Consumer Proposal – Payback Percentage

Question: Hello, thank you for taking time to read my question.

My spouse and I currently have $73,000 in unsecured credit card debt. We have a 2 yr old son. We take home approximately $4500/month net pay. Once living expense are paid, I would estimate that we have about $1500/month left to pay debt. Obviously right now that is not enough to even make the minimum payments. We have no assets besides an 8 year old car, $3000 is RESPs and $1000 in an RRSP.

We are considering personal bankruptcy or a consumer proposal. Can the RESPs and RRSPs be seized by creditors or sold by the bankruptcy trustee? I want to pay these debts however currently we cannot even meet the minimums.

What is the average payback percentage for a consumer proposal? I was thinking of 20-25% over a period of no more than 2 years. Is this reasonable? Otherwise bankruptcy is the only other option.  How will each affect my credit rating? If am going to ruin my credit, I don’t want to be paying everything back over 5 years and then having an R7 for 3 more years.

Thank you again for your time.

Bankruptcy or Consumer Proposal – Which is Better?

First, if you go bankrupt, the bankruptcy rules have changed so that the trustee cannot seize your RRSP except for contributions made within the last 12 months.  If your RRSP was from before that time it will be yours to keep. You will unfortunately lose your RESP in a bankruptcy. To find out for sure, bring your RRSP and RESP documents to your initial consultation with your trustee, and before you sign any paperwork ask them whether or not you will lose these assets in the event of a bankruptcy.

Your car is likely worth less than the allowable bankruptcy exemption limit in most provinces so you will also be able to keep your car.

Your question about the typical payback percentage in a consumer proposal is much more difficult to answer, because there is no typical payback percentage.

The amount you pay in a consumer proposal is more than what you would typically pay in a bankruptcy.  (Here’s a link explaining the cost of bankruptcy in Canada).  In your situation you would have surplus income payments of approximately $730 per month in a bankruptcy. Based on your surplus income your bankruptcy will likely last 21 months so you will pay a total of $15,330 in surplus income payments. Combine this with the $3,000 in RESP assets you have and the payments in your proposal will need to be more than the $18,000 your creditors will expect to receive in a bankruptcy.

In this example, perhaps proposal payments of $375 per month for five years ($22,500) would be accepted by your creditors, since in a bankruptcy they would only expect to receive $18,000. You can shorten this time period and increase your monthly payments if you can afford to do so and complete your proposal earlier. In your situation you may be able to offer $625 per month for 3 years.  This is less per month that your bankruptcy and you will be able to keep your RESP.

As for your credit rating, if you are currently unable to make your minimum payments and start to get behind, this will show up on your credit report and negatively impact your credit rating. A bankruptcy will remain on your report for 7 years, a consumer proposal for 3 years after your payments are complete.

Of course determining the correct amount to offer in a consumer proposal takes many years of experience dealing with the various different creditors, so for a precise evaluation of your situation you should contact a bankruptcy trustee for a no-charge initital consultation.

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