10 Myths About a Consumer Proposal - What Do I Need to Know?
Unfortunately there are many myths about consumer proposals out there.
These myths are posted online, on social media, or repeated on the radio.
Despite the myths and misconceptions told about filing a consumer proposal, proposals have become a popular debt relief option for people struggling with debt problems.
In this article, we will explore the myths and facts so you can make an informed decision about whether a consumer proposal is right for you.
Myth #1 “There is a conflict of interest, because Trustees / Proposal Administrators earn more if the proposal is higher.”
The trustee, also known as a consumer proposal administrator in this case, makes money when the money in the proposal is distributed to the creditors.
If the consumer proposal fails, there will be no money to distribute to the creditors, which means the trustee acting as the consumer proposal administrator won’t get paid.
The job of the trustee is to find a common ground for the debtor and the creditors; the creditors must get paid enough to accept the proposal, while the proposal must also be affordable for the debtor.
Trustees that work as proposal administrators have experience with drafting proposals that work for both the creditors and the debtors.
The trustee won’t get paid if the proposal doesn’t work for you or the creditors.
If the payments are too high for you to complete the proposal, the trustee won’t be paid anything, as there will be no money to distribute to the creditors.
Myth #2 “There is an up-front fee of $1500 to file a Consumer Proposal in Canada”
There is no up-front fee to file a consumer proposal in Canada if you work with an experienced Licensed Insolvency Trustee.
The confusion about this and where the myth comes from, is that the trustee, acting as your consumer proposal administrator, is paid $1,500 to cover administration costs out of your consumer proposal payments, under a government mandate.
Trustees only get paid out of the money you pay into the proposal, and they will receive $1,500 of the payments that would go to your creditors.
There is no additional fee that you have to pay for out of your own pocket.
After your consumer proposal administrator has earned their $1,500 administration fee they will earn 20% of the further payments made to your creditors.
You won’t pay this, it will come out of the monthly payment you make to your creditors through the consumer proposal agreement.
For example, if you were paying $500 a month into your proposal, the administrator trustee will keep the first 3 monthly payments, then will collect $100 from each further $500 monthly payment.
Unfortunately, there are unlicensed debt consultants that do charge upfront fees for the “service” to prepare the proposal documents.
You should never pay any fee for help or advice with a consumer proposal.
By working directly with a licensed insolvency trustee you can ensure that you avoid paying this extra cost; only licensed insolvency trustees can file a consumer proposal, so if you speak with an unlicensed debt consultant you will be unnecessarily wasting your money.
Credit counselling agencies often promote the $1,500 fee, but it is never taken as an upfront payment out of your pocket.
Myth #3: “Filing a consumer proposal is worse for your credit.”
When you file a consumer proposal, a note will be added to your credit report that you have made a proposal with your creditors that results in an “R7” rating on your report.
This note will remain on your credit report for three years after your proposal was completed.
However, this doesn’t mean that your credit is impacted further than if you worked with a credit counselling agency.
By working with a credit counselling agency to make a debt management plan, a note will also remain on your credit report for 3 years.
Certain people will try to leave this out to mislead you into believing a consumer proposal is worse for your credit.
Our trustees have often heard from people distressed to learn that a debt management plan arranged through a credit counselling agency appeared on their credit report.
Some indiviuals also try to manipulate debtors into believing a consumer proposal is the same for your credit as bankruptcy.
A consumer proposal is not significantly better for your credit, but it is different from bankruptcy.
Bankruptcy results in an R9 rating on your credit report, which is the worst possible rating, and will remain there for 6 years after your discharge.
A consumer proposal results in an “R7” rating.
Many debtors considering bankruptcy, a debt management plan, or a consumer proposal already have very poor credit, so often filing a consumer proposal doesn’t impact their credit in any damaging way.
In fact, paying what you can afford in a proposal, allows you to save money, which gives you the opportunity to rebuild your credit in a quick manner.
Myth #4: “Trustees work for the creditors”
In order to administer a consumer proposal, a person must be a Licensed Insolvency Trustee.
In order to get a license to be a Licensed Insolvency Trustee, the trustee must pass a course and then they will receive their license from the Superintendent of Bankruptcy, which is a government institution.
