What is a Consumer Proposal?
Learn More From a Government Licensed Insolvency Trustee
Any individual in Canada who has debts that do not exceed $250,000 (not including mortgage debt on your principal residence) may consider filing a consumer proposal as a way of dealing with their debts and making a settlement with their creditors.
As a bankruptcy alternative, a consumer proposal can be very effective because there are many benefits over filing for bankruptcy.
One of the main benefits of a consumer proposal vs. bankruptcy is that you get to retain all of your assets that you own; if you have significant assets you would lose in bankruptcy, a consumer proposal can allow you to keep everything you own and find a solution to your credit problems.
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What is a Consumer Proposal?
A consumer proposal is a legally binding process administered in a formal manner by a Licensed Insolvency Trustee (LIT).
When a LIT administers a consumer proposal they are known as a consumer proposal administrator.
In this legal process under the Bankruptcy and Insolvency Act your LIT will help you develop a proposal to offer your creditors to pay a percentage of the debt you owe to them over a period of time lasting for not more than 5 years.
When you enter into a consumer proposal with your creditors you will make payments to your consumer proposal administrator, and in turn, your administrator will make payments to all of your unsecured creditors.
When Should I File a Consumer Proposal to My Creditors?
Our Government Licensed Insolvency Trustees offer you an initial consultation meeting to help you discover if a consumer proposal, or another option, is the best choice for getting out of your money problems.
Our LIT will analyze your money problems and the causes to your problems and explain the pros and cons of each of the solutions that could help with your money problems.
The proposal administrator will help you develop a consumer proposal plan that will be accepted by your creditors and affordable for you to follow; a consumer proposal will be fair for all parties involved.
What are my Responsibilities in a Consumer Proposal?
When you submit a consumer proposal to your creditors you will have certain responsibilities you must:
* Make all the required payments as listed in the terms of your consumer proposal.
If you miss three payments as required your consumer proposal will be cancelled and your creditors will be able to come after you and attempt to collect on your debts.
If your consumer proposal is cancelled you won’t be able to file another proposal;
* Submit a list of your assets and liabilities (debts) that you have;
* Attend two counselling sessions at the LIT’s office;
* Advise your Licensed Insolvency Trustee of any address change;
* Provide the trustee with any information she or he asks for and assist in any way requested to administer the proposal.
* You might be required to attend a meeting of creditors if your creditors request such a meeting.
How Does a Consumer Proposal Work?
Your consumer proposal administrator will submit the proposal plan to all of your creditors and once the proposal is submitted your creditors will have 45 days to vote to either accept or not accept the proposal plan.
They can also vote to accept the proposal if you accept certain conditions they request, such as additional payments each month or payments for a longer term.
If the creditors request, a meeting of creditors will be held, although they can also mail their vote to your trustee / proposal administrator.
The creditors meeting will be held if one or more of your creditors holding at least 25% of the total proven claims of debt against you request a meeting of creditors to be held within 45 days of the proposal being submitted.
Your LIT will also call a meeting of creditors within the 45 day period if so directed by the Office of the Superintendent of Bankruptcy.
During this meeting, which will be held within 21 days of being requested, your creditors will vote to accept or reject the proposal.
If no meeting of creditors is requested, or your creditors do not supply a vote within the same 45 day time frame then the proposal be automatically be deemed accepted by the creditors.
Even if certain creditors object or vote to reject the proposal if more than 50% (a simple majority of the dollars votes, ie 50% +1) of the creditors vote to accept the consumer proposal it will be deemed accepted and any creditor who objects to the proposal will be bound to the terms of the proposal.
Each dollar you owe will count as a vote.
Example of a Creditors Vote on the Proposal
For example, if you owe $20,000 to credit card 1 at creditor #1, $30,000 to credit card 2 at creditor #2, and $80,000 on a personal loan to creditor 3 and creditors 1 and 2 vote to reject the proposal but creditor 3 votes to accept the proposal, the proposal will be deemed accepted even though there were 2 creditors voting against accepting the consumer proposal plan and only one creditor voting to accept it because the one creditor voting to accept the proposal had more votes because they had more debt owed to them than creditor 1 and 2 combined.
