A Glossary Of Important Terms Used During a Consumer Proposal
Many Canadians who possess large amounts of debt may believe that declaring bankruptcy is their only option. But in fact, you may be eligible to file a consumer proposal, which can both reduce the amount of debt you owe and allow you to keep your assets.
If this is the route that you decide to take, there are a lot of confusing words and important terminology you will hear throughout the consumer proposal process that are important to understand.
With that being said, we will list and define some of the most common terms you’ll come across when considering whether a consumer proposal is the right solution for you.
A consumer proposal is a formal legal process whereby a debtor (someone who owes money) agrees to a plan to repay a percentage of their debt to their unsecured creditors and/or to extend the amount of time they have to pay off those debts. A consumer proposal is governed by the Bankruptcy and Insolvency Act and is overseen by a Licensed Insolvency Trustee.
Being insolvent means you are not able to pay off one or more of your debts as they come due.
The Bankruptcy and Insolvency Act (BIA)
The BIA is Canadian federal legislation that regulates bankruptcy and insolvency for persons and businesses. It protects the rights of debtors and creditors and sets out the rules to resolve debt in a fair process, such as bankruptcies and consumer proposals.
Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee is a person who is licensed by the Office of the Superintendent of Bankruptcy (which supervises all matters covered under the BIA) to administer consumer proposals, bankruptcies and other debt crises.
LITs are also Chartered Insolvency Restructuring Professionals (CIRP), debt professionals that are subject to rigorous training and professional ethics.
An assessment is a complete review of the debtor’s financial situation. It is conducted as part of the first stage of the insolvency process. Upon review of the situation, the LIT will provide the debtor with options in resolving the debts and review the merits and consequences of each option available.
An assessment certificate is a document prepared by the LIT certifying that the Debtor has undergone the initial assessment with an LIT in preparation for either bankruptcy or a consumer proposal.
Credit is defined as the amount of money a consumer has available to borrow. For example, the combined limits of your credit cards and lines of credit would equal the amount of credit you have. It can also refer to your credit rating, a detailed record of your borrowing and repayment history as well as any prior bankruptcies or consumer proposals (which remain on your credit rating for specified periods of time).
Secured debt refers to debt where the creditor holds collateral on some of the debtor’s assets, such as a mortgage, car loan, or lien on your home or other property.
Unsecured debt is debt on which the creditor holds no collateral or security on the debtor’s assets. Some examples include credit card debt, payday loans, and income taxes.
Unsecured creditors are those who stand to lose their money when a debtor cannot repay what they owe, because they hold no collateral on the debts. These are the creditors who will be asked to approve a consumer proposal.
A consumer proposal is deemed annulled if the debtor falls behind on three payments. However, they do not immediately have to file for bankruptcy if this happens. If the LIT determines it appropriate, the debtor has 30 days to ask the creditors to have the proposal revived. If that is not successful, they can make an application to court to revive the consumer proposal, or file a new consumer proposal.
Meeting Of Creditors
Once the LIT files a consumer proposal, creditors have 45 days to request that a Meeting of Creditors be called, but one will only take place if creditors representing more than 25 per cent, or more, of the total dollar value of the debt ask for a meeting. If not, the proposal is deemed accepted by the creditors.
If a debtor and their spouse are jointly responsible for all, or substantially all, of their debt, such as joint credit cards or lines of credit, then they can file a joint consumer proposal.
The terms of a consumer proposal include the amount, frequency, and duration of payments (usually monthly over a period of up to five years, with the amount adjusted to what the debtor can afford to pay) and whether those payments are fixed, variable, or increased over time.
Lump Sum Payments
A debtor may be permitted, under the terms of their consumer proposal, to make lump-sum payments against the amount they owe, which means they could finish repaying the debt early. However, this is only advisable if doing so would not leave them vulnerable to further debt.
If the initial proposal is not accepted by enough of the creditors to move forward, a debtor may be able to amend the proposal so that it is acceptable to creditors.
Under the BIA, if someone files a consumer proposal and it is accepted, one of the debtor’s responsibilities is to attend two sessions of credit counseling.
If you’re facing insolvency and aren’t sure what to do next, consult with one of Baker Tilly’s Licensed Insolvency Trustees to find out more about whether a consumer proposal is the right choice for you. It might help you repair your credit rating faster and hold onto your assets.