How a Consumer Proposal Works: Understanding Consumer Proposals
A Consumer Proposal is a legal mechanism that offers consumers a path to address their unsecured debt without resorting to bankruptcy. This legal procedure is facilitated exclusively by a Licensed Insolvency Trustee (LIT), who helps you formulate an offer for your creditors to either modify your payments or repay only a percentage of what you owe.
It’s important to note that, in a Consumer Proposal, creditors often agree to an offer that allows them to recover a percentage of the debt owed. This is because it usually guarantees a higher return than they would receive if the debtor were to declare bankruptcy.
The Mechanics of a Consumer Proposal
How does a Consumer Proposal work? It’s a question many concerned debtors ask. To ensure your Consumer Proposal is successful, your LIT will assist you in determining an amount you can afford to repay. This is based on your financial circumstances and how much your creditors might be willing to accept.
Once the proposal has been crafted, your creditors will vote on whether to accept it. In most cases, the amount you’re expected to pay is made in monthly payments to your LIT over an agreed-upon period, typically not exceeding five years. However, options for lump-sum payments or a combination of lump-sum and monthly payments are also possible.
Filing a Consumer Proposal
The process of filing a Consumer Proposal is not a solo endeavor. You must work with an LIT and it’s advisable to schedule a free, non-obligatory consultation to ascertain if a Consumer Proposal is the right debt resolution for you.
Here is a brief breakdown of the Consumer Proposal filing process.
- Consultation with a Licensed Insolvency Trustee: The journey begins with a consultation with a Licensed Insolvency Trustee, a professional licensed by the Office of the Superintendent of Bankruptcy Canada. They will discuss the potential benefits of filing a Consumer Proposal, such as keeping your possessions and binding all creditors to the agreement.
- Provide a Complete List of Assets and Debts: You will need to furnish a comprehensive list of your assets and liabilities. Using this information, your trustee will craft a proposal based on your capacity to repay the debt. The proposal is then filed with the Office of the Superintendent of Bankruptcy Canada.
- Submission of the Proposal to Creditors: Once the necessary documents are filed, the trustee submits the proposal to your creditors. The creditors have 45 days to accept or reject the offer.
- Negotiation of Amendments if Necessary: If creditors seem unsatisfied with the proposal, the trustee may negotiate amendments, such as higher payments to creditors. If the proposal is rejected, you’ll need to explore other options to solve your financial problems, which could include declaring bankruptcy.
- Periodic Payments to the Trustee: If the proposal is accepted, you will then be responsible for making periodic payments to the trustee, who will distribute the money to your creditors.
- Adherence to the Conditions: You will also be required to adhere to any other conditions stipulated in the proposal. This includes attending two counseling sessions to help you regain your financial footing.
- Legal Release from the Debts: If you meet all the conditions, you will be legally released from the debts included in the proposal. It’s important to note that your credit rating will be affected, but once the terms of the proposal are met, you can begin rebuilding your credit and financial future.
Deciding the Payment Amount
The amount you’ll pay under a Consumer Proposal is not arbitrarily determined. It starts with you filing a proposal to your creditors, who then vote to accept or reject your offer. They are incentivized to participate in the process if they stand to receive more via a Consumer Proposal than if you filed for bankruptcy.
Creditors have 45 days to review your proposal and have the right to accept or reject the offer. If creditors are not satisfied, you can modify the proposal and submit it again. However, if your proposal is ultimately rejected, you must explore other debt relief options, which might include declaring bankruptcy.
Types of Debts Included in a Consumer Proposal
A Consumer Proposal chiefly addresses unsecured debts. Unlike a mortgage or a car loan, which are secured by a house or a car respectively, unsecured debts can be included in a Consumer Proposal. These include:
- Credit cards;
- Lines of credit;
- Personal loans;
- Payday loans;
- Income taxes;
- Highway / Bridge tolls;
- Insurance Corporation of British Columbia (ICBC) debts;
- Student loans (as long as you’ve been out of school for more than 7 years).
In most instances, you will continue to make payments to secured creditors as per your usual arrangements. However, in your Consumer Proposal, you may opt to surrender and return your secured assets, such as a vehicle or house, to the lender and cease making payments for these assets. In these circumstances, the sale of assets held by the secured creditor will be included in your Consumer Proposal, absolving you from any further payments to the secured creditors.
Asset Protection Under a Consumer Proposal
When you file a Consumer Proposal, all your assets are shielded from your unsecured creditors. If you own a home or a car, you will need to continue making payments on your mortgage or car loan in order to keep them, as these debts are not settled in a Consumer Proposal.
Consumer Proposals usually offer unsecured creditors settlement of debts by way of monthly payments, not by surrendering assets. This means that individuals typically retain all their assets when they file a Consumer Proposal.
Impact on Debt Collection and Joint Debts
By law, collection actions against you must stop once your Consumer Proposal has been filed. A Consumer Proposal enforces a Stay of Proceedings, which means that by law your creditors can no longer contact you for payment. All collection action against you must cease once official Consumer Proposal documents are filed.
If you have joint debts, it may be advisable to file a joint Consumer Proposal, as the non-filing partner will still be liable for the joint debts. If your spouse is not jointly responsible for your debts, then your spouse is not affected by you filing a Consumer Proposal.
Getting Credit Under a Consumer Proposal
Most lenders will not extend credit if your Consumer Proposal is still active. However, you may be able to obtain a prepaid or secured credit card. When you file your Consumer Proposal, you must surrender your credit cards to your trustee for cancellation.
After your Consumer Proposal ends, lenders can decide whether or not to extend credit to you. You can send your “certificate of full performance”, which you receive after your proposal is completed, to credit reporting agencies to update your credit report.
Dealing with CRA Debts
A Consumer Proposal is a negotiated settlement between you and your unsecured creditors, which includes the Canada Revenue Agency (CRA). If you’re unable to negotiate a payment plan with the CRA, another option to consider is a Consumer Proposal.
Tax debts, including income tax, GST/HST, and payroll remittances, are included in a Consumer Proposal and the CRA is bound by the terms of an accepted Consumer Proposal. Filing a Consumer Proposal will also halt further interest accumulation and stop bank account freezes and wage seizures that CRA may have in place.
Multiple Consumer Proposals and Exiting a Consumer Proposal
You must be discharged from a Consumer Proposal before you can file another one. You can add amendments to an active Consumer Proposal. If your Consumer Proposal is annulled because you cannot make regular payments, for example, you cannot submit a new proposal seeking relief on the same debts without court approval.
To exit a Consumer Proposal, you are responsible for making payments to your trustee for the lump-sum or monthly payments detailed in your agreement. Additionally, you must attend two financial counseling sessions.
If your situation changes and you can’t afford your Consumer Proposal payments, it may be possible for your trustee to amend the Consumer Proposal. However, your Consumer Proposal could be annulled if you fall behind on your payments. If your Consumer Proposal is annulled, your debts are reinstated, and you lose your creditor protection.
In rare cases, someone who has filed a Consumer Proposal abandons the Consumer Proposal altogether due to a change in circumstances. While a Consumer Proposal is an alternative to personal bankruptcy, it does not exclude the option to file for bankruptcy if the circumstances warrant it.