With the recent headlines of 46% of Canadians being less than $200 away from financial insolvency, we thought today we would write about consumer proposals. More specifically, just what is a consumer proposal? That answer is actually fairly simple. Through the Bankruptcy and Insolvency Act (“Act”), a consumer proposal is an arrangement negotiated with your creditors, through a Licensed Insolvency Trustee (that’s us!). The Licensed Insolvency Trustee (L.I.T.) takes the role of consumer proposal administrator, and the process allows you to settle your debts for less than you owe, and avoid bankruptcy in the process. Consumer proposals cover most unsecured debts, including:
- Credit cards
- Unsecured lines of credit
- Loans (bank, finance company, payday)
- Personal loans from family, friends and others
- Student loans
- Income tax debt
These debts are generally all accepted under a consumer proposal. If you have secured debts (like a financed/leased vehicle or a house mortgage), they would not form part of your consumer proposal. These secured creditors have to be dealt with directly.
At this point, I’m sure you’re asking “Why would I want to file a consumer proposal and avoid bankruptcy though?”, and that would be a great question to ask! There are several advantages to applying for a consumer proposal:
- You get to keep your assets (not so in bankruptcy)
- Once a proposal is accepted, your payments will not increase (payments can increase in bankruptcy depending on your income and “surplus income”)
- The negative effect on your credit score is generally not as bad as a bankruptcy
- Professional accreditation can be lost claiming bankruptcy, but retained using a consumer proposal (eg. Insurance brokers, corporation directors, licensed real estate brokers)
- Interest is frozen at the date of the proposal
- You may still sponsor a family member through the Canadian immigration process (may be hampered if claiming bankruptcy)
- It’s a legal process so you and your creditors must follow strict rules
There are some great advantages listed here, and the legal protection the process offers helps alleviate your stress as well. Once you file a consumer proposal, most wage garnishments cease, and collection companies/creditors can no longer contact you for payment. Taking charge of your debt and stopping the constant phone calls from creditors can allow you to live with a whole lot less stress! The Act ensures your protection and ensures your repayment plan follows a strict and regulated process. The L.I.T. will go over your budget with you to ensure you can afford the payment going forward. From there, the L.I.T. will negotiate a settlement between you and your creditors. You make monthly payments over a term that is usually 5 years (though there is no penalty for paying off the proposal faster). You attend two credit counselling sessions as well, which teach budgeting and credit rebuilding. Once you make your final consumer proposal payment, your debts are eliminated.
You generally pay more to your creditors in a consumer proposal vs. bankruptcy, but the payments are spread out over a longer term. This usually results in a less stressful process, not only because the payments are spread out over a longer term (and remember, there is no interest), but also because you get to keep your assets. So if you’re one of the many Canadians struggling with debt, and are looking for a way out, a consumer proposal might be worth your while. If this sounds like something that might interest you, or you have questions about the process, contact us today! We’re here to help you, and we love seeing our people get a Freshstart.