If your debts and bills are too much to handle but you want to avoid bankruptcy a consumer proposal may be an appropriate alternative for you. A Canada consumer proposal is a legal debt settlement option legislated by the federal government and administered by a Licensed Insolvency Trustee.
Understanding the avenues available to you when your debts are mounting can be overwhelming, so in this article, we break down the main aspects of a consumer proposal in simple terms to help you decide if it the best way for you to eliminate debt.
What is a consumer proposal?
What debts are eligible for a consumer proposal?
What are the benefits of a consumer proposal?
What are the terms of a consumer proposal?
How much does a consumer proposal cost?
How will a consumer proposal affect your credit rating?
How do you begin a consumer proposal?
A consumer proposal in Canada is a formal, legally binding debt proposal to pay your creditors a percentage of what you owe over a period of time.
If your unsecured debts, not including mortgages and car loans, are between $10,000 and $250,000 and you have sufficient income to make monthly payments or a lump sum payment, you qualify to make a consumer proposal.
Whilst it’s not the same as filing for bankruptcy, a consumer proposal falls under the Bankruptcy and Insolvency Act, meaning that it is a legally binding procedure approved by the federal government. Because of this, it can only be organized by a licensed official, known as a Consumer Proposal Administrator and Licensed Insolvency Trustee.
What Kinds of Debts are Eligible for a Consumer Proposal?
Typically, a consumer proposal is possible for people who:
- Have a total debt amount between $10,000-$250,000 (excluding your mortgage loan)
- Have stable employment and are able to repay some, but not all, of their debt liability
- Are unable to get a consolidation loan from a bank or credit union because of a poor credit rating, lack of collateral or insufficient income.
A consumer proposal deals with unsecured debts including:
- Credit card debt
- Unsecured bank loans and lines of credit
- Tax debt including income tax, HST and withholding taxes
- Payday loans
- Other bill payments
Student debt falls under some special rules. If you have been out of school for 7 years your student loan can be included, and forgiven, in a consumer proposal. If your student debt is less than 7 years your trustee can explain how your student debt, and payments, will be treated while you are in a proposal.
Secured debts, like a car loan or mortgage, are excluded in a proposal unless you want to walk away from the asset and payment obligations. Any shortfall a secured creditor has can be forgiven in a consumer proposal.
The primary benefit of a consumer proposal is that it presses pause on your debt – balances go down, not up.
- you only pay a portion of your debt
- interest is frozen the date you file,
- you don’t lose your house or any assets, and
- collection calls and wage garnishing stop immediately.
It is not unusual to reduce your debt by as much as 70% through a consumer proposal.
Your creditors understand that the more your debt becomes unmanageable for you, the more likely you are to have to file for bankruptcy. If this happens, they will receive only what they are entitled to by law in bankruptcy and this is usually only a small percentage of what you owe. So a consumer proposal solution is an acceptable compromise for both you and those you owe when things become unmanageable.
The legally binding agreement you come to with your creditors will also give you immediate protection from any other debt collection methods. So by filing for a consumer proposal, you are not in jeopardy of losing any assets or wages, and collection companies are no longer legally allowed to contact you.
Lastly, consumer proposals have a lower impact on your credit score than bankruptcy.
Your consumer proposal administrator will work with you to determine a settlement arrangement that you can afford and that be acceptable to your creditors.
The specifics of the agreement itself will be determined based on your income and debt liability, as well as the willingness of your creditors to forgive part of your debt. Some guidelines that affect how much you will pay:
- How much your creditors would expect to receive in a bankruptcy. You must offer slightly more than this.
- How long you choose for a payment period. Consumer proposal settlements have a maximum repayment period of 5 years or 60 months and are interest-free.
- What your creditor deems a minimum recovery. All creditors are different – some accept as low as 25%, others 35% – and they will look at your income and expenses to decide.
There can be a negotiation process, during which the Licensed Insolvency Trustee will talk with your creditors if they are not happy with your original offer to determine what they are more likely to accept. An experienced LIT knows what different creditors expect and can advise you during the free consultation what a good range might be.
You can always pay off your proposal early by increasing your payments if your income improves. If you come into an unexpected windfall you can keep that windfall or use it to pay off your proposal in one lump sum.
While a consumer proposal will help you to get your finances back in control, it’s important that is designed for financial success from the beginning.
There is no filing fee to file a consumer proposal. Your payments are based on what can be negotiated with your creditors. Many websites list a cost to file a consumer proposal of $1500 however most reputable Licensed Insolvency Trustees do not charge an upfront fee. You should not be making any payments until your proposal is filed with the government.
Your administrator is paid out of the funds your creditors receive. There is no extra charge to you. Law states they keep 20% of your agreed future payments as their fee for managing the process.
A consumer proposal will remain on your credit report for the earlier of:
- 6 years after the date you filed
- 3 years after the date of completion
What that means is if you file a 5-year consumer proposal, it will be removed from your credit report just one year after you finish. This is much faster than bankruptcy and the same impact as credit counselling.
Your credit score always depends on what else you have in your report. Anything from unpaid bills, through to maxing out your credit cards will also impact your score negatively. And while one missed payment or other credit hiccup isn’t likely to damage your profile too seriously, having lots of problematic areas will. A consumer proposal is often the first step in the process of repairing bad credit because it eliminates debt that is causing you a problem in the first place.
If you feel that your debt is becoming unmanageable, don’t panic. There are many options available to get back in control of your debt.
A word of warning:
Avoid unlicensed debt consultants who charge you an extra, unnecessary, and often large, fee to help you through the process and will only be able to refer you to a trustee to file.
Credit counselling agencies also like to promote consumer proposals however they are not trained in the intricacies to deal with individual unique situations.
For these reasons, we recommend you talk directed, for free, with a Licensed Insolvency Trustee if you want more advice on filing a consumer proposal to deal with your debt.
You can arrange a free, confidential consultation, and there is no obligation to proceed if you decide this is not the right choice for you.