Financial distress is a situation we all dread, but sometimes it’s an inevitable reality. When straddled with debt, finding a solution can seem like searching for a needle in a haystack. However, for many Canadians, a consumer proposal can be the light at the end of the tunnel. Yet, what happens when they fail to meet their proposal payments? This article will delve into the mechanics of a consumer proposal, what occurs if it gets annulled, and the potential steps to recover from such a situation.
Understanding the Concept of a Consumer Proposal
To appreciate the gravity of a consumer proposal annulment, it’s essential first to understand what a consumer proposal entails. A consumer proposal is a legally binding agreement brokered between you and your unsecured creditors under the supervision of a Licensed Insolvency Trustee (LIT).
This agreement allows you to repay a fraction of your overall debt, interest-free, over a predetermined duration that must not exceed five years. Payment methods are generally flexible, with options such as fixed monthly or biweekly installments, variable payments, and lump-sum payments from the sale of assets.
The Implications of Defaulting on Payments
Despite the flexibility offered, slipping into financial hardship can be unexpectedly easy, especially in today’s volatile economy. Losing a job, taking a pay cut, or encountering unforeseen expenses can suddenly render your consumer proposal payments unaffordable. In such instances, it is essential to consult your LIT to explore possible alternatives.
Altering Your Consumer Proposal
One of the merits of consumer proposals is their flexibility. If your originally agreed-upon payment terms have become untenable, you have the option to file an amended consumer proposal. While there is no additional cost to amend a consumer proposal, it carries some risk. Your creditors have the right to reject the proposed amendment, which can lead to the termination of your consumer proposal. However, it is in the creditors’ best interest for the consumer proposal to succeed, so it’s likely they will accommodate the amendment.
Payment Deferral
If you’re unable to make one of your consumer proposal payments due to unforeseen circumstances, the law allows you to miss and defer two payments without any repercussions. This offers you some breathing room to regain your financial footing.
The Annulment of a Consumer Proposal
Should you default on three months’ worth of payments, your consumer proposal will be automatically annulled. Annulment signifies the cancellation of your consumer proposal either due to payment defaults or by court order. This means you lose protection from creditor collection actions, and your obligation to repay your debts is reinstated, complete with any interest or penalties that would have accrued if you hadn’t filed the consumer proposal.
What Happens After Annulment?
Annulment doesn’t mean automatic bankruptcy. After a consumer proposal’s annulment, there’s a 30-day window during which the proposal can be revived with your creditors’ agreement or through a court order. Creditors tend to be understanding during these situations as they’re interested in receiving payment and helping you avoid bankruptcy.
Filing a Second Consumer Proposal
In some cases, reviving a consumer proposal may not be viable, and a second proposal must be filed. This requires obtaining a court order permitting the filing of a second consumer proposal. Your LIT will guide you through the necessary steps.
Converting a Consumer Proposal to Bankruptcy
If all other options fail, filing for bankruptcy may be the best solution to regain protection from your creditors and settle your debts. However, you should consult with your LIT to ensure that bankruptcy is the most suitable option.
How to Prevent Defaulting on Your Consumer Proposal
Creating a Budget and Reducing Costs
It’s crucial to scrutinize your finances and establish a strict budget to avoid defaulting on your consumer proposal payments. This involves cutting back on non-essential spending like eating out, impulsive shopping, and expensive gifts. You should continuously budget throughout your consumer proposal to ensure you stay on track with payments.
Making Extra Payments When Possible
Consumer proposal payments are usually flexible, allowing for lump-sum payments to fast-track the payoff process. If you receive an unexpected cash influx, consider making a one-time lump-sum payment in addition to your monthly installments. This could be an inheritance, work bonus, tax refund, gift, or even a lottery win.
Structuring Payments Based on Pay Frequency
Ensure your payment terms align with your pay schedule. Whether you’re paid weekly, bi-weekly, or monthly, or you’re a freelancer or contract worker with an inconsistent pay schedule, your LIT can help structure your payments accordingly.
Conclusion
Life is unpredictable, and financial difficulties can arise unexpectedly. The crucial thing to remember is that if your financial situation changes during your consumer proposal, you have options. By consulting with your Licensed Insolvency Trustee, you can chart the best course of action to get back on track.
