Is it Better to File a Consumer Proposal or Settle Your Debts Without Assistance?
A Look at a Consumer Proposal vs Settling Debts on Your Own
If you are having trouble paying your bills you are probably considering how you can get out of debt. You are likely wondering if you can avoid bankruptcy and still get out of debt.
In this article we will explore two options to get out of debt without going bankruptcy: Filing a Consumer Proposal vs Settling Debts on Your Own.
Choosing the best debt solution option for your situation will depend on various factors that you must consider carefully.
In some cases settling your debts on your own will be the best solution, while in other situations the best solution will be a consumer proposal.
Certain questions you should ask yourself before considering settling your debt or making a consumer proposal include:
How does making a consumer proposal work?
How can I settle my own debt on my own?
What debts can be settled?
What are the advantages of a consumer proposal?
What are the drawbacks of filing a consumer proposal?
What are the advantages of settling your own debt?
What are the disadvantages of settling your own debt?
If you are stuck in debt and would like to get your finances under control you likely have three viable ways for getting out of debt: settling your debt, credit counselling, or filing a consumer proposal with your creditors.
If you choose credit counselling as a method for getting your debt under control, you will be repaying 100% of your debt, and possibly even more and you will make a monthly payment to a credit counsellor.
This is not a recommended action, as you can see you will be paying even more of the debt you owe over a period of time lasting 5 years.
Settling your debts on your own will also mean that you will be paying the full amount of your debt, as well as any interest charges, although there are benefits.
In certain cases, your creditors might accept a reduced settlement, although you shouldn’t count on this when trying to settle debts on your own.
A personal bankruptcy will allow you to eliminate all of your debt, although for certain people there are disadvantages to bankruptcy or they are ineligible for bankruptcy for certain reasons.
A consumer proposal will give you a chance to repay a certain percent of your debts to your creditors over a period of time last up to 5 years.
When you are in a consumer proposal you will make a monthly payment to your Trustee (only a Government Licensed Insolvency Trustee can file a consumer proposal) and you won’t pay any interest charges.
In this article we will explore the pros and cons of a consumer proposal and settling your debts on your own.
As debt relief options, a consumer proposal and settling debts have different pros and cons that must be considered carefully.
Filing a Consumer Proposal vs Settling Debts on Your Own is a serious consideration so you must take the time to make the right decision with the assistance of a Government Licensed Insolvency Trustee (LIT).
How Does Making a Consumer Proposal Work?
In order to file a consumer proposal with your creditors you need to meet with a Licensed Insolvency Trustee. The reason for this is that only a LIT (Licensed Insolvency Trustee) can file a proposal. No other debt professional can make a legally binding consumer proposal to your creditors.
When you make a consumer proposal to your creditors you must include all of your unsecured debts. In order to be eligible for a consumer proposal you must have debts of less than $250,000 (not including mortgage debt on your principal residence) or $500,000 if filing a joint consumer proposal.
If you and your LIT decide that a consumer proposal is right for you, the Trustee will file the proposal with your creditors.
Your creditors will then have period of time in which they can vote on whether to accept your proposal or not.
While almost all proposals are accepted, your proposal could be rejected or your creditors might vote to accept your proposal if you offer to pay more money.
When you make a consumer proposal you will repay about 35% of your debt over a period of time usually lasting for 3 to 5 years. A 5 year consumer proposal is the longest term acceptable for a proposal.
The proposal will list your responsibilities – such as your monthly payments and the number of monthly you are proposing to repay your debt over. You might also elect to file a consumer proposal with a one-time lump sum payment to your creditors.
Creditors Vote on the Proposal
If there is a vote from your creditors, then a simple majority of votes (with each dollar of debt counting as a “vote”) will determine if the proposal is accepted or rejected.
In addition, the creditors might vote to accept the proposal if you amend the terms to pay more debt towards your creditors.
If your proposal is accepted, all creditors – even those that voted to reject the proposal – are bound to the terms of the proposal.
Once your proposal has been accepted, you must follow the terms of the proposal. You will only make one payment to your Trustee, who will then in turn distribute the funds to the creditors included in the proposal. Only unsecured creditors can be included in a consumer proposal agreement with your (unsecured) creditors.
If you are following a consumer proposal plan, make sure that you don’t miss any of your payments. If you miss three consecutive payments your proposal will automatically be annulled (canceled.)
Consumer Proposal vs Settling Debts on Your Own – How Can I Settle My Debts on my Own?
After you have not made a payment for six months on any unsecured consumer debt, then you will be able to contact the unsecured creditor to attempt to settle the debt through a payment agreement.
