Avoid Bankruptcy with Consumer Proposal Services in Ontario: A Detailed Guide

Financial difficulties and mounting debt can be overwhelming, leaving individuals feeling trapped and unsure of where to turn for help. For those in Ontario, Canada, struggling with unsecured debts like credit card debt, personal loans, and payday loans, a Consumer Proposal may provide a viable solution to avoid bankruptcy and regain financial stability. A Consumer Proposal is a legally binding process that allows insolvent individuals to negotiate a reduction of their unsecured debts or extend the repayment timeline, offering a path towards debt relief and a fresh financial start.

This comprehensive guide will delve into the intricacies of Consumer Proposal Services in Ontario, exploring eligibility criteria, the filing process, advantages, and potential drawbacks. By understanding how a Consumer Proposal works and comparing it to other debt relief options like bankruptcy, debt consolidation, and debt management programs, readers will be better equipped to make informed decisions about their financial future⁷. Whether you’re grappling with credit card debt, struggling to manage monthly payments, or seeking an alternative to bankruptcy, this article will provide valuable insights into the Consumer Proposal process and its potential to help you achieve debt freedom in Ontario.

Understanding Consumer Proposals

A Consumer Proposal is a legally binding agreement between a debtor and their creditors, administered by a Licensed Insolvency Trustee, that allows for debt obligations and monthly debt payments to be reduced by repaying a portion of the debt over a certain period, usually five years. This federally regulated process is available to insolvent Canadian individuals as an alternative to filing bankruptcy, offering the same debt relief and creditor protection.

Key aspects of a Consumer Proposal include:

• Minimum debt required is $1,000 and maximum permitted is $250,000 or $500,000 for married couples
• Interest charges are frozen
• Fixed installment payments over a maximum of 60 months
• Assets are protected, unlike in bankruptcy where non-exempt assets must be surrendered
• Provides immediate protection from unsecured creditors and stops wage garnishments
• Can include unsecured debts such as credit cards, personal loans, payday loans, student loans, income tax debt, lines of credit, unpaid utilities, store cards, memberships, and highway or bridge tolls

Benefits of opting for a Consumer Proposal over other debt relief options include:

1. Lower monthly payments compared to debt consolidation loans or second mortgages
2. Significant savings due to interest stoppage
3. Avoiding the surplus income penalty in bankruptcy, which increases payments based on income
4. Less severe impact on credit rating than bankruptcy
5. Keeping assets and having one lower monthly payment
6. Being a government program with creditor protection and court approval
7. Offering early payment options

Eligibility Criteria for Filing a Consumer Proposal

To be eligible for a Consumer Proposal in Ontario, an individual must:

1. Be a resident of Canada and insolvent, meaning they are unable to meet their debt obligations as they become due.
2. Owe more than $1,000 and less than $250,000 (excluding mortgage debt on their principal residence) .
3. Be at least 18 years old.
4. Have completed any previous consumer proposals .
5. Enlist the services of a Licensed Insolvency Trustee.
6. Not be a second-time bankrupt.

Most unsecured debts are eligible for a consumer proposal, including:

• Credit card debt
• Personal loans
• Lines of credit
• Payday loans
• Some taxes
• Student debt older than seven years
• Income taxes
• Business debts
• Debts guaranteed for a business

However, certain debts are not eligible for a consumer proposal, such as:

• Secured debts (e.g., mortgages and car loans) unless the individual is willing to give up the house or car
• Child support and alimony
• Court-ordered fines
• Student debt under seven years old
• Penalties
• Certain court-ordered payments

Joint consumer proposals can be filed if the debts of the individuals are substantially the same. A proposal can also be filed while bankrupt, but the effective date of the consumer proposal is the date of bankruptcy, and debt incurred after the date of bankruptcy would not be able to be added.

