Consumer Proposal in Canada : A Negotiated Debt Settlement
If you are in dire straits financially, your mounting debt burden may be a matter of great anxiety for you.
Apart from the fact that you have unpaid dues and liabilities, the added concern is that the longer you take in addressing them, repaying them, the heavier the burden becomes thanks to interest mounting on the debts.
There comes a time when many people belabouring under a mountain of unpaid debts consider filing bankruptcy.
However, this may not be the right move at all times.
A licensed insolvency expert may be able to introduce you to a better option, such as a consumer proposal to deal with your financial problems.
When is a consumer proposal the better option than bankruptcy?
As your insolvency expert will tell you, declaring bankruptcy may not be the smartest move if you can manage to pay off some of your debts.
The most important difference here is that when you declare a bankruptcy you have to give up your assets to the trustee who will then use it for distributing among your creditors.
This would include your most expensive assets such as your home.
If you wish to avoid giving up your assets but you cannot pay back your entirety of debts, a consumer proposal may be the perfect middle ground for you to choose.
Also, if you are a business owner and a bankruptcy will damage your reputation very severely, a consumer proposal may be the preferred option for you.
What exactly is a consumer proposal?
Consumer proposals are one among many debt settlement strategies.
You file your consumer proposal through your license insolvency trustee who can also advice you on how to go about it step by step.
You agree upon a specific repayment arrangement in this proposal that you commit to fulfilling without any lapse.
In time, you can clear all your debts under the new arrangement.
If you are in a position where you can pay off some of the debts but not all of them, then a consumer proposal that could reduce your debt burden by as much as 70%, may be the ideal option to adopt.
Once you file a consumer proposal, you are legally bound to adhere to what you committed to do.
At the same time, your interest rates on your outstanding debts are frozen and they cannot increase.
You can no longer be called and intimidated by collection agents and you also avoid the possibility of a wage garnishment.
In short, you get a protected window of time to pay back a portion of the debts that you have accumulated instead of the entire amount.
While there is no restriction on who can file a consumer proposal, there are limitations on what magnitude of debt entitles you to file one.
The limits may vary from location to location so it is important for you to check with your insolvency expert before you file this proposal.
However, in general, those who have a minimum of $1000 in debt can file a consumer proposal.
The maximum debts you can have to qualify for filing this proposal is $250,000.
This does not include your mortgage.
If you have your debts piled up and your spouse has her/ his own, then you can file the proposal jointly.
In this case, your joint proposal can be filed only if your total debt is within $500,000.
Keep in mind that it is legally binding on both of you.
Note that with his proposal, you get to clear your debts by paying just a portion of them off.
Your insolvency expert will sit with you and work out the proportion that you can reasonably be expected to repay.
The expert may also suggest that you repay the debt in full but over a longer term than originally accepted by you.
If necessary, you can also file a consumer proposal that combines both options, that is, you agree to pay off a portion of the total debt over an extended term that is longer than you initially committed.
Working with a qualified insolvency expert, you can write a consumer proposal that is persuasive and viable for your creditors to accept.
Impact of a consumer proposal in Canada on your credit rating
Before you file the proposal, you should be aware that your credit score is affected substantially.
When you file a proposal, your credit score switches to the lowest possible rating and this is why you should think long and hard before going ahead with this strategy.
With a low credit score, any loans that you may want to take in future can become very elusive and expensive.
If you take the maximum period of five years allowed through the consumer proposal to pay off all your debts, then your credit score is affected for this duration and also for three years following this period.
Remember that you do have other options for debt settlement but a consumer proposal comes with its own advantages too.
Talk to your insolvency expert before you make the final decision.