Comprehending Consumer Proposal Terms: A Detailed Guide
The world of finance is filled with complex terminologies. One such term, often encountered by individuals grappling with debt management, is ‘Consumer Proposal Terms’. These terms play a crucial role in formulating a consumer proposal, which is a formal, legally binding process that offers debt reduction or elongation of repayment time or both.
Understanding these terms is essential to make the most out of a consumer proposal. This guide will take you through the intricate maze of Consumer Proposal Terms, offering insights into their different types, examples, and much more.
1. A Glimpse into Consumer Proposal Terms
The world of consumer proposals is filled with diverse terms, each holding unique significance. From lump sum offers to fixed monthly payments and sale of assets, these terms dictate the course of a consumer proposal and its effectiveness in dealing with debts.
Let’s delve into the details of these terms, understanding their essence, and how they come into play.
1.1. Lump Sum Offer
A lump sum offer becomes a part of the consumer proposal when a third party is willing to contribute to the settlement of an individual’s debts. For instance, a third party could propose to contribute $10,000 into the proposal, which would be divided among the unsecured creditors, provided they accept the proposal. The contribution from the third party materializes only if the creditors’ acceptance leads to a legally binding agreement.
1.2. Fixed Monthly Payments
Fixed monthly payments are a prevalent aspect of consumer proposals. This term refers to an agreement where an individual commits to pay a predetermined amount every month for a specific number of months. For instance, a debtor may agree to pay $350 per month for 60 months.
The primary advantage of fixed monthly payments is the predictability it offers. The debtor is aware of the exact amount to be paid each month, which aids in better financial planning.
1.3. Stepped Payments
Stepped payments come into play when an individual’s financial circumstances are expected to change over time. These payments start at one level and then step up or down according to a pre-arranged schedule. For example, an individual could agree to pay $250 per month for the first 12 months, $350 per month for the next 24 months, and then $400 per month for an additional 24 months.
1.4. Floating Payments
Floating payments are adjustable and can vary based on a set of predefined criteria. These payments usually have a minimum payment level but can be adjusted based on future circumstances. For example, a debtor may agree to contribute half of any monthly income earned above $3,000 or a minimum of $500 per month for a period of 60 months. The higher amount among the two would be the monthly payment.
1.5. Full Payment
Full payment is an option when an individual can afford to pay their creditors but needs assistance in handling interest and penalties. Under this term, the debtor agrees to pay a fixed amount each month until the principal is paid in full. All future interest, penalties, and collection actions are halted as long as the agreed-upon monthly payment is made.
1.6. Percent Payment
Under the term percent payment, an individual agrees to pay a fixed monthly payment until a specified amount of the debt has been paid into the proposal. For example, a debtor may agree to pay $400 per month until 37% of the proven debts have been paid.
1.7. Sale of Assets
The term ‘sale of assets’ is often used in a consumer proposal to liquidate an asset either to prevent collection activities from depreciating an asset’s value or as an incentive for creditors to accept the proposal. For instance, the debtor may agree to sell a summer cottage and instruct the lawyer to pay the net proceeds from the sale into the consumer proposal for the benefit of creditors.
2. Acceptance of Consumer Proposal Terms
For the consumer proposal to be legally binding, a majority of the debtor’s creditors must agree to the terms established by the trustee. Once the terms are agreed upon, the debtor begins making payments to the trustee, who then distributes these payments to the creditors.
To ensure the acceptance of the proposal, the trustee must offer the creditors more money than they would receive if the debtor were to file for bankruptcy.
3. Determining the Cost of a Consumer Proposal
The cost of a consumer proposal is unique to each individual. It is determined during a meeting with a trustee, who reviews the debtor’s financial situation in detail. Most trustees offer this initial consultation free of charge. This meeting provides an opportunity for the debtor to understand the terms of a consumer proposal, see examples of credit proposals and payment term examples, and learn about the pros and cons of a consumer proposal.
The consumer proposal’s cost is calculated based on the debtor’s financial situation and the type of terms included in the proposal. It is crucial to review all available options and decide the best course of action in consultation with the trustee.
4. Variable Payments in Consumer Proposals
Variable payments are a flexible Consumer Proposal Term that caters to individuals with fluctuating income or seasonal work. With variable payments, higher payments are made during peak earning times and lower payments during low earning periods. The consumer proposal must clearly outline the variable payment schedule.
5. Step Up and Step Down Payments
Step up payments and step down payments are two more flexible Consumer Proposal Terms that cater to consumers with expected changes in their income during the proposal term.
Step up payments are suitable for consumers who expect an increase in their income. These payments start at a lower level and gradually increase over time.
On the other hand, step down payments are appropriate for consumers expecting a decrease in income during the proposal term. Here, the payments start at a higher level and gradually decrease over time. In both cases, the consumer proposal must clearly outline when and how the payments will change.
6. Lump Sum Payments in Consumer Proposals
Lump sum payments are a part of consumer proposals funded by one or more lump sums. This is most common when a third party, such as a family member, provides the proposal funding on behalf of the consumer.
7. Payments from the Sale of Assets
Payments from the sale of assets are another Consumer Proposal Term where the consumer proposal involves an asset sale, such as a house or other investments, with all or a portion of the proceeds being paid into the proposal.
8. Amendment to an Existing Consumer Proposal
In exceptional situations, an existing consumer proposal can be amended if there is a material change in circumstances that warrants a change to the existing proposal structure. If an amended proposal is filed, the creditors get to vote on whether they agree to the amended proposal.
9. In Conclusion
The diverse Consumer Proposal Terms offer flexibility and choices to debtors while formulating a consumer proposal. However, understanding these terms and using them effectively requires professional guidance. Consulting a trustee can help you understand these terms better, enabling you to make the most out of your consumer proposal.
Stay tuned for more posts in this series to gain deeper insights into the world of consumer proposals.
