It’s an uncomfortable reality that Canadians are carrying more consumer debt than ever. And while most are finding ways to stay afloat, it’s not the case for everyone, and many are feeling crushed under the weight of monthly payments. Thankfully, there are options for Canadians who are unable to manage their payments and are hounded relentlessly by bill collectors as they fall further and further behind each month.
The consumer proposal is one such solution that’s helping thousands of Canadians get out of debt. But what is it, and how can it help? In this article, I’ll cover everything you need to know about consumer proposal, to help you decide if it’s an option worth exploring.
What Is a Consumer Proposal?
A consumer proposal is a legally binding agreement between you and your creditors and must be negotiated through a Licensed Insolvency Trustee (LIT). It serves as an alternative to bankruptcy. Your creditors agree to accept a percentage of your balance owing, in exchange for forgiveness of the debt in full. The maximum amount of unsecured debt that can be included in a consumer proposal is $250,000.
How Does a Consumer Proposal Differ From Bankruptcy?
Many people wonder whether they should be filing a consumer proposal or filing for bankruptcy. There are some real differences between the two. The biggest is that bankruptcy requires that you surrender your assets in exchange for the elimination of the repayment requirements on your debt, while a proposal does not. A bankruptcy will stay on your credit bureau for up to seven years after discharge. A consumer proposal displays as an R7 rating on your credit bureau, and for a shorter period of time than bankruptcy, usually 3 years after your proposal is completed, and no longer than 5 years.
With a consumer proposal, your assets are protected, and you must agree to repay a percentage of your debt in full, in the form of a single, monthly payment. A consumer proposal cannot include secured debt, such as a mortgage, or a car loan. In addition, student loans cannot be included unless you’ve been out of school for more than seven years.
Where to Get a Consumer Proposal
Licensed Insolvency Trustees are available in every province in Canada. On their website, the Government of Canada has a helpful search tool that will make it easy for you to find a trustee in your area. Remember that the rules surrounding consumer proposals can vary slightly province to province, but your trustee will have the expertise to provide you with the right advice for where you live.
Qualifying For a Consumer Proposal
Not everyone qualifies for a consumer proposal, nor is it always the best solution, even if you are struggling to repay your debt. Here are a few things that might make you an ideal candidate:
- You’re struggling to make monthly payments on your debt
- Your credit has already been impacted by late payments or unpaid collection items
- You can’t qualify for a consolidation loan through a financial institution
- Your unsecured debts do not exceed $250,000
- You don’t want to surrender assets through bankruptcy
- You can afford to make a reduced monthly payment
How to File a Consumer Proposal
Filing for a consumer proposal involves a formal and legal process. The following is a list of steps that you would take, with the help of a Licensed Insolvency Trustee, in order to complete the consumer proposal process.
- After meeting with your trustee, they would file your application with the Office of the Superintendent of Bankruptcy (OSB). At this point, any payments to your creditors are halted, as well as any garnishments or lawsuits that are being made by them. Interest on your debt stops accumulating.
- The LIT files your proposal with your list of creditors. They will need to include details of your financial hardship, along with an explanation as to why you are requesting the proposal.
- Your creditors have 45 days to decide whether or not to hold a creditor’s meeting. Any one creditor carrying a 25% or larger share of your debt has the right to call a meeting. If a meeting is held, the creditors present will vote to either accept or refuse your proposal. If a creditor does not attend the meeting, or no meeting is held within 45 days of your trustee filing the proposal, then your proposal is deemed to be acceptable.
- If your proposal is accepted, you will begin to make payments, as arranged, to your LIT, who will forward it to your creditors accordingly. You will be required to follow any other conditions agreed to in the proposal, and you must attend two financial counselling sessions.
What if My Proposal Is Refused?
If the conditions of your proposal are rejected by your creditor, you have the option of meeting with your trustee to make adjustments to your proposal and resubmit, or they can advise you on other options you might have, including bankruptcy.
How Much Will My Consumer Proposal Cost?
You may be wondering about the costs of a consumer proposal. The initial consultation with the Licensed Insolvency Trustee is free of charge. If the proposal is accepted, then fees are usually collected from the proceeds of the proposal, meaning that you aren’t required to front any payment from your own resources.
Why Are Creditors Willing to Forgive the Outstanding Debt?
A major part of the consumer proposal is the forgiveness of a portion of your outstanding debt by your creditors, as well as the freezing of interest rates. There’s a reason financial institutions are willing to make this compromise, that is, it’s in their best interest to help put you in a position to payout at least a percentage of your debt. The alternative, after all, is facing the prospect of not seeing any funds repaid, and having to write off your loan off as a loss.
Pros and Cons of a Consumer Proposal
Before considering a consumer proposal, it’s important to know what you’re getting yourself into. As with most things, there are advantages to a consumer proposal, and disadvantages. While we’ve already covered a lot of the following points throughout the article, here’s a list of consumer proposal pros and cons, at a glance.
- It avoids bankruptcy
- Offers immediate protection from creditors
- Potential to reduce the majority of your debt
- Interest is frozen on your remaining debts
- The ability to make one monthly payment on your debt
- Protects important assets, such as your home
- Negative impact on your credit score
- Will take time to regain trust with creditors
- Unsecured debt only, mortgages and car loans cannot be included
- Limitations on including student loans in a consumer proposal
Do This Before Filing For a Consumer Proposal
Before meeting with a licensed insolvency trustee to consider a consumer proposal, you should explore other, less extreme, options for repaying your debt. For example, if you’re struggling to make payments, but your credit has not yet been adversely affected, my recommendation would be to try and qualify for a consolidation loan through your primary financial institution (or any financial institution, for that matter).
A consolidation loan can help by combining all of your debts into one lump sum amount, with one monthly payment. Unlike a consumer proposal or bankruptcy, it will avoid any negative impact to your credit score. If your credit has been negatively impacted to the point where you’re unable to qualify for a loan, consider whether or not you can liquidate some assets to pay down debt. For example, do you have any non-RRSP savings that could be used to reduce your debt load, or do you have an extra vehicle that could be sold to free up some cash?
These decisions can be difficult to make, so I recommend meeting with a financial professional who can provide you with an unbiased opinion. If you’ve exhausted all options, then it might be time to see a licensed insolvency trustee to discuss your options, including a proposal.
Final Thoughts on Consumer Proposal
There are many reasons people get into trouble with debt. Sometimes, it’s as simple as poor financial management or overspending. But factors outside our control, such as job loss, a prolonged illness, or a marital breakdown can also weigh heavily. If you find yourself unable to keep us with your debt repayment, a consumer proposal may be a viable option. It can be a favourable alternative to bankruptcy, which has longer term implications as well as the potential for asset loss.
If you can manage to get out of debt without a proposal, through the help of a consolidation loan perhaps, that is likely going to be your best option. If that’s not possible, try reaching out to a Licensed Insolvency Trustee for advice. They’ll look at your situation, and recommend the best course of action.