Consumer Proposals: Get Out of Debt Without Going Bankrupt
Guide to Getting Out of Debt With a Consumer Proposal
If you are an individual and have fallen into financial difficulty, Consumer Proposals allow you to avoid personal bankruptcy and can be an effective alternative.
However, there are multiple factors to take into account before filing and proceeding down the path of Consumer Proposals.
What is a Consumer Proposal?
A Consumer Proposal is a legally binding arrangement under Canada’s Bankruptcy and Insolvency Act.
It is negotiated with your creditors and administered by a Licensed Insolvency Trustee (LIT), who works with you to develop and file your proposal.
A Consumer Proposal is an option to consolidate your debts and is an offer to pay creditors a percentage of what you owe them, or extends the time you have to pay off your debts, or both. Payments to creditors are made through the LIT, and the LIT uses that money to pay your creditors.
How does the process work?
The process of filing your Consumer Proposal may vary depending on your circumstances.
In general, you can expect the following stages to occur:
|1.||Evaluation of your circumstances||The LIT will evaluate your financial situation and explain whether it is appropriate for you.|
Your total debts cannot exceed $250,000 (though this does not include debts such as a mortgage secured by your principal residence).
|2.||Disclosure of your financial circumstances||You must give the LIT a complete list of all of your assets and debts. This will largely determine the amount that the LIT will propose you repay.|
|3.||Filing of the Consumer Proposal||If you proceed, the LIT will file the Consumer Proposal with the Office of the Superintendent of Bankruptcy (OSB).|
|4.||Submission of Proposal to Creditors||The LIT will submit the proposal to your creditors, which will include a report on your situation and causes of your financial difficulties.|
To be legally binding, the creditors who own the majority of your debt must agree to the Consumer Proposal.
|5.||Meeting of Creditors||If a meeting is held, a creditor’s acceptance or refusal of a Consumer Proposal is received at the meeting.|
If no meeting is requested within 45 days of the filing of the Consumer Proposal, it will have been deemed accepted by the creditors – regardless of any objections received.
|6.||Creditor’s Decision||Upon creditors’ agreement, you will:|
· Be responsible to repay the agreed amount either as a lump sum or period payments to the LIT over a maximum term of five years;
· Retain your assets (provided you make payments to your secured creditors);
· Attend two financial counselling sessions;
· Adhere to conditions in the proposal.
|If your consumer proposal is not accepted, you can:|
· Make changes to the proposal and resubmit it;
· Consider other options to resolve financial problems;
· Declare personal bankruptcy.
|7.||Satisfy Consumer Proposal Conditions||Once you’ve met the proposal’s conditions in full, you will be legally released from the debts included in the proposal.|
If you are making monthly payments and miss three of these payments – or your last payment is more than three months past due – the proposal will be deemed null. This means your creditors will be able to take action to collect money you owe to them, unless the court has ordered otherwise.
Consumer Proposal vs. Bankruptcy: When is a Consumer Proposal appropriate?
There are a number of options between filing a Consumer Proposal and bankruptcy.
A Consumer Proposal may be a good option for some people, but not everyone.
In deciding what is appropriate to you so that you can get back on track, the below table sets out the various consequences of a Consumer Proposal.
|It may substantially reduce the amount of debt you are required to pay your creditors.||A Consumer Proposal is not private. It is filed as a permanent public record and is included on an online searchable database. This is because a special notation is placed on your credit report in the public records section, which is almost identical to the bankruptcy notation, and which could affect your credit report and your ability to borrow or loan money from the bank.|
This could also put any professional licence/s at risk and even any future employment opportunities.
|It is an effective way to consolidate debt.||There are many associated costs with filing a Consumer Proposal, which can include the following:|
· $1,500 to file;
· Initial setup fee;
· If accepted by your creditors and approved by the courts, payment of the balance to move forward;
· LITs keep 20% of your monthly payments as their administration fee.
|It can pause active collection on student loan payments.|
|Not all debts can be included in a Consumer Proposal.|
· Student loans often can’t be included, particularly if it has been less than seven years from when you stopped studying.
· Secured debts and assets also cannot be included in a Proposal.
|It is a good option if:|
· You don’t qualify for debt consolidation loan;
· If you have debts that can’t be included in a debt management program (such as high government debt).
|You might need to sell some of your assets or include them in your proposal.|
|It is one of the best ways to avoid bankruptcy – although it is still a legal insolvency process.|
|You may need to file for bankruptcy if you miss more than two payments.|
|There is no guarantee that creditors accept your Consumer Proposal, which must be approved by both the court and by creditors.|
If creditors reject the proposal, you may need to offer additional funds to convince them to proceed.
The above considerations should also take into account the costs of bankruptcy.
In particular, anyone going through bankruptcy may have to give up valuable assets such as their home and vehicle.
Are there other factors that I should take into account?
Individuals should additionally be aware that prior to proceeding with a Consumer Proposal, they should only engage an LIT.
There are many debt companies that offer Consumer Proposals to get out of debt for the payment of large fees.
However, these companies ultimately refer you to the LIT.