You are unable to settle your debts yourself before the 6 month period has been completed.
Even once the six month period has been reached, there is no guarantee that your creditors will settle your debt at a reduced rate. All creditors, or a collection agency, are trying to recover their full unpaid accounts.
You can write to your creditors and offer a lump sum payment settlement, or they might contact you and offer a settlement.
If you have decided to attempt to settle your debts, then it is important that you never admit in writing to legal liability for your debt. There are other rules to follow such as:
- You must inform your creditor, or the collection agency they have hired, that you are interested in settling your debt. You should include the amount you are willing to settle the debt for in your letter;
- If your creditor (or their representative) refuses your offer, you can negotiate with them;
- You must receive, in writing, a settlement offer confirming the details of the settlement offer if your creditors offer to settle the unpaid account;
- If you settle any unpaid account make sure you hold onto all documents relating to the settlement agreement, including your settlement agreement and a receipt of your payment.
Debt collectors are trained to maximize the collection amount when making contact with a debtor. They will often refuse to accept anything less than the full amount.
In this situation, you can politely say the creditor can contact you in the future if they are willing to accept a discounted settlement.
However, if you decide to attempt to settle your debts on your own, your creditor might decide to sue you. When your creditor has sued you, it is still possible to settle your debts, although you will be in a worse situation than before.
If you can prove that you are suffering a genuine financial hardship, you are more likely to get your creditors to agree to a debt settlement agreement. In this case, your creditors will likely request documentation of your financial hardship – they will request a copy of your paystub, recent income tax filings, and they might request you to fill out a form that provides information about your liabilities, assets, expenses and income.
Consumer Proposal vs Settling Debts on Your Own: Considering What Types of Debts Can Be Settled
Before you make a decision about filing a consumer proposal or making a debt settlement agreement on your own, you must consider some factors:
- Which debts can be included in a consumer proposal?
- Which debts can you attempt to settle on your own?
- When can you file a proposal?
- When can you settle your debts with your creditors?
- Can all types of debts be settled or included in a proposal?
What Types of Debt can be Eliminated?
When you make a consumer proposal only certain types of debt can be included in a proposal, as with attempting to settle your debt on your own.
There are two main categories of debt: Secured and Unsecured debt, and whether your debt is secured or not will have an impact on if it can be included in a proposal. Secured debt is debt where your creditor has collateral in the asset that the debt covers.
For example, your mortgage is secured debt as your house is collateral if you do not pay on your debt. The two main types of secured debts are mortgages and car loans. Unsecured debt is debt that has no asset as collateral. For example, credit card debt, personal loans and some lines of credit are unsecured debt.
Certain debt that is unsecured is known as “non-dischargeable debt,” which includes debt arising from child support, alimony, debt arising from fraud, and certain fines and civil judgements.
In a consumer proposal you can eliminate unsecured debt, debt owed to the government, and student loan debt.
When you attempt to settle your debt on your own, you can only attempt to settle your unsecured debt. The government will not accept any informal settlement with you.
There is no way to eliminate secured debt (unless you voluntarily surrender the asset), or non-dischargeable debt.
Dollar Value of the Debt: Does This Impact a Consumer Proposal vs Settling Debts on Your Own?
If you would like to “settle your debts on your own” there is no debt limit – either minimum or maximum – that you must be aware of. You can attempt to settle any amount of debt you have with your creditors. There are no restrictions on the dollar amount of debt you can attempt to settle.
However, if you would like to make a consumer proposal, you must be aware of certain debt limits. While not a hard rule, you are unlikely to find a Licensed Insolvency Trustee who will be willing to make a proposal if your debt is less than $10,000.
There is a hard limit of $250,000 as a debt limit for a consumer proposal (the limit increases to $500,000 if you are filing a joint consumer proposal). This debt does not include the mortgage debt on your principal residence.
If your debt is over $250,000 (or $500,000) you can speak with an Insolvency Trustee about a Division I proposal.
Can I Pick Which Debts to Include in a Consumer Proposal or When Settling Debt on My Own?
Most individuals have debts that are owed to several different creditors that they would like to settle. If you have more than one debt you might want to only settle one or two of these debts and repay the others at the original repayment agreement.
One of the main benefits of settling debts on your own is that you can choose which debt to attempt to settle. In a consumer proposal you must include all of your unsecured debts in the proposal. While most individuals would like to settle all their debts at once, depending on your circumstances, it might not be beneficial to settle all of your debt.
When Can I Resolve my Debts With a Proposal or By Settling My Debts With My Creditors?
