What is a Consumer Proposal?
A consumer proposal is a legally-binding agreement negotiated between you and your creditors to repay a portion of your debt over a specific period, typically up to five years. This debt relief option is managed by a Licensed Insolvency Trustee (LIT) and presents an alternative to bankruptcy, allowing you to retain your assets while receiving protection from creditors. Under a consumer proposal, you agree to make regular payments to the LIT, who then distributes the funds to your creditors. The proposal must be accepted by a majority of your creditors to be accepted. A Consumer Proposal halts all legal actions and collection efforts against you, thereby providing you with a structured path to managing and reducing your debt.
The Role of a Licensed Insolvency Trustee
Licensed Insolvency Trustees (LITs) are federally regulated professionals who administer the consumer proposal process. They play a critical role by acting as intermediaries between you and your creditors. Their responsibilities include assessing your financial situation, providing unbiased advice, and helping you draft a consumer proposal. The LIT submits the proposal to your creditors and oversees the entire process to ensure compliance with legal requirements. Additionally, the LIT manages the payments and communicates with creditors on your behalf, alleviating the stress associated with debt management.
Eligibility Criteria for a Consumer Proposal
Not everyone qualifies for a consumer proposal, and specific criteria must be met. To be eligible, you must owe less than $250,000 (excluding a mortgage on your principal residence). Additionally, you must demonstrate an inability to repay your debts in full and reside in Canada. During the initial consultation, the LIT will conduct a thorough evaluation of your financial situation, including your income, expenses, assets and total debt. This assessment determines whether a consumer proposal is a viable option for you. If your financial situation aligns with the eligibility criteria, the LIT will guide you through the next steps.
Benefits of Filing a Consumer Proposal
Filing a consumer proposal offers several advantages. Firstly, it puts an immediate stop to collection calls, wage garnishments, and legal actions from creditors. This legal protection can provide significant relief and peace of mind. Secondly, the amount you repay is generally less than the total debt owed, and the repayment period is defined, usually not exceeding five years, with no interest being charged. Thirdly, you get an opportunity to retain your assets, such as your home and car, which might otherwise be at risk in bankruptcy. Finally, the structured payment plan outlined in the proposal helps you manage your finances more effectively and work towards regaining financial stability.
The Process of Filing a Consumer Proposal
Step 1: Initial Consultation with an LIT
Your journey begins with an initial consultation with a LIT, who will assess your financial situation and discuss your options. They’ll guide you through the process and help you understand if a consumer proposal is the right choice.
Step 2: Drafting the Proposal
The LIT will help you draft a proposal that outlines your payment plan and the amount you intend to pay. This document will be presented to your creditors for approval.
Step 3: Creditor Approval
Creditors have 45 days to accept or reject your proposal. If the majority agrees, there is a 15 day waiting period for deemed Court approval at which time the consumer proposal becomes legally binding. If rejected, you may negotiate amendments to the consumer proposal or consider other debt relief options.
Step 4: Making Payments
Once approved, you’ll start making regular payments to the LIT, who will then distribute the funds to your creditors. Staying current with these payments is crucial to the success of your consumer proposal. Falling 3 payments behind results in default to a consumer proposal and the consumer proposal will be deemed annulled.
Step 5: Completion and Discharge
After successfully completing the payment plan, attending the two required counselling sessions and proving that you are in compliance with your income taxes, you’ll receive a Certificate of Full Performance, formally releasing you from the remaining debts included in the proposal.
Understanding the Cost of a Consumer Proposal
The cost of filing a consumer proposal can vary based on your debt amount and the negotiated terms. Typically, the total amount repaid is less than the total debt owed. The fees associated with the LIT are included in your payments, meaning there are no additional costs. The LIT’s fees cover the administrative costs and their services throughout the process. This structure makes a consumer proposal a transparent and affordable option for individuals seeking debt relief, as all costs are outlined clearly in the proposal.
