Consumer proposals are an effective tool for debt management, offering individuals a way to regain control of their financial situation. However, one of the most common concerns for those considering this option is the cost of a consumer proposal. This article aims to provide a comprehensive overview of the expenses associated with filing a consumer proposal, helping you make an informed decision.
Understanding Consumer Proposals
A consumer proposal is a legal agreement negotiated between you and your creditors, facilitated by a Licensed Insolvency Trustee (LIT). This agreement allows you to pay back a portion of your debts over a specified period, usually up to five years.
The cost of a consumer proposal mainly depends on your financial situation, including your income, the value of your assets, and the amount of debt you owe. It’s important to note that the total cost would be significantly less than the total debt you currently owe.
Factors Affecting The Cost of a Consumer Proposal
The cost of a consumer proposal depends on several factors, including:
- Your monthly income and surplus income.
- The value of assets you would lose in a bankruptcy.
- The nature of your creditors and their expected recovery rate.
Remember, every situation is unique. Therefore, the cost of a consumer proposal can vary widely from one individual to another.
The Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT), formerly known as a bankruptcy trustee, plays a crucial role in filing a consumer proposal. They help assess your financial situation, recommend how much to offer your creditors, and negotiate the proposal terms.
Importantly, the trustee’s fees are included in your consumer proposal payments. You don’t have to pay any additional charges or upfront costs to the trustee.
The Negotiation Process
Consumer proposal payments and terms are negotiated between you and your creditors with the LIT acting as an administrator. The negotiation process is designed to ensure that both parties, the debtor and the creditor, benefit from the agreement.
For creditors to accept a proposal, they generally expect to receive more than what they would recover if you filed for bankruptcy. On the other hand, the payments should be affordable for you, considering your financial situation.
Payment Plan: Breaking Down the Costs
The consumer proposal payment plan is designed based on your financial situation. You can choose to make fixed monthly payments, spread your settlement offer over three to five years, or make lump sum payments.
As an example, if you owe $40,000 in unsecured debt, you may negotiate a settlement as low as $14,000. If you choose to repay this amount over 60 months, your monthly proposal payment would be around $233.
Changes in Financial Situation During a Consumer Proposal
If your financial situation changes during the proposal period, you have options to adjust your payment plan. For instance, you can arrange for smaller payments in the beginning and larger payments towards the end if you anticipate an increase in income.
Conversely, if your financial situation worsens, you may defer up to two payments during a consumer proposal. However, missing three payments can lead to the failure of the proposal.
Non-Financial Effects of Filing a Consumer Proposal
While a consumer proposal can significantly reduce your debt, it can also have other impacts. For instance, it might temporarily affect your credit score, and you will have to surrender your credit cards.
However, it’s worth noting that you can start rebuilding your credit rating soon after filing the proposal. Regular payments can gradually improve your credit score, even while you’re in the proposal.
The Administrator’s (Trustee) Fee
The fees of a Licensed Insolvency Trustee are regulated by federal law and are included in your consumer proposal payments. These fees cover the cost of filing the proposal, mandatory financial counselling sessions, and the administration of the proposal.
The fees paid to a trustee include:
- A filing fee paid to the Office of the Superintendent of Bankruptcy.
- Counseling fees for each of the two mandatory sessions.
- Administrator (trustee) fees, which include a flat fee and a percentage of creditor distributions.
The Cost of a Consumer Proposal: A Case Study
Let’s consider a scenario where you owe $35,000 in consolidated debts. You offer your creditors a total of $10,800, which you agree to pay over 36 months. This translates to $300 per month. In this case, you would be paying less than a third of your total debt, with all the associated fees included in this amount.
Conclusion
In conclusion, the cost of a consumer proposal is a small portion of your total debt, which is spread over a period of up to five years. The process is facilitated by a Licensed Insolvency Trustee, who negotiates the terms with your creditors. The trustee’s fees, along with other associated costs, are included in your consumer proposal payments. While there are some non-financial effects to consider, a consumer proposal can provide an affordable and manageable path to becoming debt-free.