Can I Settle My Debts at Any Time? You must wait a period of six months from your last payment on an unsecured consumer debt before you can contact your creditors with a debt settlement offer.
Even if the six month period has passed you must be aware that your creditors are under no obligation to accept a settlement agreement for less than the full amount owed at any time.
Your creditor has the right to sue you if you do not make a payment on your unsecured debt, although, even if you have been sued, you can still attempt to settle your debts with the creditor.
If you have been sued you will be at an even greater disadvantage when dealing with your creditor when attempting to make a debt settlement.
Can I Make a Consumer Proposal at Any Time? There is no time requirement for your debts to be unpaid before you can make a consumer proposal with your creditors, although there are certain eligibility requirements that must be met before you can make a proposal.
Firstly, you must meet with a Licensed Insolvency Trustee, as only a LIT can file a legally binding consumer proposal. When you meet with the Trustee they will determine if you are insolvent, which is a requirement under the Canadian Bankruptcy and Insolvency Act for an individual to file a consumer proposal.
What are the Advantages of a Consumer Proposal?
There are many advantages to a consumer proposal. For many consumers the biggest advantage of a consumer proposal is they can avoid bankruptcy, get debt relief and keep all of their assets.
There are other advantages to a consumer proposal as well:
All Collection Activity Against You Stops: When your consumer proposal is accepted, all collection activity on your unsecured debt, money owed to the government and student loan debt will stop. This occurs through a legal protection known as a “stay of proceedings.”
Your secured debt cannot be included in a consumer proposal, so your secured creditors can still contact you if you default on your secured debt.
Lawsuits Against You Will Stop or Be Stayed: If the debt was included in the proposal, all lawsuits relating to the unsecured debt will stop.
The stay of proceedings, which goes into place immediately after your consumer proposal is accepted, prevents your unsecured creditors from suing you. Lawsuits from secured creditors won’t be stopped or stayed.
Wage Garnishments Are Stopped: Any garnishments against your wages, whether already in place or being considered, will be stopped by filing a consumer proposal.
Garnishments against your wages for child support or alimony won’t be stopped, as these debts are not eligible to be included in a proposal.
Eliminate All Eligible Unsecured Debt For 30 to 50 cents on the Dollar: A main advantage of a consumer proposal is you will make a legal agreement with your creditors to repay approximately 30 to 50% of your debt.
In some cases you might repay even less, or you might pay more. Some creditors have a certain percentage of debt repayment to accept a proposal. Your creditors would prefer to recover 30% of what is owed to them than nothing or a very little amount of repayment if you were to go bankrupt.
No Interest is Charged During Your Consumer Proposal: During the time you are making payments to your Trustee for your consumer proposal (usually 3 to 5 years) there will be no interest charges to pay on your debt included in the proposal.
The amount you agree to pay each month is your only payment – even your Trustee’s fees are included in the amount you to pay to your creditors in the consumer proposal.
Make a Lump Sum Debt Repayment Agreement: If you have sufficient funds to make an attractive proposal (about 30% of your debt) to your creditors, you have the option of making a 1 time lump sum payment to “pay out” your consumer proposal.
The benefit of paying out your proposal with a lump sum payment means you can access your credit as soon as your consumer proposal has been paid out, and will be able to rebuild your credit score sooner.
A Consumer Proposal Has Low Risk: Because a consumer proposal is flexible and allows a consumer debtor to repay only a portion of their debt, their is very little risk involved with a consumer proposal for the debtor.
You can even miss two payments (you will have to make them up later) without consequence. Never miss a third payment though as this will result in the proposal being automatically cancelled. Not even your Trustee can reinstate a proposal in this case, and all funds you already paid to the proposal will be lost, and your full debt amount will be reinstated (along with any interest charges that would have been charged while you were making your proposal.)
Your Trustee will have a good knowledge of making an acceptable consumer proposal so you can feel comfortable about seeing a Trustee about making a consumer proposal to your creditors.
What are the Disadvantages of a Consumer Proposal?
There are many benefits of a proposal, although there are certain drawbacks as well. The biggest disadvantage of a proposal is that your creditors have the right to vote to reject your proposal. Although this is rare, it can occur and you need to be aware of this.
Often, your creditors won’t vote to outright reject your proposal, but will vote to accept a modified proposal.
For example, you might offer to repay 30% of your debt, and your creditors might vote to reject the proposal unless you offer to repay 40% of your debt. In certain cases, repaying 40% of your debt might not be reasonable depending on your circumstances.