Trustees that work as consumer proposal administrators are appointed by the federal government (not creditors).
Trustees / Consumer proposal administrators are impartial officers of the court, and we don’t work for the creditors or the debtor.
Myth #5: “Everyone will know about my Consumer Proposal if I file.”
This is a myth and scare tactic often used by unlicensed debt consultants and credit counselling agencies.
While it is true that your proposal will be registered with the federal government, and will appear in the government’s database of people that have filed an insolvency (proposal or bankruptcy), it is not common public knowledge.
People can search this database, but they must first assume you have filed a proposal (or gone bankrupt) to search for your name, and they must pay a fee to search the database.
Even if people can find your proposal in the database, the information provided is limited; no direct information about your proposal is provided.
Your proposal being registered with the government is what provides the legal protection from your creditors that stops collection calls and wage garnishments.
Myth #6: “A consumer proposal takes 5 years to get out of debt.”
The maximum length of a consumer proposal is 5 years, although many are much shorter.
Generally, the consumer proposal will last about 3 years, although it can be for any amount of time from 1 month (a lump sum payment) to the maximum 60 months.
Proposals cannot last longer than 60 months, because people need to see “a light at the end of the tunnel.”
A consumer proposal is very flexible and the length of the proposal plan will depend on how quickly you think you can repay the proposal.
During a consumer proposal you often pay 30 cents on the dollar so if you owe $30,000 to creditors, you must determine how quickly you can pay off the $9,000 you would need to pay in the proposal.
If you can afford to pay $1,000 a month, your proposal can be over in 9 months; if you can only afford $300 a month your proposal will need to last for 30 months.
You can also pay off your proposal early if your situation changes, so making extra payments if you can afford to do so, is always possible.
Myth #7: “My House, car or other secured assets will be sold if I file a proposal.”
This is a particularly disturbing myth about a consumer proposal, because nothing could be further from the truth!
In fact, the main benefit of filing a consumer proposal is that you can keep all of your assets, even those that would be surrendered in bankruptcy.
Proposals do not deal with secured creditors.
You must maintain the payments on your mortgage or car loan to keep your home and car, but you can keep your secured assets when making a consumer proposal.
This often becomes easier, because the payments on your unsecured debts – such as your credit card debt – becomes greatly reduced.
The trustee won’t make you sell your home or car if they become your consumer proposal administrator.
If you feel you cannot maintain your payments on your secured debt, you can choose to surrender these assets if you wish.
Any shortfall on these assets can be included in your consumer proposal.
Myth #8: “If my Proposal fails, I will automatically be bankrupt.”
This is another myth. If your proposal is not accepted by your creditors, or it fails at any point, you will not be automatically declared bankrupt.
If your creditors don’t accept your proposal, you can work with your creditors to negotiate a more acceptable proposal deal.
Most Licensed Insolvency Trustees have a 99% proposal acceptance rate because they have experience in crafting attractive proposals, and because the main rule in drafting a consumer proposal is the creditors must be “better off” than if you were to file bankruptcy.
If you find you cannot maintain your proposal payments, you can elect to declare bankruptcy, but it does not automatically occur.
Myth #9: “Some creditors don’t accept consumer proposals”
At Bankruptcy Canada, our trustees have a 99% success rate in filing a consumer proposal with your unsecured creditors.
Creditors have the right to reject your consumer proposal if they chose to do so, although this is rare because they will receive more money than if you go bankrupt.
Creditors are less likely to accept debt settlement and debt repayment plans that are put forward by unlicensed debt consultants and firms.
Myth #10: “A credit counsellor can help me file a consumer proposal.”
Only a licensed insolvency trustee (LIT) is licensed to provide consumer proposal services in Canada.
As such, you should only get advice and information about consumer proposals from a LIT.
It takes years to train to become a LIT / Consumer Proposal Administrator and even more time to get experienced in crafting proposals that are acceptable to creditors.
Credit counsellors can only provide consumer proposal information, but they will charge you for this priviledge.
Credit counsellors provide debt management plans, and they get paid from the DMP, which leaves them at a conflict of interest.
We provide you with the most affordable, easiest method to get out of debt.
If you have a serious debt problem, the best thing you can do is consider your options and get the best advice possible.