Consumer Proposal: 1 Step to Erasing Debt
A consumer proposal offers an alternative to personal bankruptcy. If you are in financial straits but can afford to make small monthly payments to ease your debt, then a consumer proposal represents an ideal solution.
What is a Consumer Proposal?
A consumer proposal is a legally binding agreement between a debtor and his or her creditors. It allows the debtor to settle debts for a portion of what is actually owed. A bankruptcy trustee works with the debtor to draft a proposal, and the proposal must be approved by the majority of creditors. Once the proposal is approved, the debtor begins to make payments to the trustee and the trustee pays the creditors. Creditors will almost always accept a consumer proposal since some form of payment is preferable to the alternative: none – if the debtor files for bankruptcy.
Who is eligible?
Those interested in filing a consumer proposal must meet the following requirements:
- Must be a first time consumer proposal filer
- Must be a private individual
- Must have a stable source of income
- Must be insolvent, i.e. unable to pay debt(s) in full
- Unsecured debts must be lower than $250,000
What debts are included in a consumer proposal?
- Credit card debts
- Retail loans
- Personal loans from financial institutions
- Payday loans
- Lines of credit
Secured debts may not be included in a consumer proposal because lenders may repossess the property at any time to resell for money. Types of secured debts include:
- Home mortgages
- Car loans/leases
- Boat loans
The most common types of consumer proposals
- Monthly payments: the most common type of agreement. Debtors make monthly installments over a period of time not exceeding five years.
- Lump Sum Payment: debtors may choose this option if they have enough savings or assets to cover the readjusted debt in the consumer proposal with a single payment. This option can help the debtor's credit to recover faster.
- Combined payment: this option combines the monthly and lump sum payments.
Why is a Consumer Proposal better than Bankruptcy? When a debtor files for bankruptcy, his or her credit score plummets and all personal assets are usually seized. Note that certain provinces and territories allow a person to keep some belongings if they are absolutely necessary for survival. Such items can include hearing aids, dental equipment, clothing, and even a home.
Consumer proposals are frequently the last step before bankruptcy, and used in a timely fashion can help to protect the debtor's assets while reducing the amount owed to creditors. Below are some advantages consumer proposals have over bankruptcy.
- Interest stops accruing on debt from the date the proposal is filed
- Collection companies and creditors can no longer contact debtors for payment
- House and other assets are protected
- Debtors pays off a portion of consolidated debt within five years
- Most wage garnishments cease immediately
- Credit scores can recover faster
Accepting a consumer proposal can be advantageous to creditors, too. When a debtor files for personal bankruptcy, all debt is wiped clean and the creditor receives no payment at all. Accepting a consumer proposal allows creditors to receive a portion of what is owed to them.
How is a Consumer Proposal different from Debt Consolidation?
There are a few notable differences between debt consolidation and a consumer proposal. Debt consolidation entails using one loan to pay off many debts, while a consumer proposal does not involve taking on additional loans. Below are listed additional differences between debt consolidation and consumer proposals.
Consumer proposals are legally binding agreements between debtors and creditors. Once consumer proposals are entered, Canadian law prohibits creditors from taking legal action, garnishing wages, and seizing assets. On completion of the proposal, all debt is written off. Debt consolidation plans do not protect the debtor under such laws. Persistent creditors still have the liberty to take legal action, or to garnish wages, against the debtor.
No additional interest
Debt consolidation settlements are not negotiated until the end of the plan, which means that interest charges continue to accrue each month and the debt continues to build. Consumer proposals, however, are negotiated for the amount owed at the time the proposal is filed. Therefore, interest stops accruing immediately and the debt level does not change throughout the duration of the proposal.
No hidden fees
Under debt consolidation plans there is no schedule of costs. Administrative fees and hidden charges often add up. In a consumer proposal plan, debtors pay fees to the trustee in amounts set by the government. Fees and payment schedules are fully disclosed, and are based on a percentage owed to creditors listed in the proposal.
What is the Application Process behind a Consumer Proposal?
- The debtor should first seek the advice of a licensed bankruptcy trustee.
- The trustee evaluates the debtor's financial records, and looks into the cause of the debtor's insolvency. The trustee then advises the debtor on his or her options. Note: financial records include a list of the debtor's debts, income, expenses, assets, receipts, and any other material that can assist the trustee in determining the debtor's financial status. The debtor should arrange all necessary documents prior to meeting with the trustee.
- The trustee files a proposal and the required documents to the Office of the Superintendent of Bankruptcy (OSB).
- Once a proposal is filed with the OSB, all payments to unsecured creditors stop. Wage garnishments cease.
- Within ten days of filing the proposal, the trustee must send a report explaining his or her perception in regards to the fairness of the proposal, and the ability of the debtor to follow the established terms of the proposal. The report also includes a list
- Creditors are given forty-five days to either accept or reject the proposal. The proposal is considered as accepted if none of the creditors provide dissenting feedback. The agreement becomes legally binding if the majority of creditors vote to accept the proposal.
- If a proposal is accepted, the debtor is required to make all agreed-upon payments. The filer must observe all terms of the proposal and attend two financial counseling sessions.
- If a proposal is denied, the trustee can further negotiate the terms. If a trustee is not successful in devising acceptable terms for a proposal, the debtor returns to his or her previous insolvency status. At that point, the debtor will need to evaluate other options, and potentially file for bankruptcy.
- Payments cannot be more than three months late. If payments are made later than three months, the proposal will be annulled and the debtor loses legal protection from creditor action.
Personal Bankruptcy Canada and You
If you wish to learn more about consumer proposals, Personal Bankruptcy Canada can put you in touch with a reputable and licensed trustee near you. Our staff at Personal Bankruptcy Canada is fully versed on topics comprising debt management, consumer proposals, and bankruptcies.
Your initial consultation is completely free of charge, so get a fresh start today and find out how we can help you achieve a debt-free life.