RBC Votes No to Consumer Proposals: What Happens Next?
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Consumer proposals are one of the options for Canadians facing crippling debt to avoid bankruptcy or insolvency declarations.
Rise in insolvency
The number of insolvency filings are increasing in Canada fueled by large debt burden and higher interest rates.
As per Canada’s Office of the Superintendent of Bankruptcy, 32,239 insolvencies and consumer proposals were filed in 2019’s first quarter.
This represents a record eight-year high while the numbers translate to a 6.1 percent increase from 2018.
A 2019 poll also showed that 46 percent of Canadians are just $200 away from insolvency, while 31 percent state they do not earn enough to make debt payments and to pay bills.
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What are consumer proposals?
Brenda and Fred owe $40,000 on payday loans, income taxes and credit cards.
Although they have full-time jobs, what they earn is not adequate to ensure minimum payments for these debts.
While they own the home they live in, since it has a huge mortgage, they are not able to go in for a refinance option.
The couple also wish to avoid filing bankruptcy as they are not comfortable with the concept and are concerned doing so might result in their losing their property.
The minimum amount of payment Brenda and Fred can afford is $250 per month.
They initiate a proposal for a monthly payment of $250 for five years, and in exchange the creditor will write off the balance.
If the proposal is accepted by creditors, the couple need to deal with just a single monthly payment towards all unsecured debts.
As they can afford to pay the mortgage, they will also be able to keep their home.
For creditors, accepting this proposal makes sense because they would be able to get back $15,000 out of $40,000 total debt.
If Brenda and Fred were to file bankruptcy, the creditors would get much less.
In simple terms, a consumer proposal is an agreement made between you and creditors (or those to whom you owe money).
It is a legally binding, formal process.
To file a consumer proposal, you would first have to see a Licensed Insolvency Trustee or LIT who is a qualified, legal professional.
The Licensed Insolvency Trustee is experienced in handling all levels of debt including extreme cases.
Your trustee works closely with you to draw up a legally-binding consumer proposal which you can submit to your creditors.
The LIT develops the consumer proposal which is an offer you make to pay your creditors a certain percentage of the total debt you owe.
The proposal can also include an offer to extend the duration for paying your debts.
The consumer proposal can also include both offers, however, the maximum term of five years cannot be exceeded.
Once the proposal is accepted by the creditor, you can make the payment through your LIT who pays all the creditors with that money.
What types of debts can be cleared with consumer proposals?
Consumer proposals enable you to clear wide range of unsecured debts such as:
It is important to note that the consumer proposal will not have any impact on your mortgage linked to your car loan or principal residence.
Who is eligible to submit a consumer proposal?
Consumer proposals are regulated federally in Canada and have specific requirements that debtors need to meet to be eligible for filing consumer proposals.
These requirements include:
- You need to be able to afford partial payment of total debt you owe your debts have to be more than the total value of all assets owned by you. In other words, you should be insolvent, you cannot maintain your debt payments in due time;
- Your debt is not more than $250,000 excluding mortgage;
- You should own a property in Canada or must be a Canadian resident. Citizenship, however, is not required for consumer proposals. Debtors can either be permanent residents or have a work permit that enables them to reside in Canada.
Benefits of consumer proposals
Collection efforts will stop: Once your consumer proposal is accepted by your creditors, you can start to make monthly payments. This will ensure immediate cessation of collection calls and other collection efforts.
Peace of mind: Your payments are channeled through your LLT to your creditors. Knowing that you have only a fixed amount of payments that you need to make every month gives you peace of mind and certainty. You can also avoid penalties and growing interest rates by starting your monthly payments.
Consolidate your debts: As the popular and top alternative to managing debts, the consumer proposal provides many benefits as compared to bankruptcy or other debt clearance options. While the proposals enable you to reduce debts by as much as 70 percent, you can consolidate all your debts under one monthly, affordable payment.
Royal Bank has a high rate of rejection
Royal Bank, according to an estimate, rejects 6 percent of consumer proposals and requires debtors to pay more as compared to other creditors in the proposal.
In one instance, the Royal Bank rejected a debtor’s proposal to pay $200 monthly for 35 months which would bring up the total payments to $7000 while the debtor owed slightly less than $13000.
The Royal Bank made a counter-offer after rejecting this proposal and asked for a monthly payment of $200 for 60 months which would amount to $12,000 that is almost the total amount owed to them.
In such an event the debtor can either agree to the Royal Bank’s terms which will result in having a note on the credit score report for eight years or choose to file bankruptcy.
The latter option will enable the debtor to make a monthly payment of $200 for 9 months while the credit report note stays on record for seven years.
For many people who do not have friends or family to help or a lump sum to make a debt settlement, bankruptcy may be the logical option.
However, when it comes to making an informed decision as to which debt payment option is right for you and to avoid creditor’s rejection of your consumer proposal, it is important to consult an experienced legal professional.
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