What You Need to Know About Consumer Proposals
When you have a large amount of debt and feel like you need a solution other than bankruptcy in order to pay it all off, the most viable and popular option in Canada is a consumer proposal.
This method of consolidating your debt is a government approved debt settlement program and makes it easier for many individuals to manage and pay their debts without any additional financial strain.
Learn everything you need to know about consumer proposals in Canada, the pros and cons, and whether this type of debt proposal will work for you.
What is a Consumer Proposal?
There are many different debt relief options available to individuals who need help getting out of debt.
Consumer proposals are the top alternative to bankruptcy — it has both pros and cons, but is definitely a preferred debt relief solution for the majority of Canadians seeking help with their debts.
A consumer proposal is a legally binding agreement to settle your debt.
It is filed with and administered by a Licensed Insolvency Trustee (LIT), and sanctioned by the Canadian government.
Before the actual proposal is filed, the LIT will work with you to come up with a feasible plan for repayment of your debt.
This typically involves an offer to pay the creditors a percentage of the total amount owed, more time to pay your debts, or a combination of both.
In many cases, you can repay a smaller amount than what you actually owe — this is based on your current income and assets, but the settlement can possibly be as low as 30 cents on the dollar, saving you potentially 70% of your total current debt.
Once an acceptable agreement is reached between all parties, you will make a monthly payment to the LIT, who, in turn, pays the creditors.
The maximum term for repayment is five years.
How Do You Qualify for a Consumer Proposal?
So long as your total debts do not exceed $250,000 (not including your mortage), chances are you will be eligible to receive a consumer proposal.
You do not need to be a Canadian citizen but you must be either a resident of Canada, in Canada under a work permit, or have property in Canada.
To find out if it is the best debt settlement option for you, you’ll need to request an appointment with a LIT.
The LIT will thoroughly examine your financial situation and discuss the consumer proposal process, as well as other options that you might want to consider.
The LIT will need a complete list of all your assets and liabilities in order to proceed with the filing of a consumer proposal.
When the LIT submits your consumer proposal to the creditors, it will detail the proposed terms of repayment, as well as information on your current financial situation and why you are experiencing financial difficulties.
The creditors have a period of 45 days to accept or reject the proposal.
In some cases, a meeting of creditors may be held and they will vote whether to accept or reject the proposal.
Subsequently, there is no 100% guarantee that all your creditors will accept your consumer proposal.
Each creditor will evaluate the proposal and accept or reject the terms based on their own specific policies.
And while a consumer proposal enables you to retain your assets, some creditors won’t agree to a proposal if they feel that you have substantial assets that can be sold in order to enable you to pay back the full amount of what you owe.
What Happens if a Creditor Rejects the Consumer Proposal?
At a meeting of creditors, if the total number of acceptance votes constitutes the majority of the dollar amount to be repaid, then any other creditors must also accept it even if they initially chose to reject it.
If the proposal is rejected, you have several options.
You can revise the proposal and have it resubmitted, choose another debt settlement option, or file for bankruptcy.
Obviously, it is more beneficial to have the consumer proposal accepted.
What Happens When the Consumer Proposal is Accepted?
When you consumer proposal is accepted one of the major benefits is that you are allowed to retain your assets, which is not always the case in bankruptcy or other debt settlement options.
You will be responsible for making either a lump sum payment or periodic payments as detailed in the proposal to your LIT.
Additionally, you will be required to attend to financial counseling sessions and provide any assistance as necessary to the LIT for administering the proposal.
Are There Additional Costs Involved with Filing a Consumer Proposal?
To file a consumer proposal you must pay a $1,500proposal administration fee and an initial filing fee of approximately $100.
Additionally, the trustee in charge of handling your debt proposal receives a levy of your payments as a fee for managing the account.
This levy is included in your monthly payments to the LIT.
This may seem like a lot, but it is important to keep in mind that by choosing a consumer proposal over other debt consolidation options, there is a high probability that the amount of your initial debts will be significantly reduced.
What Happens if You Miss a Payment?
The condition of the consume proposal are strict and binding, so you must be sure you can make the monthly payments in the proposal.
Three missed payments will result in you defaulting on the consumer proposal.
Your creditors will then seek to reclaim the remainder of the debts owed, pursuing legal action if necessary.