The Process of Filing a Consumer Proposal

The process of filing a Consumer Proposal in Ontario involves several steps:

1. Contact a Licensed Insolvency Trustee (LIT) for a free, confidential debt assessment. The LIT will determine your eligibility and advise on the best proposal options.
2. Gather necessary documents and information for the LIT to prepare the Consumer Proposal. This includes a Statement of Affairs, budget or cash flow statement, and Trustee’s Report on the Proposal.
3. Sign the proposal documents and have the LIT file them with the Office of the Superintendent of Bankruptcy (OSB) and send copies to each creditor. Upon filing, a Stay of Proceedings is imposed, protecting you from creditor actions.
4. Creditors have 45 days to accept, reject, or request a meeting regarding the proposal. If a creditor holding at least 25% of your debt requests a meeting, it must be held within 21 days. If the proposal is accepted by a 51% majority of your creditors, it will be approved by the court and become legally binding.
5. If the proposal is accepted, make the agreed-upon payments to the LIT, who will disburse the funds to the creditors. Attend two mandatory credit counselling sessions. Defaulting on payments for more than 3 months can lead to the proposal being annulled.

The cost of filing a Consumer Proposal includes a $1,500 filing fee plus 20% of future payments. The payment terms are determined based on your financial standing ¹⁷. Once you have fulfilled all obligations under the terms of the proposal, the LIT will issue a Certificate of Full Performance, releasing you from the debts included in the proposal.

It’s important to note that a Consumer Proposal will affect your credit rating and remain on your credit report for the duration of the proposal term, plus a few additional years. However, upon successful completion of the proposal, you can begin rebuilding your credit history.

Advantages of Opting for Consumer Proposal Services

Opting for Consumer Proposal Services in Ontario offers several advantages for individuals struggling with debt:

1. Significant Debt Reduction: Consumer proposals can help debtors pay off up to 70-80% less than what they owe, providing a more manageable path to debt freedom.
2. Affordable Monthly Payments: With a consumer proposal, you’ll make one fixed monthly payment directly to the trustee, based on what you can afford. These payments can be spread out over a maximum of 5 years, interest-free and without penalties.
3. Legal Protection from Creditors:
   • A consumer proposal is a legally binding agreement that shields you from lawsuits and harassing collection calls once accepted by your creditors.
   • It provides immediate creditor protection through a legal stay of proceedings, stopping all creditor actions, including wage garnishments.
4. Asset Protection: Unlike bankruptcy, where non-exempt assets may be seized, a consumer proposal allows you to keep your assets while paying back a portion of your unsecured debts.
5. Less Severe Impact on Credit:
   • A consumer proposal has a less severe impact on your credit score compared to bankruptcy.
   • It will remain on your credit report for three years after completion, as opposed to six years for a first-time bankruptcy.
6. Flexibility and Control:
   • Consumer proposals offer the flexibility to pay off your debt early, with a shorter effect on your credit rating compared to bankruptcy.
   • As a proactive approach, you have more control in deciding what you can afford to pay, unlike bankruptcy, where monthly payments may change depending on your income.
7. Professional Advantages:
   • A consumer proposal does not have the same impact on employment or professional certifications as bankruptcy.
   • It is considered a more respectable option, as it involves a negotiated agreement with your creditors.

By opting for consumer proposal services, such as those offered by Remolino & Associates with a 96% success rate, individuals can reduce their unsecured debts by up to 75% and achieve a better-balanced budget on the path to debt freedom within 3 to 5 years.

Comparing Consumer Proposals with Bankruptcy

When comparing Consumer Proposals and Bankruptcy in Ontario, there are several key differences to consider:

