A consumer proposal is a legal arrangement between a person (referred to as a consumer debtor or simply a debtor) and their creditors in which the debtor pays back (often) only a portion of the amount that is owed to their creditors over an extended period of time (up to 60 months). A consumer proposal is an alternative to bankruptcy and is also governed by the Bankruptcy and Insolvency Act.
Total debts cannot exceed $250,000 (excluding debts owing on mortgages on the person’s principal residence). Once a consumer proposal is filed, no additional interest is added to the debt(s) owed. A consumer proposal allows you to consolidate all of your unsecured debts for a single monthly payment that is often a fraction of the total amount that was owed. The amount that is offered to creditors in a consumer proposal takes into account a person’s income, their (non-exempt) assets and the total debts owed. A general rule of thumb is to offer your creditors more than they would receive if you were to file for personal bankruptcy.
Once the proposal documents are signed by the debtor, the proposal administrator will send the documents to your creditors. The creditors then have 45-days to vote on your proposal. Do they want to accept it, reject it or amend it (if this happens, they are generally looking for a slightly higher offer)? In order for the proposal to be accepted, it requires that a majority accept your proposal offer. Once a majority have accepted the proposal, it is legally binding on all (unsecured) creditors, even those that did not accept or vote on your consumer proposal. It is now a legally binding agreement. The main duty at this point is to continue making the monthly proposal payments. If a debtor misses three proposal payments, the proposal is deemed to be annulled. When a proposal is annulled, the rights of the creditors are revived. This means that they can restart the collection activities including garnishing your wages or seizing your assets.
After all the proposal payments have been made, the administrator will issue a Certificate of Full Performance. It is at this point that the (unsecured) debts that were included in the proposal are discharged (a fancy way of saying wiped out).
Some important facts about consumer proposals:
- Total debts cannot exceed $250,000 excluding mortgages on your principal residence (if debts are over $250,000 then you would file a Division I Proposal);
- Once a majority have accepted the proposal (within the 45-days), the proposal becomes legally binding even on creditors that voted against the offer or that did not vote;
- Continue to make your monthly proposal payments. If 3 monthly payments are missed, the proposal is deemed annulled, and the administrator is required to notify the creditors of the annulment. The annulled proposal can be revived by the administrator within 30-days;
- When the proposal is annulled the rights of the creditors will be reinstated to pursue their collection activities. At this point in time, the debtor may have no alternative but to file a bankruptcy;
- You will need to attend two financial counselling sessions provided by your proposal administrator;
- When you file a consumer proposal, your credit report will indicate an R7 which indicates that you have compromised or settled your debts. This rating is not as severe as in a bankruptcy which has the lowest rating of an R9; and
- Once the final proposal payment is made and the Certificate of Full Performance is issued, the record of the proposal filing will remain on your credit report for 3 years after your last payment.
Advantages of a consumer proposal:
- Filing a consumer proposal provides the protection offered under the Bankruptcy and Insolvency Act by the stay of proceedings. As a result, all collection actions against you are stayed (stopped) and your creditors must deal with the proposal administrator. Your wages and assets are now protected;
- Lower monthly payments. Since the proposal is often filed for a period of 60-months, the monthly payments are often significantly lower than they would be in a bankruptcy scenario where surplus income payment is required;
- Consolidate into a single monthly payment for only a fraction of the total amount owed. Most consumer proposals filed are for 30 – 50% of the total (unsecured) debts. Under some circumstances, the proposal offer could be a little lower or higher depending on a person’s personal circumstances; and
- Can start rebuilding your credit while still in the proposal.
Disadvantages of a consumer proposal:
- It has a negative impact on your credit rating. A proposal filing receives an R7 (while not as negative as a bankruptcy which gets an R9 – the lowest rating). However, this said, most people that file a proposal or bankruptcy already have their credit rating negatively impacted by late or missed payments. We find that when people file a proposal, it gives them the “breathing space” that they need to rebuild their financial position and get the fresh start that they were looking for.
- You will need the means of being able to make regular fixed monthly payments either via a income (from a job or business) or financial assistance or a combination of both.
Take Back Control of your Debts and Get a Fresh Start!!
If you are unable to repay your debts in full and want to avoid filing a bankruptcy, a consumer proposal may just be the debt solution that you are looking. Give us a call or fill out the contact form below and we will call you to book a free no-obligation debt relief consultation. You have nothing to lose except your debts!