Is a consumer proposal worth it?

If you want to get rid of your debts but can no longer cover the exorbitant amounts you have to pay each month, you should consult a Licensed Insolvency Trustee (LIT) to analyze the financial solutions available to you.

Sometimes it is difficult to pay off all your debts and bankruptcy may seem to be the only way out. Fortunately, there are other options available to you such as a consumer proposal. This is a solution provided by the Bankruptcy and Insolvency Act that consists of making a proposal to your creditors in order to repay your debts and avoid declaring bankruptcy. In this article, we detail the important points to know about the consumer proposal.

What is a consumer proposal? 

A consumer proposal is a Canadian government-approved debt solution that enables you to consolidate and reduce your debts. This program gives you the opportunity to pay off your debts without interest according to a well-defined process, and reduces your debt up to 70% of its initial value. 

This is a legally binding agreement to be discussed with your creditors in order to repay the principal through monthly payments made over a maximum period of 5 years. Under the law, this proposal allows you to keep your assets and protects you from the risk of foreclosure. So it is a perfect solution to alleviate your debts in order to avoid bankruptcy.

Unsecured debts 

Only unsecured creditors are concerned by the consumer proposal:

  • Credit card debts
  • Tax liabilities
  • Bank Loans
  • Payday Loans

Debts not included in a consumer proposal

Certain debts are excluded from the consumer proposal:

  • Guaranteed debts such as those related to your house, your vehicle, your boat and others
  • Court-prescribed fines, penalties and restitution orders
  • Alimony
  • Compensation awarded by a court
  • Debts relating to fraud, embezzlement or misappropriation

The mortgage on your primary residence or the financing contract on a vehicle are not affected by the consumer proposal.

Eligibility criteria for a consumer proposal

There are some specific requirements you must meet in order to be able to file a consumer proposal which is governed by the Bankruptcy and Insolvency Act:

  • The total amount of your debts (not including the mortgage on your primary residence) does not exceed $250,000
  • You are insolvent (your debts exceed the value of your assets or you are unable to pay your debts on the due dates)
  • You reside or own property in Canada
  • You are not bankrupt

If you meet these criteria, you can consult your Licensed Insolvency Trustee (LIT) who can help you begin the process of a consumer proposal if he/she considers this to be your best option or direct you to other alternatives.

How does a consumer proposal work?

To know if the consumer proposal is right for you, it is important to understand its process. It all starts with a free consultation with your Licensed Insolvency Trustee (LIT) the professional who will play a major role throughout this procedure.

The Licensed Insolvency Trustee role

Consumer proposals are regulated by the Canadian government and only a Licensed Insolvency Trustee can file the proposal. The trustee acts as your partner, analyzing your financial situation and guiding you towards the most appropriate solution.

If you decide to opt for a consumer proposal, the LIT will act as an intermediary between your creditors to find a compromise that satisfies both parties. He/she will guide you through the insolvency process and will take care of gathering creditors if needed. Finally, it is up to your trustee to pay the total amount to your creditors once the proposal has been accepted. Trustee services are part of the written agreement and will therefore be paid as you pay off your debts.

Main steps of a consumer proposal:

  • Free meeting with your Licensed Insolvency Trustee during which he/she evaluates your financial situation.
  • The LIT determines a new budget based on the amount you are able to pay each month.
  • If the consumer proposal suits your situation, he/she helps you draft the offer he will present to creditors.
  • This offer may cover some or all of your unsecured debts payable over a maximum period of five years.
  • Your Licensed Insolvency Trustee files the consumer proposal with the Office of the Superintendent of Bankruptcy OSB and creditors have 45 days to approve it.
  • If the proposal is accepted, you attend two counselling sessions to receive a Certificate of Full Performance.
  • Creditors must comply with the new terms of the consumer proposal and no longer have a relationship with you.
  • You are discharged of all your old debts and start repaying only your LIT according to the new schedule.
  • You pay the new amount through monthly payments for a period of up to five years.

However, the offer may be refused, or the consumer proposal may be cancelled, so you can ask your LIT to guide you towards other alternatives.

The benefits of the consumer proposal

A consumer proposal can save anyone from bankruptcy if he/she has the capacity to pay a part of their debts. Depending on your financial situation, this program could be your best alternative and guarantees various advantages:     

  • The offer is interest-free, so it reduces your debts.
  • You can keep your assets, you are protected against seizure of property.
  • You have only one monthly payment to repay and it is adapted to your budget.
  • You can reduce your debts up to 70% of their initial value.
  • Mortgage renewal is not affected.
  • The consumer proposal is removed from your credit file three years after it has been paid. 
  • You no longer have contact with former creditors, as they are no longer allowed to call you.

Consumer proposal effects

There are several effects to initiating the consumer proposal process:

  • Stopping all legal proceedings or seizure
  • Cessation of all contact with unsecured creditors who deal directly with your LIT
  • Prohibition on secured creditors from terminating the financing agreement
  • Prohibition against terminating or modifying any contract only because you are insolvent.
  • Prohibiting an employer from dismissing or suspending a person because he/she is insolvent.

Secured creditors are not affected by the consumer proposal, so you must continue to pay them in the usual manner. However, if the consumer proposal is cancelled, in particular because of late payments, the creditors will once again have the right to request reimbursement in their own way.

What about your credit report and credit score?

Everyone who files a consumer proposal will have a low credit score. Once you are part of the consumer proposal program, your credit report will have a note indicating that you are in debt repayment mode. This will make it difficult for you to get new credit. However, in your situation it is better not to relapse into over-indebtedness.

You can also take the opportunity to try to save money without using credit cards. If you complete your consumer proposal, you will be able to get a new credit card and improve your credit score, especially if you keep your debt ratio low.

Why and when to opt for the consumer proposal?

When to consult your Licensed Insolvency Trustee (LIT):

You should consider a consumer proposal when:

  • You are overwhelmed by your monthly expenses
  • You can no longer pay your debts on the due dates.
  • You use a credit card to pay your expenses.
  • You can no longer save and you feel your debts keep increasing.

Be aware that a consumer proposal is for anyone whose income is stable but who is overwhelmed by expenses because of high interest rates or strict terms imposed by creditors.

Why choose the consumer proposal?

The consumer proposal is the perfect solution if you have a stable income and can pay part of your debts. It prevents you from a personal bankruptcy by reducing the total value of your debt by almost 70%. You can then pay off your debts with a single monthly payment that fits your budget. The change in payment terms enables you to repay some or all of your unsecured debt over a maximum period of five years. In addition, this procedure frees you from all interest and other additional costs. It gives you the ability to quickly reduce and consolidate your debt and improve your financial potential.

If you are still hesitating to opt for a consumer proposal, get a free consultation with one of the Groupe Serpone’s experts. Our consultants can help you find the alternatives that match your situation and guide you towards the best solution.

The post Is a consumer proposal worth it? appeared first on Groupe Serpone.

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