Everything You Need to Know About Consumer Proposals
Consumer proposals have quickly become one of the most popular debt relief solutions in Canada, often used as an alternative to bankruptcy. Even still, some mystery still surrounds the topic of consumer proposals.
If you are considering a consumer proposal, you probably have a lot of questions that need answering.
So, to help shine a light on the topic of consumer proposals, we’ve answered some of the most commonly asked questions we hear about them.
Most Frequently Asked Questions Regarding Consumer Proposals
What Is A Consumer Proposal?
A consumer proposal is a federally regulated debt settlement agreement negotiated between your unsecured creditors and a Licenced Insolvency Trustee (LIT), acting as the consumer proposal administrator.
Under the terms of a consumer proposal, you will only be required to re-pay a portion of your debt load over an agreed time period, interest-free. A consumer proposal must be completed within 5 years.
Your LIT will work with you to come up with a settlement and payment terms to present to your creditors.
Once accepted by the majority (determined in dollars owed) of creditors, your payments will likely never increase for the duration of the consumer proposal.
Another benefit of a consumer proposal is that it provides you with immediate protection against creditors and debt collectors, who will be unable to:
- Call you
- Proceed with, or continue debt collection lawsuits
- Garnish your wages
- Write to you
- Contact you in any way
Once you have fully paid your consumer proposal payments, your consumer proposal will be completed, and you will be able to start working towards rebuilding your credit.
How Much Does A Consumer Proposal Cost?
The cost of a proposal is determined on a case by case basis, as the payment plan presented to your creditors must take into consideration your personal financial situation and how much the creditors would have recovered if you had gone bankrupt. Typically, for the unsecured creditors to accept a consumer proposal – subject to at least a minimum 20% recovery – it must offer at least 5% more than the estimated bankruptcy recovery.
Often, this can mean reducing your debt by as much as 50%, 60%, or even 70% of what you owe.
Can Creditors Reject A Consumer Proposal?
Most consumer proposals are accepted without a formal vote taking place. They are deemed by law to have been accepted by the creditors. This occurs by law if, upon 45 days having passed since the consumer proposal was filed with the federal government regulator, less than 25% (in creditor dollars owed to the creditors that responded to the consumer proposal), have asked that a meeting be convened to vote on the consumer proposal.
If a meeting must be convened to vote on the consumer proposal, as 25% of more of the dollars owed to the creditors who responded within the 45 days directed the LIT to convene a meeting, the LIT will call and give notice of the required meeting to vote on the consumer proposal. The consumer proposal will likely not be amended prior to the vote, if it is apparent that the required majority of creditors’ votes will accept the consumer proposal as originally filed. If it is apparent that the original consumer proposal will not obtain the necessary majority of votes in favour, an amended consumer proposal will likely be provided to the creditors prior to the meeting and vote occurring. The LIT will work with you and the creditors to arrive at a compromise and an amended consumer proposal.
Consumer proposals have a very high acceptance rate, as they permit debtors to avoid bankruptcy and offer creditors a greater recovery than bankruptcy.
Who Is Eligible for A Consumer Proposal?
To qualify for a consumer proposal, you must:
- Be a person, not a business
- Be insolvent
- Not owe more than $250,000 of unsecured debt
- Have a stable source of income and be able to make the required monthly or periodic payments
- Not be in a Division I proposal, or the initial creditor protection afforded by a Division I proposal
What Kind of Debt Does A Consumer Proposal Help With?
A consumer proposal is typically filed to settle unsecured debts, such as:
- Credit cards
- Personal bank loans
- Lines of credit
- Payday loans
- Income tax and HST debts
- Certain student loans
- Guaranteed business debts
- Shortfalls on secured loans due to the re-possession and sale of homes and vehicles
Secured debts, such as a mortgage or car loan, can be, but rarely are, compromised in a consumer proposal.
How Long Does A Consumer Proposal Last?
By law, a consumer proposal must be completed within 60 months (or 5 years). The average payment term is estimated to be around 47 months. However, once approved, you can pay off a consumer proposal sooner than the time period agreed to.
How Does A Consumer Proposal Affect Your Credit Rating?
Unfortunately, a consumer proposal does impact your credit rating, and an R7 rating (one of the lowest possible ratings) will be added to your credit report. However, this doesn’t last forever, and only remains on your credit report for three years after your consumer proposal has been completed. This is a better rating outcome than if you had gone into bankruptcy.
Will My Assets Be Seized?
No! That’s the beauty of a consumer proposal. Unlike bankruptcy, a consumer proposal does not require you to surrender your assets to your LIT.
How Does A Consumer Proposal Compare to Bankruptcy?
One of the most significant differences between a consumer proposal and bankruptcy is that a consumer proposal is a settlement agreement, that allows you to pay back a reduced amount of the debt you owe over an extended time period. Whereas bankruptcy, and a discharge from bankruptcy, will eliminate your unsecured debts, but at the risk of the loss of assets, a harsher credit rating outcome, greater monitoring by the LIT, and other costs.
Which brings us to the next major distinction – the seizure of assets.
Unlike a consumer proposal, with bankruptcy, you must surrender your assets (except for assets exempt from seizure by creditors) to your LIT, who will sell them on behalf of your creditors. In some cases, this could mean losing your home, vehicle, and other valuables.
Bankruptcy also remains on your credit report for longer than a consumer proposal. For a first-time bankruptcy, you will have a R9 – the lowest possible rating – added to your credit report for 6 years post discharge from bankruptcy. For a second bankruptcy, it will stay on your report for 14 years post discharge.
If you are considering a consumer proposal, it’s important to speak with a LIT to help you determine if it is the best course of action. And, if you choose to file a consumer proposal, your LIT will be with you every step of the way, helping you through the process, so that you can reach the finish line and start working towards rebuilding your bruised credit.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!