Who Can File a Consumer Proposal?

Navigating the complexities of debt can be a daunting task, but luckily, there are solutions available. One such option for people residing in Canada is the Consumer Proposal. But the question arises – Who Can File a Consumer Proposal? This comprehensive guide will walk you through the ins and outs of consumer proposals, including the eligibility criteria, the process, and the practicalities involved.

A Brief Introduction to Consumer Proposals

A consumer proposal is a legal settlement offer made to unsecured creditors. It acts as a lifeline, allowing individuals to manage their debt effectively. This agreement, if accepted by the majority of creditors, becomes legally binding for all unsecured creditors. However, it’s not a one-size-fits-all solution, and not everyone grappling with debt can file a consumer proposal.

The Role of a Licensed Insolvency Trustee

The consumer proposal process necessitates the involvement of a Licensed Insolvency Trustee (LIT). This professional is responsible for reviewing the legal and practical aspects of a consumer proposal, ensuring it’s the right solution for your financial situation. Their primary role is to assess your financial circumstances and guide you through the options available, including consumer proposals.

Consumer Proposal: Legal Eligibility

Filing a consumer proposal in Canada is governed by the Bankruptcy & Insolvency Act, which outlines the following legal requirements:

 

  • You must be an individual who resides, does business, or owns property in Canada.
  • You must be insolvent, meaning either you have stopped paying your debts as they come due, you cannot pay your debts as they become due, or your assets’ value is less than your unsecured debts.
  • Your debt must be more than $1,000 but less than $250,000, excluding your primary residence’s mortgage debt. If you exceed this debt limit, you can consider a Division I proposal.
  • If the debts of the individuals are significantly similar, they can file a joint consumer proposal.
  • You can file a consumer proposal even if you are bankrupt. However, the effective date of the consumer proposal is the bankruptcy date, which means you cannot add debt incurred after the bankruptcy date.

 

Debts Eligible for a Consumer Proposal

A consumer proposal consolidates and settles unsecured debts. Eligible debts include credit card debts, unsecured loans or lines of credit, payday loans, monies due to the Canada Revenue Agency (CRA), accounts in collection or outstanding bill payments.

Government student loans can also be included, provided you have been out of school for seven years. Secured debts, like mortgages or car loans, are not eligible unless you surrender the underlying asset.

Certain debts cannot be discharged, including support payments, court fines or penalties, and debts due to fraud. While these debts don’t disqualify you from filing a proposal, they will persist after completion.

Practical Considerations for Filing a Consumer Proposal

Beyond the legal requirements, there are practical considerations that determine whether a consumer proposal is the right solution for you. These considerations are usually based on your financial situation and include:

 

  • Possession of assets that you might lose in personal bankruptcy.
  • A high income that could trigger a surplus income penalty in bankruptcy.
  • Enough income to make some monthly payments to your creditors.

 

Remember, if you can only afford the minimum payments on your credit cards and other debts, you might remain in debt indefinitely. The goal of a consumer proposal is to provide debt relief by allowing you to repay less than what you owe, with no interest, within a maximum of five years.

Consumer Proposal vs. Bankruptcy: Which is More Suitable?

Deciding between a consumer proposal and bankruptcy often boils down to practical, financial considerations. Here are some scenarios where a consumer proposal might be more suitable:

Scenario 1: High Home Equity

If you own a home with substantial equity, filing for bankruptcy might force you to pay the trustee the home’s equity or risk losing your home. In such cases, a consumer proposal allows you to pay that equity over a maximum of five years, making it a more suitable option.

Scenario 2: Lump-sum Proposal

If you can sell an asset, refinance, or get financial support from a family member, you could consider a lump-sum proposal. However, remember that you must be insolvent to file. If your assets significantly outweigh your debts, you may not qualify.

Scenario 3: Surplus Income

If you have a high income but can’t make minimum monthly payments on your credit card debt, your income may trigger large monthly surplus income payments in bankruptcy. A consumer proposal can help reduce these payments.

Scenario 4: Second Bankruptcy

A second bankruptcy will affect your credit rating for 14 years from the date of discharge. Through a Licensed Insolvency Trustee, you could offer a proposal, potentially clearing your credit history from your credit report in a maximum of eight years.

Final Thoughts

Understanding the intricacies of “Who Can File a Consumer Proposal?” can help you make informed decisions about managing your debt. While this guide provides an overview, it’s always best to seek professional help when dealing with financial hardships. If you’re struggling with debt, don’t hesitate to reach out to a Licensed Insolvency Trustee to discuss if a consumer proposal is the right debt relief solution for you.

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