Benefits of Filing a Consumer Proposal Over Bankruptcy

When debt keeps piling up and you find yourself struggling to keep up with payments, bankruptcy often feels like the only solution.

But what you might not know is that there is a better solution (in many cases) that has become increasingly popular among debtors in Canada: A Consumer Proposal.

In the past few years, there has been a significant increase in Canadians filing Consumer Proposals compared to other debt relief solutions. In fact, according to statistics from Canada’s Office of the Superintendent of Bankruptcy, 56% of all insolvencies filed in 2018 were Consumer Proposals.

What is a Consumer Proposal?

With a Consumer Proposal, you work with a Licensed Insolvency Trustee (LIT) to negotiate an agreement with your unsecured creditors that allows you to pay back a reduced amount of what you owe, within a specified timeframe, interest-free. Under the agreement, your creditors forgive the balance owed. A Consumer Proposal provides you with legal protection from debt collectors’ calls and creditors’ collection lawsuits, while you partially repay your unsecured debts.

By filing a Consumer Proposal, you must:

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• Give your LIT a full accounting of all your assets, debts, income and expenses
• Meet with the LIT to discuss and agree to the terms of your Consumer Proposal
• Attend meetings of creditors, if a meeting is or meetings are required
• Attend two credit counselling sessions
• Assist the LIT in administering the Consumer Proposal
• Make all of the required payments to the LIT on time, and as described in the Consumer Proposal

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Why Should You File a Consumer Proposal?

Here are a few reasons people often consider a Consumer Proposal.

Legal Protections

Filing a Consumer Proposal results in a stay of proceedings. This means that:

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• Creditors are no longer permitted to commence a lawsuit to collect the money that you owe
• Ongoing collection lawsuits are stayed/suspended, subject to the court granting permission for a lawsuit to continue
• Unsecured creditors and their collection agents must not contact you
• Interest stops accruing on your unsecured debts

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Reduction of Debt Owed and Eliminated Interest

By filing a Consumer Proposal, and the creditors approving it, amounts owed to the unsecured creditors are significantly reduced. Frequently, debtors reduce their unsecured debt load by as much as 70%. This makes it much easier to pay off your debts and immediately puts you on a better financial footing.

Keep Your Assets

For most debtors, a debt reduction solution that involves potentially losing their home is often a deal-breaker. What’s great about a Consumer Proposal is that you often get to keep your home along with any other assets you wish to retain.

Avoid Bankruptcy

Due to the stigma that comes with filing for bankruptcy, individuals that file for bankruptcy can face challenges in their professional lives. Bankruptcy may impact your ability to find work, and it can also be difficult to retain certain professional designations, or to meet business licensing requirements. A Consumer Proposal allows you to avoid these implications and many other negative effects of bankruptcy.

Advantages of Filing a Consumer Proposal over Bankruptcy

Even though a Consumer Proposal will end up being costlier than filing for bankruptcy, there are several advantages you should consider.

Creditor Protection

Filing a Consumer Proposal legally protects you from your unsecured creditors. Once the Consumer Proposal is filed, your unsecured creditors must no longer contact you directly, and all communication must take place through the LIT. This means that your creditors can no longer send a collection agency after you or hound you with phone calls.

Manageable Payments

Your Consumer Proposal will be customized to your specific situation and budget. Other than offering a recovery to unsecured creditors that is greater than a bankruptcy recovery, there are no pre-determined rules or standards that decide how much your payments will be. Your payment plan will be based on your income, your family needs and obligations, and your ability to pay.

In general, though, most debtors make Consumer Proposal payments to the LIT for 4 to 5 years. Payments beyond 5 years are not permitted.

Less Complication

The process of filing a Consumer Proposal is significantly less complicated than bankruptcy. Unlike bankruptcy, your payments are fixed – the LIT is not required to review your income and adjust your payments; you do not lose your tax refunds, inheritance or lottery winnings; nor do you have to give up possession of your home or other assets.

Unlike bankruptcy, court attendances are very rare with Consumer Proposals.

Once the LIT submits your Consumer Proposal to your creditors, they have 45 days from the filing of the Consumer Proposal to advise the LIT if they agree or disagree to its terms. At the expiry of the 45 days, if less than 25% of the amounts owed to the unsecured creditors do not agree to it, the Consumer Proposal is deemed to have been approved by the unsecured creditors.

At the expiry of the 45 days, if 25% or more of the amounts owed to the unsecured creditors do not agree to it, the LIT must convene a meeting of the creditors to discuss the Consumer Proposal and to formally vote on accepting or rejecting it. If it appears that the creditors will not approve the Consumer Proposal with the necessary dollar majority, an amended Consumer Proposal can be filed. It’s that simple.

Regardless of which solution you decide is best for you, a Licensed Insolvency Trustee can explain the pros and cons of all debt relief solutions available to you, and help you make an informed decision. Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. Since 2002, it has assisted thousands of individuals and couples successfully resolve their debt crises. Its passion – its mission – is your health and well-being!