Understanding the Consumer Proposal in Ontario
The route to financial freedom is often fraught with hurdles, particularly for those grappling with insurmountable debt. One effective strategy, widely recognized and utilized in Ontario, is the consumer proposal. But what exactly is a consumer proposal, and how does it work? Let’s delve into the specifics.
The Essence of a Consumer Proposal
A consumer proposal is a legal agreement between the debtor and their creditors, regulated by the Office of the Superintendent of Bankruptcy in Ontario. This debt relief strategy enables an individual to negotiate a reduced amount of their total unsecured debt, repaid within a maximum term of five years.
The main incentive for creditors to consider such a settlement is the prospect of receiving a consistent repayment, albeit smaller, rather than enduring an indefinite wait for a payment that may never materialize if the debtor files for bankruptcy.
The Role of a Licensed Insolvency Trustee
In Ontario, a consumer proposal can only be administered by a Licensed Insolvency Trustee (LIT), a professional authorized to negotiate with creditors on behalf of the debtor. The LIT’s role extends beyond the negotiation phase, as they also mediate the entire process, ensuring adherence to the rules set out by the Bankruptcy and Insolvency Act of Canada.
Eligibility for a Consumer Proposal
To qualify for a consumer proposal in Ontario, an individual must meet certain requirements:
- The debtor must be insolvent, meaning their debts exceed the value of their assets, or they are incapable of keeping up with regular debt payments.
- The unsecured debt should be greater than $1,000 but less than $250,000, excluding the mortgage.
- The debtor must be a Canadian resident or possess property in Canada.
Debts Covered by a Consumer Proposal
A consumer proposal primarily deals with unsecured debts, which include credit card debts, lines of credit, personal loans, and income tax obligations. However, it does not cover secured debts such as mortgage and car loans.
Implications on Credit Rating
While a consumer proposal provides instant debt relief and a viable path to becoming debt-free, it does temporarily impact the debtor’s credit rating. After the LIT files the consumer proposal, it results in an R7 rating on the credit report, which is the second-lowest rating used by credit reporting agencies like TransUnion and Equifax.
Comparing Consumer Proposal with Other Debt Relief Solutions
To illustrate the effectiveness of a consumer proposal, let’s consider an example. If an individual named Jane carries a credit card debt of $25,000, she can file a consumer proposal whereby an LIT negotiates with her creditors to repay only 60% of her debt or $15,000 over five years.
Now, let’s compare Jane’s consumer proposal with other debt relief solutions:
| Debt Solution | Monthly Payment | Terms |
|---|---|---|
| Jane’s Consumer Proposal | $250 | Pay back 60% of original amount owed |
| Credit Counselling | $458.88 | Pay debt in full with no interest, plus a “fair share fee” equal to 10% of the debt |
| Debt Consolidation Loan | $734.67 | Pay debt in full at 12% interest, compounded annually |
| Do-it-yourself Budgeting | $994.34 | Pay debt in full at 19% interest, compounded annually |
As evident from the comparison, a consumer proposal is the most cost-efficient method, placing the debtor on a steady path towards becoming debt-free.
Consumer Proposal vs. Bankruptcy
While both consumer proposal and bankruptcy can offer a fresh financial start, there are some key differences:
- A consumer proposal allows you to retain all your assets, while filing for bankruptcy may lead to the sale of certain assets to repay part of the debt to creditors.
- A consumer proposal requires a fixed monthly payment to the LIT, whereas in bankruptcy, the monthly payment can vary based on surplus income.
Consumer Proposal vs. Debt Management Plan
A debt management plan, administered by a non-profit credit counselling agency, is another debt control strategy. However, unlike a consumer proposal, this plan requires you to repay all your original creditors in full, and not all creditors may agree to participate.
Real-life Example of a Consumer Proposal
A consumer proposal can bring tremendous relief to individuals struggling with debt. For instance, new parents with a debt of $95,000 due to a shortage of work and maternity leave managed to reduce their debt to $43,700, a reduction of 46%, through a consumer proposal.
Conclusion
A consumer proposal is a powerful tool for individuals in Ontario seeking a pragmatic solution to their debt problems. While it does have implications on credit rating, its ability to consolidate unmanageable debts into a single, manageable monthly payment makes it a popular alternative to bankruptcy.
However, the decision to file a consumer proposal should be made after careful consultation with a Licensed Insolvency Trustee, who can guide you through the process and ensure that it aligns with your financial goals.
