Consumer Proposals: When you can’t pay your debts or even when you can repay your debts but not under their original terms, it can feel like there aren’t many options available to you. But in fact, one option you may want to consider is a consumer proposal.
But some individuals can feel hesitant about consumer proposals, most wonder if they’ll have a negative effect or if they’re the best choice for them when it comes to debt repayment options. Here is a full breakdown of what consumer proposals are, if they’re a good choice and they can benefit and affect you.
What is a consumer proposal?
A consumer proposal is a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). Throughout this process, the LIT will work with you to determine how much debt you can reasonably afford to pay back. The LIT will develop a “proposal”, which would be an offer to pay creditors a percentage of what you owe to them, or extend the period of time you have to pay the debt off, or a combination of both.
The LIT would send off the proposal to the creditors, now it is important to note that the creditors have the option to either accept or reject the proposal. If your proposal is accepted, your LIT will then create a payment plan for you which would have to be approved by your creditors. Once you complete the term of your payment plan, your creditors will discharge the remaining balances on your accounts.
Some additional notes to keep in mind about consumer proposals, the term of consumer proposal cannot exceed five years and payments are made through the LIT and the LIT uses that money to pay each of your creditors.
How do consumer proposals work?
There are six steps in the process of creating a consumer proposal
Find a Licenced Insolvency Trustee
The Canadian government has a helpful tool that allows you to find an active Licensed Insolvency Trustee based on where you live. However, depending on where you’re located there may be dozens of trustees near you.
Receive a debt assessment and draft a proposal
During your assessment with the LIT, they will assess your debt (also called your liabilities) against your assets and income. You will need to provide information such as your:
The main point of this assessment is to determine if you are insolvent. Insolvency means that your liabilities outweigh your assets and this reinforces the concept that you cannot reasonably repay your debts. If you are determined to be insolvent, the trustee will recommend bankruptcy over a consumer proposal.
But if you can afford to repay some of what you owe, then a consumer proposal would be the better option for you.
Send the proposal to the creditors for approval
If your LIT recommends going through with a consumer proposal, they will then help draft a proposal and submit it to the creditors on your behalf. Within the proposal it will set the terms of your payment schedule and the payment installments. If the majority of creditors vote yes, you will progress onto the next step.
File your proposal with the OSB
Once you receive the majority vote needed, your proposal is then considered court-approved and will be held within the Office of the Superintendent of Bankruptcy (OSB). The proposal will become part of a permanent public record held by the OSB.
Complete the payment plan
Your proposal payments begin on the day stated in your formal agreement. You will have to make fixed payments to your trustee and they will then pay your creditors for you.
It’s crucial to complete your payments on time. If you miss three monthly payments or one payment by more than three months, you risk the chance of having your proposal being annulled.
Receive release from your debts
Once you complete all the payments and counselling requirements, you will be legally released from the debts included in it.
How long will a consumer proposal stay on my credit report?
It takes three years for a consumer proposal to be taken off your credit score after your last payment in three years. What this means is that if you are capable of paying your debt off faster and meeting all your obligations, the sooner you will be able to rebuild and repair your credit.
How do I know if a consumer proposal is right for me?
Consumer proposals are like the little brother of bankruptcy. They are generally considered less dramatic than declaring full-out bankruptcy but in order to be eligible your debt total has to be under $250,000 (not including secured loans like your mortgage or car loan). The best person to speak about debt solutions and alternatives is a Licensed Insolvency Trustee, they are the only ones qualified to draft the legally binding proposal and help determine if a consumer proposal or other management solutions would be the best choice for you and your specific financial situation.