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Debt can be overwhelming and hard to understand, but it’s important for people to get a grip on their financial options when struggling with debt. This is especially true for Canadians, as Canada’s consumer debt is among the highest in the world.
If you’re in debt, for any reason, and worrying about what to do, then consumer proposals may be a viable route to getting yourself debt-free. Here we’ll take an in-depth look at consumer proposals and how they may help you get out of debt.
When you reach the point that you can no longer afford to pay off your debts, you are technically “insolvent.” Canadian insolvencies are on pace to grow by 10% this year, thanks in part to increases in expenses (such as food and housing) outpacing wages. If this happens to you, you have few options, and many might immediately think of bankruptcy as their only way out. But consumer proposals are an alternative to bankruptcy, and let you keep more of your assets.
A consumer proposal is a legally binding debt settlement arrangement made between you and your creditors, with the help of a Licensed Insolvency Trustee. It assists you in paying back as much of your debt as you realistically can, while protecting you from debt collectors, lawsuits, wage garnishment, and so on. It works on the premise that, while you cannot pay back all of your debt, your creditors are better off in finding an arrangement with you to get back some of their money, compared to if you declared bankruptcy, where they’d be unlikely to see any of their money. Consumer proposals usually mean alleviating a significant portion of your debt and eliminating interest payments on what you owe.
While they have many benefits, consumer proposals are a serious and significant financial decision; so let’s look at how they work.
It is possible to file a joint consumer proposal, for example if you share your debts with a family member or partner. In this case, the eligible amounts scale upwards.
Filing a consumer proposal follows a structured process, as it is a protected, legally binding undertaking.
Find and hire a Licensed Insolvency Trustee (LIT). This is a federally regulated professional who can provide advice and assistance in matters relating to debt relief, consumer proposals and bankruptcy. You can find a LIT here. If you cannot find or are unable to afford a LIT, then you may be eligible to have one assigned to you via the government’s Bankruptcy Assistance Program.
Review your financial information with your LIT, to determine the best possible route for you. They will need to see paperwork on your debts, income, assets, monthly expenses, and so on. They will do some calculations, and if your debt to income ratio suggests you may be able to pay some portion of your debts each month, then they may agree that a consumer proposal is reasonable.
As soon as you and your LIT agree that a consumer proposal is the way to go, you need to hammer out the details of what you think is a reasonable payment proposal. You must stick to some basic terms (for example, you must be able to meet the payments you’re suggesting, they can’t be required for more than five years, and it needs to be more beneficial to your creditors than if you filed for bankruptcy). The exact nature of your proposal will depend on your circumstances, and your LIT will help you to assess what’s reasonable, and will prepare all the paperwork. Once you are both satisfied, your LIT will file the paperwork with the Office of the Superintendent of Bankruptcy (OSB).
As soon as your assessment is filed, you can stop making payments to your unsecured creditors. Lawsuits and wage garnishments also stop. The OSB will inform all of your creditors about your filing. Unfortunately though, your creditors may not accept the terms of your consumer proposal. They are under no legal obligation to do so, and each creditor will have their own criteria for accepting or rejecting consumer proposals. Your LIT should be able to educate you about large creditor’s criteria as you’re crafting the consumer proposal, to avoid rejection.
Now your proposal must be voted on. Your creditors have 45 days to vote on your proposal, and votes are weighted by the amount owed to each creditor. It’s possible that before the creditors vote, they may require a meeting. This is done if requested by a creditor, and if they are owed at least 25% of the total amount being claimed. The vote on proposal acceptance can happen at or after this meeting; if there is no meeting, the 45 day window still applies.
One of two things will happen. If your proposal is accepted, then you must adhere to the steps and requirements set out in it. This may mean making a lump sum payment or monthly payments, or other conditions. All payments are made to your LIT, who then disperses the funds as necessary. You will also be required to attend two mandatory financial counselling sessions.
If your proposal is rejected, you can try to modify the proposal to be more acceptable to your creditors, in the hopes of gaining acceptance. They may even have come back to you with amended terms that they would accept. Or, if absolute rejection occurs (rare but possible), you must consider other options entirely, such as bankruptcy.