Consumer Proposal vs. Bankruptcy
Key Differences
Both consumer proposals and bankruptcy offer debt relief, but they differ significantly. In a consumer proposal, you retain your assets, such as your home and car, while repaying a portion of your debt through regular payments over a specified period. This option allows you to avoid the more severe impact on your credit score and personal life that bankruptcy entails. Bankruptcy, on the other hand, involves the liquidation of certain assets to repay creditors and can have more severe long-term effects on your credit rating and financial standing. Bankruptcy is typically faster but comes with greater financial and personal repercussions.
Which is Right for You?
The decision between a consumer proposal and bankruptcy depends on your individual financial circumstances. Factors to consider include the total amount of debt, the types of assets you own, your income, and your ability to make payments. Consulting with a Licensed Insolvency Trustee can help you weigh the pros and cons of each option, providing you with professional insights to make an informed choice that best aligns with your financial situation and long-term goals.
Impact on Credit Score
Filing a consumer proposal does impact your credit score, as it remains on your credit report for three years after completing the payment plan. This impact indicates to future lenders that you have entered into a formal agreement to repay a portion of your debts. Although this affects your credit rating, it is generally less severe than the impact of bankruptcy, which can remain on your credit report for seven years or more. The consumer proposal demonstrates a proactive approach to managing and repaying your debts, which can be viewed more favorably by future creditors.
Rebuilding Your Credit After a Consumer Proposal
After completing your consumer proposal, you can start rebuilding your credit by monitoring your credit report, making timely payments, and using credit responsibly. Secured credit cards and small loans can also help improve your credit score over time.
Alternatives to a Consumer Proposal
Debt Consolidation
Debt consolidation involves combining multiple debts into one, often with a lower interest rate. This approach can simplify payments and reduce the overall interest paid.
Debt Management Plans
A debt management plan, facilitated by a credit counseling agency, negotiates reduced interest rates and a structured payment plan with creditors, offering another alternative to a consumer proposal.
Informal Debt Settlements
An informal debt settlement involves negotiating directly with creditors to pay a lump sum amount less than the total owed. While not legally binding, it can provide debt relief without formal legal proceedings.
FAQs About Consumer Proposals
1. How long does a consumer proposal stay on my credit report?
A consumer proposal stays on your credit report for three years after completing the payment plan. This period allows you to rebuild your credit history over time.
2. Can I include tax debt in a consumer proposal?
Yes, tax debts can be included in a consumer proposal. The LIT will assess your total debt, including taxes, to create a comprehensive repayment plan.
3. What happens if I miss a payment?
Missing a payment can jeopardize the success of your consumer proposal. If you miss three payments, the proposal may be annulled, and creditors may resume collection actions.
4. Are all debts eligible for a consumer proposal?
Most unsecured debts, including credit card debt, personal loans, and tax debts, can be included. However there are certain unsecured debts that may survive a consumer proposal, such as student loan debts if it is less than 7 years since you completed schooling. Secured debts like mortgages and car loans are typically excluded.
5. Can I pay off my consumer proposal early?
Yes, you can pay off your consumer proposal early without penalties. Early repayment can be advantageous, helping you restore your financial health sooner.
6. Is a consumer proposal public record?
Yes, consumer proposals are public records, and anyone can access the information. However, this typically does not impact employment or housing opportunities significantly.
Conclusion
A consumer proposal offers a structured, legally-binding path to debt relief, allowing you to regain financial control while avoiding the more severe consequences of bankruptcy. By understanding the process, eligibility criteria, benefits, and potential drawbacks, you can make an informed decision about whether a consumer proposal is the right solution for your financial situation. Working with a Licensed Insolvency Trustee ensures you receive professional guidance and support throughout the journey, helping you navigate the complexities of debt repayment and move towards a brighter financial future.
Require Assistance?
At Crowe MacKay & Company, we have over 60 years of experience and offer free initial consultations. If you have any questions regarding the information above, contact our office today and start your debt relief journey.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
If you require corporate or personal insolvency services, Crowe MacKay & Company provides custom solutions for clients, allowing you to live debt-free.
