How Consumer Proposals Work in Canada – FLM 2021

Do you want to learn more about how a consumer proposal can help you solve your debt problem and avoid bankruptcy?

As Financial Literacy Month ends we want to leave you with a little more information about this alternative to bankruptcy so that you can easily decide if a consumer proposal is a good option for you.

Let’s begin with a few of the most common questions that come up when researching consumer proposals in Canada.

What is a consumer proposal?

A consumer proposal is a debt relief solution governed by federal law. In a consumer proposal, an offer is made by the person in debt to “settle” their debts with creditors. Typically, the “offer” made by the debtor is for a percentage of the total debt owed, payable by way of a monthly payment over a fixed period of time. Interest is stopped and any creditor legal action is prohibited.

How do I get started with a consumer proposal?

Your Licensed Insolvency Trustee (LIT) will provide you with a free consultation to review your options. During this consultation your LIT will review what a bankruptcy would look like for you as well as a comparison between bankruptcy and your most affordable proposal offer. Your assets, budget and total debt will all be considered. If you can afford a proposal and would like to make an offer to your creditors, your LIT will prepare the required documents and submit your proposal to the government and your creditors. A 45 day “voting period” will begin, and your creditors will have an opportunity to respond to your offer.

What happens during the voting period?

Your creditors will review your proposal offer and respond to your LIT with a vote for or against your proposal. Some creditors may like the idea of giving you a break, but request that you make an adjustment to your offer. A proposal can last a maximum of 5 years (60 months), so a creditor may request that you add time on to your offer if you haven’t offered to pay for the maximum timeframe.

Creditors can also request that you increase the amount of your offer. Each dollar owed to a creditor is considered one vote in the voting process. The creditor you owe the most money to will also have the most votes in your proposal, and, if they have more than half (50%) of the votes, they will control the outcome too.

If the proposal is accepted by a majority of the voting creditors, all of your unsecured creditors – even the ones who may have voted against the proposal – are now bound by it. A creditor is required to submit specific paperwork to your LIT if they want to receive money (dividends) from the proposal. Your LIT will distribute money to your proven creditors over the course of your proposal.

What’s the catch?

Both consumer proposals and bankruptcies require that you follow specific rules or complete specific duties to complete the process, likewise, both will have an impact on your credit score.

You are required to do fewer things to obtain a certificate of completion in a proposal than you are to receive a bankruptcy discharge. In a proposal you are required to make all required payments and never fall three payments behind in your payment schedule. You are also required to keep your LIT up to date if you change your contact information and attend two mandatory financial counseling sessions – that’s it.

In a proposal your credit rating will be reflected as an R7 versus a bankruptcy which is an R9 (the lowest end of the rating scale).

Will I lose my assets if I file a consumer proposal?

No. One of the many benefits of choosing a consumer proposal over a bankruptcy is that you get to keep your assets. The reason your LIT must compare your proposal offer to what a bankruptcy would cost, is to ensure that your assets have been considered while making your offer. If you own a home with some equity, more than one car, have investments or RESPs for your children, you will not be required to liquidate them as part of the proposal process. Your LIT will add up what creditors could get in a bankruptcy and ensure that you offer to pay them more in your consumer proposal – making this a great option for someone with assets AND out-of-control debts to address.

Are there any other benefits to choosing a consumer proposal?

Many people who file a proposal like that they do not have to report their ongoing monthly income to their LIT. During a bankruptcy, a monthly income and expense report is required of the debtor and that report is used to determine if additional money should be paid to the bankrupt estate. A government average is used (based on family size), and if a bankrupt person exceeds the threshold, 50% of their “surplus” earnings are paid to the bankruptcy estate.

“Surplus income is tough to part with for many people in bankruptcy,” explains Licensed Insolvency Trustee Ron Klein. “For some, a change in jobs, marital status, unexpected raise or bonus can really alter the landscape of their bankruptcy. You might just start to feel like things are turning around for you, only to find out that your bankruptcy will take longer and cost you more than you originally expected. It’s important that we discuss your current financial reality as well as any possible shifts you may experience over the next 9 months before you decide on a course of action for your debts.”

A big change in income can also impact the duration of a bankruptcy, the bankruptcy period can be extended up to 21 months to collect additional surplus income for creditors. A proposal can eliminate the element of surprise by committing to a fixed payment that will not change if your income does. A consumer proposal is also “open-ended” – meaning that it can be paid off early, it’s up to you if you’d like to spend your holiday bonus or income tax refund to get ahead, but it’s not required.

"A consumer proposal is one of the best ways to reduce your debt and pay it off without adding interest to what you owe. One of the benefits that many of our clients take advantage of is the ability to accelerate their payments and finish the program early without any penalty. Once your budget is under control and the stress of watching your debts balloon out of control is gone – it gets easier to see the ways you can finish your proposal sooner than expected,” adds Ron.

Your fresh start can begin sooner

The final check-mark for the consumer proposal “pro” column is how long it is reported at the credit bureau and how much sooner you can begin to rebuild your credit. While a bankruptcy is reported by the credit bureau for approximately 7 years, a consumer proposal drops off 3 years after your final payment is made. So – if you do pay that proposal off early, you can begin to heal your damaged credit sooner. It is also easier to be approved for a secured credit card and start using credit responsibly to rebuild after a proposal than it is if a bankruptcy is on your record. During our counseling sessions we provide you with our best tips to help make starting over easier.

If you think a consumer proposal may be the right debt solution for you, please connect with us to review your options, free of charge.

Are you ready to be free from debt today?