 in unsecured debt may be able to negotiate a settlement as low as $14,000. If they choose to repay this amount over 60 months, their monthly proposal payment would be $233.
Who Negotiates Consumer Proposal Payment Terms?
Consumer proposal payments and terms are negotiated between the debtor and creditor with the help of your licensed insolvency trustee acting as administrator of the proposal. The trustee will review your budget and debts during your debt assessment and recommend how much to offer your creditors.
Your proposal amount can be paid over a period of up to 5 years, interest-free.
Most people choose a fixed monthly payment, spreading their settlement offer over three to five years. However, lump sum payments or adjusting your repayment schedule to match your pay period are options.
Consumer proposals can also be paid off early at any time.
Once your debt proposal is accepted you make one, single payment to the trustee. This makes a consumer proposal a lower-cost alternative to a debt consolidation loan.
What Happens if My Financial Situation Changes?
If you know your income may increase before you file a consumer proposal, you can adjust your payment plan to match. For example, you can arrange for smaller payments during the beginning of the proposal and larger payments towards the end.
If your financial circumstances change for the worse, you may defer up to two payments during a consumer proposal. Unfortunately, if you miss three payments, the proposal fails. Technically, your consumer proposal is ‘deemed to be annulled’ on the date your third monthly payment became due. If your credit proposal is annulled, then your total debts return, and your creditors may take legal action against you. You do not, however, automatically become bankrupt.
If you think you might miss the third payment, you have options available to put in place before your proposal fails. Your trustee can help negotiate and file amended payment terms. As long as the creditors accept this revised proposal plan, you can continue with the new proposal terms until completion. If your situation has changed dramatically, you can also file bankruptcy during any proposal.
Non-Financial Effects of Filing a Consumer Proposal
Filing a consumer proposal has a big impact on your budget. It lowers your monthly debt payments and allows you to build some savings.
There are other consequences of filing a consumer proposal. You will be required to surrender your credit cards, and a proposal will hurt your credit score initially. A note will appear on your credit report and remain for up to 6 years from the date of filing.
However, you can begin the process of rebuilding your credit rating after a consumer proposal soon after you file. We usually recommend you begin the process of applying for a secured credit card four to six months after you have filed. Regular on-time payments on this card will cause your credit score to rise even while you are in the proposal.
How Does a Consumer Proposal Administrator (Trustee) Get Paid?
The cost of administering your proposal is included in your single monthly payment. You do not pay the consumer proposal fee upfront, and no costs are added to your settlement offer. Trustee fees are included in the payment you negotiate with your creditors. If your creditors agree to a deal to accept $350 each month, then that is all you pay.
Licensed Insolvency Trustees are paid to administer consumer proposals.
How are trustee fees calculated?
Fees paid to a trustee for a consumer proposal are set by legislation and are the same across all trustees in Canada.
The amounts paid to a Licensed Insolvency Trustee for a consumer proposal include:
- A filing fee of $100 paid to the Office of the Superintendent of Bankruptcy
- Counselling fees of $85 for each of two mandatory counselling sessions
- Proposal fees to the administrator (trustee) of $1,500 plus 20% of creditor distributions
- Levy of 5% of creditor distributions payable to the Office of the Superintendent of Bankruptcy
Unsecured creditors who have filed a claim in your consumer proposal receive any balance from your proposal payments after these fees are paid. In effect, creditors cover the cost of a consumer proposal as part of the deal.
At Hoyes Michalos, we have:
- no additional fees,
- no up-front fees,
- no set-up fees,
- and no minimum fees.
You do not make any payments until your consumer proposal is officially filed.
Get a Free Quote Based on Your Situation
Our team of Licensed Insolvency Trustees treat each situation as unique. We know there are no cookie-cutter solutions and that is why we have such a high success rate for consumer proposals.
Hoyes Michalos has a 99% acceptance rate for all proposals we file. We understand what creditors are looking for and what debtors need.
We also offer convenient, flexible, pre-authorized payments to help make managing your payments easier. Arrange weekly, bi-weekly or monthly payments, based on what works for you.
More information about the cost of a consumer proposal on our blog:
- Calculating payments in a consumer proposal
- Making a lump sum consumer proposal
- What creditors expect in a consumer proposal
- Making a consumer proposal work with your budget
- Are there typical consumer proposal terms?
Find out how to file a consumer proposal in Canada or contact us for a free consultation.