1. Asset Protection: A Consumer Proposal allows individuals to keep their assets, while in a Bankruptcy, non-exempt assets may be seized by the Licensed Insolvency Trustee to pay creditors.
2. Income Surplus Payments: In a Bankruptcy, individuals may be required to make additional payments to creditors if their income exceeds a certain threshold. This is not the case with a Consumer Proposal.
3. Length of Process:
   • Consumer Proposals typically take longer to complete than a Bankruptcy, usually lasting four to five years.
   • This is due to the lower monthly payments spread out over a longer period in a Consumer Proposal.
   • In contrast, a Bankruptcy discharge usually occurs after 9 or 21 months, depending on the individual’s circumstances.
4. Credit Impact: While both options will affect an individual’s credit score, a Bankruptcy may have a more severe and longer-lasting impact compared to a Consumer Proposal.
5. Suitability:
   • A Consumer Proposal is best suited for individuals who have a steady income to make monthly payments, own assets they wish to protect, and would find Bankruptcy too expensive due to potential surplus income payments.
   • Bankruptcy may be more appropriate for those with limited assets and income, or those who cannot afford the payments required in a Consumer Proposal.

Other alternatives to a Consumer Proposal include Orderly Payment of Debts (OPD), Debt Management Plans (DMP), and Consolidation Loans. It’s essential to consult with a Licensed Insolvency Trustee to determine the most suitable option based on individual circumstances.

Role and Importance of Licensed Insolvency Trustees

Licensed Insolvency Trustees (LITs) play a crucial role in the consumer proposal process in Ontario. They are the only professionals authorized by the Office of the Superintendent of Bankruptcy Canada to administer consumer proposals or bankruptcies in Canada. LITs undergo rigorous training, pass written and oral examinations, and complete a three-year bankruptcy law course to ensure they have the knowledge and expertise to guide individuals through the insolvency process.

As impartial representatives, LITs work for both creditors and debtors to find the best solution for all parties involved. Their responsibilities include:

• Reviewing all debt relief options and determining if an individual qualifies for a consumer proposal
• Explaining how a consumer proposal works and helping to determine an affordable repayment plan
• Preparing necessary forms and filing the proposal agreement with the government
• Communicating with creditors on behalf of the debtor

LITs are paid by the creditors involved in the consumer proposal or bankruptcy through the proceedings of the claim or the assets sold from the bankruptcy. Their fees for consumer proposals and bankruptcy services are set by the Federal Government in the Bankruptcy and Insolvency Act (BIA) and include:

• $750 payable on filing a copy of the consumer proposal
• $750 payable on the approval of the consumer proposal by the Court
• 20% of the moneys distributed to creditors under the consumer proposal
• The fee for filing a consumer proposal
• The fee payable to the registrar
• Applicable federal and provincial taxes for goods and services

It is important to note that LITs cannot act as advocates for debtors when making consumer proposals due to their statutory duties. They must adhere to the Code of Ethics for Trustees found in the BIA to ensure fair and ethical practices throughout the insolvency process.

Understanding the Financial Implications

When considering a Consumer Proposal in Ontario, it’s crucial to understand the financial implications involved. The cost of filing a Consumer Proposal is around $750 for filing and another $750 for administration if accepted by creditors, with the trustee taking a cut (sometimes 20%) of the agreed-upon payments as a service fee. Consumer Proposal costs start at $1,500, with additional fees based on the proposed amount and assets. In comparison, bankruptcy costs approximately $1,800. It’s important to note that credit repair services may be required after bankruptcy or a Consumer Proposal, costing thousands of dollars.

The monthly payments for a Consumer Proposal are fixed, and if the individual’s financial situation changes, they have to go through the voting process again. A Consumer Proposal is included on the individual’s credit report and negatively impacts their credit score for three years after completion. Some financial institutions may treat a Consumer Proposal the same way as they do a Bankruptcy when rebuilding credit.

A Consumer Proposal results in an R7 credit rating, which remains on the individual’s credit report for 3 years after completion. It will affect the individual’s credit rating, leaving an R7 rating on their credit report for a maximum of 6 years from the date of filing. Filing a Consumer Proposal will negatively impact the individual’s credit rating, and higher borrowing rates may be experienced due to the Consumer Proposal. An R7 rating will appear on the credit report for up to three years after completion, up to a maximum of six years from the filing date. The cost of a Consumer Proposal is based on the terms agreed upon with creditors, with fees deducted from monthly payments.

