The last few years has seen a significant rise in the numbers of Canadians filing for Consumer Proposals as opposed to the more traditional Bankruptcy route.
In large part this can be attributed to an increase in marketing exposure from Trustees and Debt Solutions companies highlighting the potential benefits of a consumer proposal over bankruptcy as a debt relief method.
It is important to note that every individual situation is unique and the application of the best debt relief method for any specific circumstance can vary based on numerous factors. That being said, there are some high level principles that can make a consumer proposal the more appealing route.
Assets
One of the biggest advantages of a Consumer Proposal is the retention of assets. Specifically, your home is not at risk in a proposal as the focus is on your unsecured debts only. In a bankruptcy, all your assets are thrown in the pot to pay off creditors. Bankruptcy will result in the seizure of specific assets based on your allowable exceptions, depending on the province you are in. Retention of assets the main reason people would rather choose a consumer proposal.
Creditor Protection:
A proposal protects you from your creditors. Once your proposal is filed with your creditors, any wage garnishments will cease, and creditors cannot go after your assets. Creditors also have to stop contacting you for payments either directly or through debt collection services.
Manageable Payments:
In a proposal your agreed monthly payment is fixed, affordable and interest free. A proposal is a negotiation – your trustee will negotiate with creditors, based on your situation and come up with a percentage of the debt that everyone agrees you should be able to pay back based on your expenses and income. This means the payment agreed has to be affordable, otherwise you won’t be able to pay it, the proposal will lapse, you will have to declare bankruptcy and the creditors are likely to get nothing. You will pay the agreed amount over 48-60 months and because the payment is interest free, there is no penalty for taking the full term to pay it off.
Avoids Bankruptcy:
Bankruptcy can have serious legal, social and personal consequences that some people would rather avoid. It could affect your ability to retain a professional designation or apply for certain jobs in addition to the impact on credit availability.
Cost:
Filing a consumer proposal has no cost directly associated with the process. There are no filing fees, administration fees or consultant fees paid independently of the proposal payments. The only payments are those made by you to your Licensed Insolvency Trustee who sorts out the entire process including making payments to your creditors to repay your debt.
Qualification:
If you are insolvent, unable to pay your debts. If you have $1000.00 to $250000.00 of unsecured debt (excluding mortgage debt), you have an ability to repay a portion of your debt and your creditors agree to your proposal, then you are a candidate for a proposal.
Process of a Proposal:
A Consumer Proposals (“CP”) is significantly less complicated than a bankruptcy, making it easier for the consumer to navigate and complete. The depth of regulation, the volume of mandatory documents and the level of legal complexity is higher in bankruptcy. Given that they are less restrictive, CPs can be managed and filed by a Consumer Proposal Administrator through a Licensed Insolvency Trustee firm. There are generally no court appearances required and no monthly reporting to the trustee. Once your proposal is submitted to your creditors they have 45 days to agree to the terms and conditions. The creditors can choose to accept, decline or ask for a meeting of creditors. Your administrator or trustee could amend your initial proposal if the creditors do not agree to your terms.
Instant Financial Improvement:
The moment a proposal is approved by your creditors you are on your way to a financial recovery. The terms of the proposal are legal and binding and as such, you can move on. If you get a new job, make more money, sell an asset, get a bonus or tax refund then that revenue is yours to keep. You will never be required to pay more money even if you make more money!
Credit Rating:
People are often concerned about their credit rating with a consumer proposal vs bankruptcy. The reporting agencies will treat them differently, a proposal is an R7 and bankruptcy an R9. As well a proposal will stay on your credit bureau for 3 years after receiving your certificate of completion and a bankruptcy will remain for 6 years after receiving your certificate of discharge. One thing to keep in mind, your credit rating could already be demolished by missed payments and collection processes. Credit repair will take effort and time. Your creditors will need to see you have changed your habits and have been rehabilitated.
As there is no one size fits all solution and every situation is different it is important to sit down with a trustee to discuss the best path for you