Consumer Proposals

It's the end of the month and the bills are due. You've got a good job. You can afford to pay, just not as much as everyone wants. What do you do? If you find yourself in this situation month after month then you might want to consider debt negotiation and settlement by making a consumer proposal to your creditors.

What is a Consumer Proposal?

Debt negotiation and settlement through a proposal to creditors is similar in concept to a Debt Management Plan: you can afford to repay a portion (or all) of your debts; you simply need more time to pay.

In general, a Consumer Proposal is an appropriate form of debt negotiation and settlement in situations when:

• a person's debts exceed $5,000, to a maximum of $250,000;
• the debtor has the ability to repay a portion of their debt;
• and the debtor is looking for a bankruptcy alternative (rather than a personal bankruptcy) that can solve their problems.

Unlike a Debt Management Plan, a consumer proposal (also known as Proposal to Creditors or Personal Proposal) is a legally binding procedure administered for the courts by a licensed Bankruptcy Trustee as a consumer proposal administrator - whereas a Debt Management Plan is not binding on your creditors.

Our Financial Advisor tool lets you compare different debt repayment options that are available to you by calculating what your monthly payments would be in each case.

For details on negotiating tax debts and filing a proposal to Revenue Canada, please visit our Tax Debt Settlement page.

Advantages of debt negotiation and settlement through a proposal

Advantages of debt negotiation and settlement with creditors through a consumer proposal are:

• Maximum length of the repayment period is 5 years;
• If accepted by a majority of your creditors (50% +1) it is deemed to be accepted by ALL of your creditors;
• Interest is frozen at the date you file;
• You can negotiate to repay only a portion of the debt you owe;
• Your creditors are "stayed" (restricted) from taking any legal action against you;
• Wage garnishments (except for support and alimony) are immediately stopped.

Proposals to creditors were created to provide people with an alternative to bankruptcy. If you are in financial trouble and you have the ability to repay a portion of your debt, perhaps a consumer proposal is the right solution for you.

Once you file a proposal, none of your unsecured creditors can garnish your wages or take you to court until the proposal has been dealt with. In fact, if your wages are being garnished and you file a proposal, the garnishment will stop.

In addition, when you file a consumer proposal, all of your unsecured debts are frozen and no more interest accumulates against them.

How does a proposal work?

First, a consumer proposal administrator (a trustee) will help you summarize your financial situation and determine how much of a monthly payment you can afford to make. Then, they will compare that payment to the total amount of your unsecured debt to determine how many months you will be required to pay. If the numbers appear reasonable for both you and your creditors, the trustee will prepare the documents necessary to file a consumer proposal to creditors.

Is that all it takes to make a proposal?

That's the end of the first stage. The second stage is up to your creditors. Under the Bankruptcy and Insolvency Act ("BIA") your creditors have 45 days to vote for or against your proposal. If a simple majority (50 % +1) vote for the debt negotiation and settlement in the way you proposed it, then it is deemed to be accepted by ALL of your creditors. Fifteen days after that, if there are no objections, your proposal will be approved by the Court. From that date forward, both you and your creditors are locked into the terms of the proposal.

What if my creditors vote "no?"

If 25 % or more of your creditors vote against accepting your proposal and request a meeting, your trustee will call a meeting of creditors. At that meeting the trustee will help you negotiate with your creditors in an attempt to come to an agreement that both you and the creditors find acceptable.

Here's an example of a proposal

"You have debts totaling $25,000. After you pay all of your living expenses (rent, utilities, groceries, etc) you have $500 left to pay bills. You want to leave yourself a bit of a "buffer" for unexpected expenses (like car repairs) so you think you can afford to make a payment of $350/month towards a proposal."

Generally, the threshold that creditors consider reasonable is an offer to repay at least 50% of the amount that you owe. In the example above, that would be $12,500. With a payment of $350 per month it would take you 36 months to pay that amount; in this situation, a debt settlement advice from a professional would probably be that you come up to your creditors with a consumer proposal suggesting 36 monthly payments of $350/month.

If you could only pay $250 a month, then it would take you 50 months to pay $12,500. If you could pay $400 per month, then if would take you 32 months to pay $12,500.

Keep in mind that this is only an example. Your creditors might settle with less than 50 % or they may ask for more. Each consumer proposal is different and has to be considered on its own merits.

Which debts can I include?

Proposals were created to deal with unsecured debt. An unsecured debt is money owed without collateral. Some examples of unsecured debt include:

• Credit cards
• Lines of credit
• Personal loans
• Income taxes

The other type of credit that people usually have is called secured debt. Secured debt is money that was borrowed with a condition that if you fail to make your payments one (or more) of your possessions may be seized and sold by the secured creditor. Some examples of secured debt include:

• Mortgage
• Car loan/lease
• Financing contract

In most cases, secured creditors are excluded from your proposal. The exception the case when you owe a secured creditor more than the value of the item over which they hold security. For example:

"One of your creditors is Acme Finance. You owe Acme $2,500 and they hold security over your stereo system, with a current value $1,500."

Acme is both a secured ($1,500 for the stereo) and an unsecured creditor ($2,500 - $1,500 = $1,000). Under the terms of the proposal, you will have to make an arrangement to pay Acme the $1,500 that they are entitled to (the value of their security) or give them the security (your stereo). The other $1,000 that Acme is owed will get lumped together with all of your other unsecured debts.

Can't I just leave Acme out of the proposal?

No. If you file a proposal as a means of debt negotiation and settlement, you are required to include all of your unsecured creditors. That goes for family and friends too. All of your unsecured creditors must be treated the same - it's one of the basic conditions of filing a consumer proposal.

What happens if I miss a payment?

Over the life of a proposal you may miss up to 2 payments and the trustee will simply add two more payments to the end of the proposal.

However, if you miss 3 months worth of payments, the proposal collapses and is annulled by the Court. If your proposal is annulled, your unsecured creditors may immediately apply to the court to garnish your wages and interest charges are applied to your debts back to the day that you filed your consumer proposal.

If you run into payment problems after filing a proposal, contact your consumer proposal administrator immediately.

What about my credit rating?

As soon as you file a proposal your credit rating will be revised to an R7 and it will probably remain at this rating until the proposal is completed. In addition, after you complete the proposal, a note will appear in your credit record for up to 3 years from the date that you completed your proposal.

This sounds too easy...

Don't kid yourself. Your idea of debt negotiation and settlement through a consumer proposal will only work if you have the ability to make your payments. Remember, your alternative is to file bankruptcy. Your proposal must offer your unsecured creditors more money than they would receive in a personal bankruptcy and they have to believe that you are capable of making the payments that you are proposing.

What does it cost?

The trustees' fees are set by the Superintendent of Bankruptcy and are described in the BIA. In most cases, your trustee will be paid out of the proceeds of the consumer proposal. Using our earlier example, if you offered your creditors 36 payments of $350 to retire $25,000 worth of debt, your total payments would be $12,600. The fees for the proposal would come out of that amount.

What do I do now?

If you are experiencing financial difficulty, and are thinking that debt negotiation and settlement with creditors in the form of a consumer proposal might work for you, we recommend you to make an appointment with a licensed proposal administrator. Only a licensed trustee can assist you in filing a proposal. They will assess your situation and help you determine the strategy and debt management solution that makes the most sense for you. The initial consultation is free of charge, and may help you to resolve your problems before they get out of hand.

(This article is provided by Hoyes, Michalos & Associates Inc., Trustees in Bankruptcy.)