What are the Laws of a Consumer Proposal in Ontario?
Currently, there’s a misconception that the only way to clear a large amount of unsustainable debt in Ontario is to file for bankruptcy.
However, it turns out that there is a second legal mechanism you can use, a consumer proposal.
And in some situations, it could make you better off.
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What Is An Ontario Consumer Proposal?
An Ontario consumer proposal is a legal procedure in which you and your creditors negotiate the terms on your debt and come to a settlement that benefits both of you.
The mechanism reduces the total amount of money that you owe while allowing your creditors to get more money back than they would if you declared bankruptcy.
The vast majority of people seeking consumer proposals in Ontario did not get into debt deliberately.
Instead, they got into their current situation because of unfortunate circumstances and financial mistakes.
Generally, Ontario residents want to avoid bankruptcy and repay the money they owe.
Opting for a consumer proposal frees them from unsustainable borrowing while enabling them to make affordable repayments.
For many, it is an acceptable route out of an unfortunate and unwanted situation.
In Ontario, a consumer proposal is a formal legal process, carried out by a licensed trustee in bankruptcy.
It is their job to take over your case and represent your interests during negotiations with your creditors.
Usually, you will need to supply the trustee with accurate information regarding your income and debt.
Then, they will calculate what you can feasibly repay and use this information when discussing the terms of your loans with your creditors.
Once they complete negotiations, they will file the proposal as administrators, setting out the new terms of the borrowing agreements you have with your lenders.
Typically, you can reduce the debt you own by a substantial amount, sometimes up to eighty percent (although this varies on a case by case basis).
You should note that a consumer proposal is not the same as bankruptcy.
It does not clear all qualifying debt.
It does, however, offer a host of benefits.
These include protecting your credit rating and keeping total interest payments to a minimum.
This article will discuss Ontario laws and procedures regarding consumer proposals.
You will learn:
- The process of filing a consumer proposal;
- How a consumer proposal affects your credit rating;
- The differences between a consumer proposal and bankruptcy in Ontario;
- How consumer proposal in Ontario differs from other provinces in Canada.
By the end, you will have a much clearer idea of how the process works and whether it is right for you.
What Is The Procedure For Filing A Consumer Proposal In Ontario?
In Ontario, the Bankruptcy and Insolvency Act governs the process of filing a consumer proposal.
The law implies that your licensed trustee must follow a set process.
- Review your financial situation. First, the trustee evaluates your loan repayments in comparison to your income and wealth. The purpose of the review is to determine the level of debt you can reasonably support. The trustee will often conclude that your debts outstrip your ability to repay.
- Determine a fair offer. Your trustee will determine how much you can feasibly repay your creditors every month, taking into account your basic expenses after reviewing your financial situation. Typically, their offer accommodates your existing secured debt repayments on your house and car. Any payments you make on unsecured debt, therefore, take your current secured debt into account.
- Submit an offer to all your unsecured creditors. Your trustee submits an offer to your creditors on your behalf, providing them with proof of your financial situation. The new offer shows them how much you can feasibly repay if you have accumulated unsustainable levels of debt. Your unsecured creditors then have forty-five days to respond. Once you file a consumer proposal, your creditors must stop communicating with you directly and use your trustee instead. They cannot take legal action against you or garnish your wages from this point onwards.
- Creditors vote on whether to accept the proposal. In Ontario, most trustees resolve consumer proposals with creditors via a vote. If the majority votes in favour, then the proposal will pass, and you will enjoy better terms on your debt, as set out in the offer. (Please note that lenders may arrange a meeting of creditors to discuss your case among themselves. At the end of the process, they will then vote to decide whether to accept the new offer. If some creditors do not vote in favour of the offer, but the majority do, they are still bound by the terms of the consumer proposal).
- You repay the debt according to the new terms. Once your creditors agree to the consumer proposal, you must repay the debt per the terms. At the end of the process, you will receive a certificate of full performance from the trustee, indicating that you have completed the process and are on the path to financial health.
This process might sound a little complicated, but it is surprisingly easy.
From your perspective, the main work is to prepare information about your financial situation and make sure you repay the lower monthly installments.
Your trustee and creditors resolve the rest.
In Ontario, people who choose a consumer proposal must attend two financial counselling sessions with a registered counsellor.
Furthermore, only licensed trustees are allowed to act as a consumer proposal administrator in Ontario.
You cannot hire your accountant or lawyer to perform this service.
How Does A Consumer Proposal Affect Your Credit Rating?
As you might expect, filing a consumer proposal affects your credit rating negatively.
The reasons for this are obvious: creditors are less likely to want to lend to you if you have not been able to repay their peers in full in the past.
With that said, most people who file for a consumer proposal already have damaged credit ratings because of late payments on unsustainable debt.
The additional impact of a consumer proposal, therefore, is likely to be marginal.
Furthermore, a consumer proposal is a mechanism that you can use to create financial wellbeing that allows you to build strong credit in the future.
In Ontario, consumer proposals remain on your credit report for three years.
In the short term, therefore, it is harder to take out a loan at favourable rates.
Consumer proposals, however, don’t make it impossible to borrow money in the future.
Once you get your certification of full performance and allow three years to pass, they fall off your credit report.
Thus, barring any further credit problems, you can borrow similarly to anyone else.
What Is The Difference Between a Consumer Proposal And Bankruptcy In Ontario?
In Ontario, there are many similarities between a bankruptcy and consumer proposal.
The Bankruptcy and Insolvency Act governs both of them.
Each provides you with legal protection from your creditors, barring them from pursuing you directly for the money you owe.
Both affect your credit report.
And both require you to attend financial counselling sessions.
There are, however, some differences.
First, you will not lose any of your assets (such as your house and car) when you file for a consumer proposal in Ontario.
You may if you file for bankruptcy, depending on what you own.
Second, a consumer proposal remains on your credit report for three years.
In contrast, bankruptcy remains for a minimum of six if it is your first (and longer if it is your second or third).
Third, people who file for bankruptcy may have to pay surplus income to creditors, depending on household income.
Here, you pay a percentage of any money you make above the relevant threshold to creditors for a fixed period, even after you file.
Under the rules of a consumer proposal, this does not happen.
How Does An Ontario Consumer Proposal Differ From Those Of Other Provinces?
Bankruptcy rules can differ from province to province in Canada.
Consumer proposals, however, are consistent across the board.
The rules governing the process in Ontario are the same as anywhere else in the country.
Whenever you file a consumer proposal, you must do so through a licensed trustee.
They must then follow the process outlined above, according to the law.
Should You File A Consumer Proposal?
If you are currently in debt, your main task is to decide whether to file a consumer proposal or choose bankruptcy.
In many cases, a consumer proposal is a better option.
It allows you to make good on the debts that you can afford while avoiding many of the downsides that can come with bankruptcy (such as wage garnishment and loss of assets).
It is also often the best option for your creditors because it allows them to recoup some of their losses.
Figuring out which option is right for you can be tricky.
It is vital, therefore, to speak with licensed trustees about your situation so that you can get the best financial advice possible.
The more you learn about your options, the better your financial position will become.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal