Consumer Proposal: One of the most important financial tools available to Canadians
When you fall into a debt trap, it’s very easy for things to get out of control. What started as a small credit card debt has snowballed into something that’s impossible to handle. Consequently, you pursue different avenues to attempt to get rid of your debts. Some of these are obvious – like using a debt consolation loan or filing for bankruptcy – while others are less well-known, like a consumer proposal.
As it happens, consumer proposals are one of the best tools a Canadian can utilize in the battle against debt. The annual insolvency rate has been on the rise over the last few years. However, what’s interesting is the number of bankruptcies is decreasing while consumer proposals are rising. In essence, this demonstrates one of the key benefits of a consumer proposal: it helps you avoid bankruptcy!
This can be incredibly advantageous for a number of reasons, all of which we shall discuss in this guide. To truly understand how helpful consumer proposals are, you must figure out what they are and how they work.
What is a consumer proposal?
The government definition of a consumer proposal is that it is a formal and legally binding process that helps you pay your creditors. If we dive a little deeper, we find that the premise behind consumer proposals is simple. As the name suggests, you’re making a proposal – or an offer – to your creditors. The aim is to reach an agreement by which you can clear your debts.
How does a consumer proposal work?
You should have a basic grasp of the purpose of a consumer proposal, but how do they work? To start, you have to work with a Licensed Insolvency Trustee (LIT) to create your proposal. They work with you to develop your offer to creditors. Now, this offer is used to help you pay as much of your debts as possible. There are two main ways to go about this:
- Offer to pay a percentage of your debts.
- Ak to extend the time you have to pay off the debts.
Of course, you can also use both of these in your proposal. Once submitted, your LIT will send a copy to your creditors. If they aren’t happy with the proposal, they have 45 days to call a meeting of creditors. This can only be called by one or more creditors provided they are owed at least 25% of the total value of your debts. If a meeting is called, the creditors will negotiate to come up with a new deal. Regardless of what happens, they have to vote on your proposal. You need at least 51% of the votes for your proposal to be accepted. 51% meaning one or more creditors who are owed at least 51% of your total debts voting in favour.
If no meeting is called within the 45 days, it counts as everyone approving the proposal, and you can move forward. You’ll now abide by the terms set out in your proposal. This could mean making set monthly payments for a specific period until you’ve paid the agreed sum to your creditors. It’s worth noting that the terms of a consumer proposal can’t exceed 5 years.
After this, your debts are officially cleared and you can get back to your normal life and rebuild your credit.
Why is a consumer proposal beneficial for you?
As mentioned, the key advantage of consumer proposals is they help you avoid bankruptcy. This is important for many reasons. Firstly, a bankruptcy stays on your credit report for at least 6 years, while a consumer proposal is only there for half the time. This means you can work on rebuilding your credit a lot sooner and will have access to money through applying for credit.
Secondly, a proposal won’t automatically make you relinquish your assets. This is the case in bankruptcy as you are forced to sell some of what you own.
Thirdly, consumer proposals make it easier for you to manage your debts. You bring payments to a reasonable level and give what you can. Within 5 years, you can be free from your unsecured debts.
The final benefit of a proposal is that it is a legal process. Why is this advantageous? Well, compare it to similar debt-relief options in debt settlements or debt restructuring. Both of these ideas revolve around negotiating with creditors to either lower your repayments or pay a percentage fo your debts. However, as they are not legal processes that go through the court, you must have approval from all of the creditors you contact. With a consumer proposal, you only need a majority based on how much your creditors are owed. As long as the majority vote in favour, you’re clear to move ahead.
So, you can have a scenario where there are 5 creditors, but two of them collectively are owed 51% of your debts. If they vote yes, and the other 3 votes no, the proposal will still go ahead. As such, it improves your chances of seeking debt relief.
When do consumer proposals make the most sense?
By all means, you shouldn’t instantly jump to a consumer proposal. Explore other debt-relief methods that don’t impact your credit score beforehand. Most of the time, consumer proposals are for people who are considering bankruptcy. This is an excellent tool to help you avoid going bankrupt and dealing with everything that comes with it. In fact, you can see this in the statistics mentioned above. Bankruptcies are on the decline, and consumer proposals are on the rise.
If you think bankruptcy is your only option, think again! A consumer proposal can be exactly what you need to get out of debt in a relatively short space of time. Not many Canadians are aware of this, which is why we want to spread this information far and wide.
Call us for debt advice!
As an LIT, we’re able to help with consumer proposals and all other debt relief services. Give us a call to learn more about what we do and how we help. Or, fill in our online evaluation form, and we’ll get in touch with you.