You will be prohibited from filing another consumer proposal.
What Debts are Eligible to be Included in a Consumer Proposal?
Almost all unsecured debts can be included in a debt proposal.
- Credit Card Debts;
- Payday Loans;
- Personal Bank Loans;
- Income Tax Debt;
- Lines of Credit.
Car loans are considered a secure debt and are not eligible to be included in a consumer proposal.
Mortgage payments will also be paid as normal and cannot be included in a consumer proposal.
Additionally, only some student loan debt can be included under certain circumstances.
In Canada, student loans fall under the Bankruptcy & Insolvency Act, which only allows student loan debt to be eliminated under a bankruptcy or settled through a consumer proposal if you have been out of school for more than 7 years.
What is the Difference Between Consumer Proposals and Other Options for Debt Settlement in Canada?
Like other debt settlement and credit consolidation programs, a consumer proposal allows you to consolidate your debts into one monthly payment that is more affordable than paying each separately.
But after that there are many differences and advantages to choosing a consumer proposal over other options.
The largest benefit of a consumer proposal is that you can reduce your debt by up to 70%.
This is a huge boon for people who feel as though they are drowning in debt and may never financially recover.
Additionally, when a consumer proposal is accepted, any future interest on your debts is frozen.
This also makes it much easier to manage and eliminate your debts within a specified time period.
As a consumer proposal is legally binding, creditors must also adhere to the terms of the proposal and cannot seek to engage in wage garnishments or collection calls.
As mentioned earlier, you also get to retain all your assets, which includes your home and equity, tax refunds, and investments.
While a consumer proposal can take longer to complete than a bankruptcy, you are only responsible for paying a fixed amount to your LIT each month.
With a bankruptcy, the amount you pay can vary from month to month based on any surplus income you may make.
And while there are fees involved with a consumer proposal, they are generally less than other debt settlement options.
In fact, many for-profit companies even tout their services as a consumer proposal in order to lure unsuspecting consumers, charging their own high fees and then referring you to an LIT where you will then pay the required additional fees.
It is advised to steer clear of other debt relief companies without first doing your due diligence and ensuring that you are dealing with a reputable company.
Will a Consumer Proposal Affect My Credit?
A Consumer Proposal is a matter of public record and will also appear on your credit report as an R7 rating.
Like a bankruptcy, a consumer proposal will negatively affect your credit score.
It will appear on your credit report throughout the duration of the term, and a number of years after it has been completed.
The exact amount of years is dependent upon the province you reside in, but is typically 3 years.
A consumer proposal will not appear on the credit report of your spouse, but your spouse may still be held responsible for joint debts or loans that he or she has co-signed.
During the duration of the consumer proposal, you will also be required to hand over your credit cards to the LIT, and will not be allowed to apply for any new unsecured credit cards until the term is complete.
In addition to significantly lowering your credit score, having a consumer proposal on your credit report can also affect you adversely in other ways.
You may find it difficult to obtain or use credit, although it is often possible to apply for a secured credit card, which will help you rebuild your credit score.
You will likely need to take additional steps to rebuild your credit score after the completion of a consumer proposal, such as monitoring your report for errors and ensuring at least two years of a good payment history.
What Happens When My Consumer Proposal is Completed?
After making your final payment, you will receive a “Certificate of Completion.”
The LIT will file all the necessary paperwork stating that all debts are paid and you are released from the debts.
Afterward, the LIT will continue to work with you by offering financial advice on how to rebuild your credit and better plan your financial future.
Who Should I Contact About a Consumer Proposal?
If you have explored other options or wish to learn more about whether or not a consumer proposal is the right debt settlement option for you, you will need to contact a LIT.
You can do this simply by making an appointment with one of the Licensed Insolvency Trustees that have partnered with Bankruptcy Canada.
Keep in mind that a referral is not required to speak with an LIT, nor should you be paying anyone to help you prepare any paperwork.
Additionally, be wary of debt settlement companies that steer you away from a consumer proposal with the promise of a better deal — this is extremely unlikely and the fees proposed by other companies are often much higher.
Visit Bankruptcy Canada for more information on consumer proposals or to make an appointment with an LIT, and take your first step to eliminating your debts and financial freedom.