A consumer proposal offers an alternative to personal bankruptcy. If you are struggling financially, meet the eligibility requirements and can afford to make small monthly payments, 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 to be repaid over a pre-determined amount of time of no more than five years.
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
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.
First Steps of a Consumer Proposal
In order to file a consumer proposal, you must first meet with a licensed trustee in bankruptcy in your province. Your trustee will conduct a thorough review of your financial condition and determine if you are eligible. If a consumer proposal is the right debt solution for you, your trustee will explain in detail what your responsibilities will be and the costs you will incur.
Your trustee will then draft an agreement and file it with the Office of the Superintendent of Bankruptcy. Once your proposal is filed, you will cease to make payments directly to your creditors.
Your proposal will be presented to your creditors. Creditors may request a meeting within 45 days of the filing. If a majority of your creditors approve, the proposal will likely be approved by the court at which time it becomes binding on all of your creditors.
If your proposal is not accepted by your creditors, you can:
- Submit a revised proposal
- Look to other debt solution alternatives (i.e. debt consolidation)
- File for bankruptcy
Your Responsibilities During a Consumer Proposal
Throughout the duration of your consumer proposal, you will be expected to make your agreed upon monthly payments on time. You are also expected to attend two credit counselling sessions with your trustee. If you fail to meet the terms of the proposal, the agreement will become void, and you will again be responsible for the full amount of the debt you owe.
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. A consumer proposal 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. When a debtor files for personal bankruptcy, all debt is wiped clean and the creditor is at risk of receiving little to 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 additional differences between debt consolidation and consumer proposals.
Consumer proposals are legally binding agreements between debtors and creditors. Once a consumer proposal is filed, 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 interest charges continue to accrue each month and 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.
Completing Your Consumer Proposal
Once you have completed your monthly payments, your consumer proposal is finished. You will receive a “Certificate of Full Performance” which legally releases you from your debts.
After Your Consumer Proposal is Complete
After you have completed the requirements of your consumer proposal, you can begin the process of rebuilding your credit. To ensure your credit report accurately reflects your completion of the proposal, submit copies of the Certificate of Full Performance to Equifax and Trans Union, the two credit reporting agencies in Canada.
While a consumer proposal will remain on your credit for a period of up to six years, you can begin repairing your credit immediately upon completion of your agreement.