The consumer proposal is closed once you have met all of the conditions enclosed within, effectively removing all of the associated debt from your shoulders. Your LIT will send you some paperwork and a Certificate of Full Performance to prove your compliance.
However, if you miss multiple payments or are late making payments, you risk having the proposal annulled, which puts you back at square one. If you have a consumer proposal and are struggling to meet its demands, contact your LIT immediately, so you can work out a solution. For more information on amending existing consumer proposals, see here.
Not all types of debt can be cleared via consumer proposals. Excluded are:
Filing a consumer proposal has both positive and negative effects, so it’s important to weigh the pros and cons before making a decision.
Pros:
- Allows you to retain secured assets
- Once resolved, unsecured debt is cleared
- Provides clarity on financial future and consolidates
- debt into a single, known monthly payment that does not change
- Stops lawsuits and wage garnishments
- Stops interest from accumulating
- Is often cheaper than other options
- Avoids bankruptcy
Cons:
- Does not discharge of debts related to secured assets
- Some portion of debt still must be paid back
- Resets your credit score to the lowest rating for at least 3 years after completion of the proposal's term
- If you miss payments, the proposal can be annulled
If you’re struggling with unsecured debt and are concerned about being unable to pay back mounting interest, but have a steady income, then a consumer proposal might be an option for you. Connect with a LIT for more information; the initial assessment is usually free and they can provide great advice on how to get debt-free.
A consumer proposal is a legally binding debt settlement agreement between a consumer and their creditors, relating to the repayment of unsecured debts. A consumer proposal is prepared with the assistance of a Licensed Insolvency Trustee, when a consumer is unable to pay off their debts, and it helps them pay back as much as they reasonably can without extra interest or debt collection worries.
A consumer proposal sets out terms for a consumer to repay a portion of their debt to their creditors, without interest payments accumulating and typically at a lower level than they would otherwise do. This means that consumer proposals are cheaper for the consumer; they allow creditors to get some portion of their money back, and help consumers clear debt they would otherwise be unable to pay.
Your Licensed Insolvency Trustee is responsible for managing your consumer proposal and disbursement of its proceeds. So in effect, you must make a single monthly debt payment to the Trustee, who then portions it out to your creditors on your behalf. This effectively consolidates your debts.
Filing a consumer proposal is the same across the country; first you must have a Licensed Insolvency Trustee to advise you and help you complete the necessary paperwork. Four items are required to properly file: an Assessment Certificate, a Statement of Income and Expenses, a Statement of Affairs and a Consumer Proposal. These must be submitted, via your Trustee, to the OSB.
A consumer proposal effectively combines all of your unsecured debt into a single sum, which is administered and managed by your Licensed Insolvency Trustee. It sets up rules that you must follow to pay off this debt - usually via a monthly sum that your Trustee distributes to your creditors. It relies on you working collaboratively with your creditors to give them back as much as you reasonably can.
A consumer proposal filing will reset your credit score to the lowest possible level. This stays in effect for three years after you have completed the consumer proposal. So if you close the proposal within two years, you can start rebuilding your credit after five years.
The consumer proposal process starts with finding a Licensed Insolvency Trustee, who will advise you and help you complete the necessary paperwork. They then file this paperwork with the OSB, and the OSB informs your creditors. Your creditors must then either approve or reject your proposal.
A consumer proposal is a less harsh process than bankruptcy. In bankruptcy, your assets can be used to help pay off creditors; this is not true in a consumer proposal - you retain your assets. However a consumer proposal relies on you continuing to pay something towards your debts, while a bankruptcy does not.
Anyone struggling with unsecured debt, and who has a steady income, should consider a consumer proposal as a possible route out of debt. You must meet some eligibility requirements though: to file in Canada you need to be a Canadian resident or worker, and your debt must be between $1000 and $250,000.
Once your consumer proposal is closed, the task of rebuilding your credit begins. There is no single timeline for doing this, and how quickly you can regain your credit (and how soon you will be eligible for loans and credit cards) will depend on your personal finances, your income, other debts, and so on. In theory, there is nothing stopping you from applying for a credit card right away, but many companies will have a certain minimum credit score threshold for you to meet before you can be approved.
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