Another drawback of a consumer proposal is you must have a steady income in order to afford to make the payments in your consumer proposal.
If you have a large amount of debt your consumer proposal payment might be quite high. Although your proposal payment would be less than your current debt repayments, your situation might make a viable proposal unaffordable, and you might have to consider personal bankruptcy.
All Debts Must be Included in a Consumer Proposal: While this is often a major advantage of a consumer proposal, in certain cases it can be a disadvantage.
For example, if you have a loan from an employer, you will have to include this debt and your employer will be notified of your proposal.
They might even vote to reject your proposal! You might have a loan from a family member or friend and you will have to tell them about your proposal, and you must repay them only a percentage of what is owed.
During Your Consumer Proposal You Have No Access to Credit: If you are considering a proposal, you are likely finding it hard to get new credit. When you make a consumer proposal you won’t be able to get any credit during the time you are in the proposal.
You are unable to keep any of your credit cards with a balance during your consumer proposal.
There is no Guarantee You Will Get Out of Debt: Although you will be able to settle your outstanding debt at a reduced amount, you still have to make a monthly payment to your Trustee.
If you do not get your spending habits under control, you could find yourself in debt issues all over again. If you miss three consecutive monthly payments then your proposal will be cancelled and your full debt will be reinstated.
If you are not careful, you could actually find yourself in a worse debt situation.
What are the Advantages of Settling My Debt?
Settling your debt is a very informal and flexible process that allows you to resolve 1 or more of your unsecured debts. There is no debt limit, or formal rules as like with a consumer proposal.
A debt settlement allows you to cherry pick which debts you would like to repay. In certain cases, such as if you have a loan from your employer, you might not want to include all of your debts when trying to resolve your debt problem.
You might only want to resolve your credit card debt, for example, and settling your debt on your own with your creditors makes this possible.
Settling your debts is an ideal solution for people with very low income and/or are in dire financial difficulty.
If you are unable to afford the payments necessary for a consumer proposal to cover a fair amount of your indebtedness, settling your own debts or filing personal bankruptcy might be your only chance for getting out of debt.
If you can prove your financial hardships, then you have a greater chance of your creditors agreeing to settle your debt for a reduced amount.
You might be able to settle your debts on your own for less than a consumer proposal. When you make a debt settlement to your creditors there is no rule about the amount you must repay your creditors.
If enough time has passed and the statute of limitations on debt repayment periods is drawing near, your creditors will likely accept a debt settlement offer for a very low amount – perhaps as little as 10% or 20% of the debt you owe.
Settling your debts on your own is flexible, so if your financial situation changes at a future date, or you are sued by a creditor, you are not “locked in” to any agreement and you have the chance to try another option for resolving your debt such as filing a consumer proposal or entering into personal bankruptcy.
When you settle your debts on your own then you are still able to maintain your existing credit. You likely won’t be able to receive new credit but if you would like to settle certain credit card debt, but leave another card intact, for example, you can maintain the credit on the 1 credit card.
What are the Disadvantages of Settling My Own Debt?
In addition to the benefits of settling your debt, there are also some disadvantages to trying to settle your own debt with your creditors.
When you settle your debts on your own then you must not pay on the debts you are intending to settle for at least 6 months. This means that during this time, you will likely receive payment demands and threats for collection action.
You must wait at least 6 months to settle your debt, as your creditors will refuse to discuss any settlement until this timeframe has passed. You must stop making payments on the debt you are attempting to settle.
During the six period you must wait to settle your debt, interest charges will continue to accrue on the debts. However, certain creditors will cease the interest charges if you have not paid on your debt for 6 months.
You will receive collection calls / letters. While you are not making payments for 6 months on your debt you intend to settle, your creditors will contact you demanding payment. You will likely receive letters in the mail as well as calls at home and possibly at work.
Your creditor might sue you. If you owe money to your creditors then they have the right to sue you. The fact you have been sued does not prevent you from reaching a potential settlement with your creditor that sued you however.
You might not be able to negotiate a favourable settlement. Your creditors are under no obligation to attempt to negotiate a debt relief settlement with you.
The longer your debt remains unpaid means your creditors are more likely to negotiate a favourable settlement.
There are certain other situations where a creditor might accept a generous settlement:
- If you can demonstrate a financial hardship;
- If the statue of limitation on debt collection in your province has expired or is close to expiring;
- If your creditor, or a collection agent acting on their behalf, has acted in an illegal or unprofessional manner then the creditor might leverage that fact into a more generous settlement.
To learn more about filing a consumer proposal you can contact a licensed insolvency trustee for a risk free evaluation meeting.