When your proposal is voted to be accepted your creditors or the OSB will have 15 days in which they can request that your LIT has the proposal reviewed by applying to the court.
The consumer proposal will be accepted by the court if no such request is made within the required time frame.
A consumer proposal plan can last for up to 60 months.
The reason the length of a consumer proposal is limited to 5 years is to give people hope they will eventually be debt free.
Any longer than 5 years and people can get discouraged and lose faith in their proposal plan.
When you submit a consumer proposal your LIT will file the proposal with the OSB (Office of the Superintendent of Bankruptcy).
As soon as your proposal is filed you will make payments to your LIT (Licensed Insolvency Trustee) instead of your creditors.
Actions such as wage garnishments (a collection of part of your salary by your creditors) or lawsuits against you for debt collection will be immediately stopped through a process known as the “stay of proceedings.”
In addition, if your creditors are collecting your salary (garnishing your wages) or have filed lawsuits against you, these actions are stopped.
What Happens When My Consumer Proposal is Accepted?
Once your consumer proposal has been accepted you will start following the terms of the proposal:
* You will make the payments as required under the terms of the proposal.
These payments can be a lump-sum payment made up front to end the consumer proposal as soon as possible, or monthly payments for a certain period of time lasting no longer than 60 months. Most consumer proposal payment plans last approximately 3 years;
* You will also be responsible for any other conditions that are required in your proposal plan; and
* You will be required to attend the required two counselling sessions.
The point of these meetings is to help you understand the cause of your financial problems that led to you filing a consumer proposal and help you learn how to manage your finances properly in the future so you can avoid money problems in the future.
Your monthly payment will be the only payment you make; all fees for the trustees’ time and other fees are included in this payment (the trustee will take approximately 20% of your proposal payments to cover their administration fees).
What Happens if my Proposal is Rejected?
Almost 100% of proposal plans are accepted because the main condition of a consumer proposal is your creditors must be better off than if you file bankruptcy.
When structuring your proposal, your LIT will help make sure the proposal plan fits this requirement and that the plan you submit to your creditors has the greatest chance of being accepted.
However, in rare cases, it is possible for a proposal to not be accepted.
If your proposal is rejected you can:
* Make changes to the proposal, such as increasing the monthly payment, the size of the lump sum payment, or increasing the number of months to make payments;
* Consider seeking other options for getting out of debt; or
* You can claim bankruptcy.
If your consumer proposal is rejected you are not automatically forced into bankruptcy.
Impact of a Consumer Proposal on Credit Rating
When you file a consumer proposal your credit rating will automatically be set to an R7 rating, while if you file bankruptcy you will receive an R9 rating which is the worst possible credit so a consumer proposal does not have as dramatic an effect on your credit rating as a bankruptcy.
The record of your consumer proposal will remain on your credit report for 3 years after you receive your “certificate of completion” after making your final payment as required in your proposal.
As a consumer proposal can last for up to 5 years, the record of your proposal can remain on your credit report for up to 8 years.
You can also complete a consumer proposal in only a few months by offering a lump sum payment which in turn means the record of your consumer proposal will only remain on your credit report for slightly more than 3 years.
When you receive your certificate of performance you can send a copy of this document to your creditors which will allow your credit report to be updated as soon as possible.
What Happens to my Secured Debts in a Consumer Proposal?
You won’t be able to include your secured loan debts in a consumer proposal.
Secured debts include car loans and mortgages.
You will be required to keep making the required payments on your mortgage and car loan.
If you cannot afford to make these payments, along with your consumer proposal payments, you might have to sell the asset.
Additionally, if you have assets that you can sell and repay what you owe your creditors may reject your proposal.
If you would like to know more about what a consumer proposal is you can contact one of our Licensed Insolvency Trustees, who are also the only experts that can help you file a consumer proposal.