Potential Downsides and Considerations

While Consumer Proposals offer many advantages, there are some potential downsides and considerations to keep in mind:

1. Credit Impact:
   • Obtaining unsecured credit or personal loans will be difficult after filing for a Consumer Proposal.
   • A Consumer Proposal will negatively impact your credit rating, leaving an R7 rating on your credit report for a maximum of 6 years from the date of filing.
   • Some financial institutions may treat a Consumer Proposal the same way as they do a Bankruptcy when rebuilding credit.
2. Debt Eligibility:
   • Secured debts, such as car loans or mortgages, cannot be included in a Consumer Proposal unless you return the asset back to the lender.
   • Student loans less than 7 years old, spousal and child support payments, fines, and certain court-ordered payments are not eligible for discharge through a Consumer Proposal.
3. Creditor Approval:
   • Creditors may not approve the proposed terms in a Consumer Proposal.
   • If the majority of creditors vote against the Proposal, you may have to file for Bankruptcy.
   • Large creditors can dictate higher payment terms in a Consumer Proposal.
4. Payment Adherence:
   • Filing a Consumer Proposal is a legally binding commitment to fulfill a new contract with monthly payments.
   • Adherence to all payment and agreement terms is mandatory in a Consumer Proposal.
   • If you default on the Consumer Proposal by falling three months behind in payments, you are not able to file another Proposal until the debts included in this Proposal are paid in full.
   • If you are unable to make payments, you may have to file for Bankruptcy, affecting your credit for seven years.
5. Employment Impact:
   • Modern employment background checks often include a review of credit history, which may impact job opportunities.

It’s essential to carefully consider your financial situation and consult with a Licensed Insolvency Trustee to determine if a Consumer Proposal is the best option for your unique circumstances.

Conclusion

In summary, a Consumer Proposal is a powerful tool for individuals in Ontario struggling with unsecured debt, offering a legally binding agreement to repay a portion of their debts over a fixed period. By working with a Licensed Insolvency Trustee, debtors can negotiate affordable monthly payments, protect their assets, and gain relief from creditor actions. While a Consumer Proposal may have some downsides, such as a temporary impact on credit scores and the need for creditor approval, it remains a viable alternative to bankruptcy for many individuals.

Ultimately, the decision to pursue a Consumer Proposal should be made after careful consideration of one’s unique financial circumstances and a thorough discussion with a Licensed Insolvency Trustee. By understanding the process, advantages, and potential drawbacks of this debt relief option, individuals can make informed choices to regain control of their finances and work towards a brighter, debt-free future.

FAQs

Q: What steps can I take to prevent bankruptcy in Ontario? A: To avoid declaring bankruptcy in Ontario, consider these steps:

1. Create a budget that includes manageable bill payments.
2. Request that your creditors lower your monthly debt payments to align with your budget.
3. Ensure that your monthly payment is administered properly, deposited into a secure, insured trust account, and then distributed to your creditors.

Q: Why is my consumer proposal listed as bankruptcy on my credit report? A: When you file a consumer proposal, creditors report this to the credit bureau as a proposal debt. However, sometimes creditors may incorrectly report it as bankruptcy. If you notice this error, you should contact the credit bureau to have it corrected.

Q: Are there any disadvantages to a consumer proposal? A: Yes, there are some drawbacks to a consumer proposal, including:

• It typically takes longer to complete compared to bankruptcy, which means you may be paying back debt for an extended period. However, you can pay off a proposal early if your financial situation improves.
• Your credit rating will be affected, as a consumer proposal does impact your credit.

Q: Is filing a consumer proposal less damaging than declaring bankruptcy? A: Yes, a consumer proposal generally has a less severe impact on your credit rating compared to bankruptcy. A bankruptcy can stay on your credit report for six to seven years after you complete it, whereas a consumer proposal remains on your report for six years after filing or three years after you complete it, whichever comes first.

References

[7] – https://www.litvackgroup.ca/post/consumer-proposals-ontario-guide [17] – https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/you-owe-money/you-owe-money-consumer-proposals