If a Consumer Proposal is Better Than Bankruptcy, Why Would a Creditor Ever Say No?
Changes to the law in 2009 made it more expensive to file for bankruptcy and improved the process of filing a consumer proposal.
The government aimed to encourage more people to file consumer proposals rather than filing for bankruptcy, and they were successful.
Since then, the number of people opting for a consumer proposal over bankruptcy has increased a lot.
However, many people still find that their consumer proposals are denied by their creditors and they are unsure why.
So, if a consumer proposal is better than bankruptcy, why would a creditor ever say no?
Unfortunately, lenders do not have the same attitude towards consumer proposals that the government does, and even though legislation changes increased the number of people filing consumer proposals, that doesn’t necessarily mean that your creditor will approve the proposal.
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Creditors expect a certain number of customers to default on their debts and they consider this one of the unavoidable risks of lending money.
Interest rates on loans are calculated to absorb this loss, which means that lenders are not as concerned with recouping their investment as you might think.
In fact, creditors want to get rid of those customers as quickly as possible so they can avoid the administrative costs involved with managing and chasing a debt.
Bankruptcy is usually the quickest way for them to do that, so they tend to prefer that option over a consumer proposal.
If they accept your consumer proposal, they are then tied into a payment plan for years to come, which means that they have to keep that account active and manage the debt for a lot longer.
This doesn’t mean that lenders will always refuse a consumer proposal, but if it is going to make financial sense for them, they need to recoup a significant portion of the debt.
So, even though a consumer proposal is better than bankruptcy for you, it can be difficult to convince lenders to agree.
If you are going to get them to agree to a consumer proposal, you need to meet some basic requirements.
Firstly, you need to offer them more than they would recover if you filed for bankruptcy, which is relatively simple.
You also need to make an offer that is large enough to make it worthwhile for them so they can justify keeping your account open, which is a little more difficult.
Say, for example, you owed $30,000 to your creditors.
If you filed for bankruptcy, you would pay around $1500 (the average cost of filing bankruptcy in Canada) depending on your circumstances.
However, you may decide to file a consumer proposal and offer to repay $6000, which seems like a much better deal for the creditor.
They’re getting a lot more money back, so why would they say no?
But when you consider all of the administrative costs involved with the consumer proposal, they will actually only recover around $3000.
That means that they are only recovering 10% of the debt and they will have to wait up to five years depending on the payment plan that you are offering them, so it’s not worth their while keeping the account open.
In this case, they would rather you filed for bankruptcy so they can get $1500 right away and close the account.
When you file your consumer proposal, you need over 50% of your creditors to agree for it to go through, which means that you need to make an offer that is high enough for your creditors.
So, how do you know what kind of offer will be acceptable and what can you do to improve your chances of getting accepted?
Creditors are more likely to accept a consumer proposal if you have already tried other debt relief options.
Before you consider filing a consumer proposal, you should look into your options for debt consolidation and credit counselling.
These other debt relief options help you to pay back the full amount, so creditors are unlikely to accept a consumer proposal if they are still an option.
The amount of money that you offer to pay back is obviously important as well.
You need to consider your finances and see what you can realistically afford to pay back.
The higher the offer, the more likely you are to be accepted.
Choosing the right trustee to help you file a consumer proposal is essential as well.
If you go with an inexperienced trustee that doesn’t file that many consumer proposals, they will not have a good sense of how creditors will vote and what kind of offers they find acceptable.
However, an experienced trustee will know what the lender’s criteria for accepting a proposal is, so the lender will be far less likely to reject your offer.
A creditor will not accept your consumer proposal if it is not filed properly either.
It is a binding legal agreement and everything needs to be filed in a specific way.
If you try to approach creditors on your own or you go with an inexperienced trustee, you are more likely to have issues with the way that the proposal is filed and your creditors will reject you.
If you have a lot of debts, you may assume that a consumer proposal is always your best option, but it’s important to remember that creditors often prefer bankruptcy and they will only accept a consumer proposal if it is worthwhile for them, which means filing it properly and making an offer that is large enough.
We can help you to file your consumer proposal and increase your chances of success because we understand the criteria that creditors will consider when deciding whether to accept a consumer proposal or not.
We will take you through the whole process and make your obligations clear to you throughout, and if you want to explore other debt relief options before you file a consumer proposal, we can give you all of the advice that you need.
If you are concerned about your debts, get in touch today and we will help you to find financial freedom again.
You can reach us on the phone or fill out an evaluation form and we will get back to you.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal