How to Avoid Bankruptcy with a Consumer Proposal
One of the most difficult financial situations to overcome is bankruptcy. But what happens when you feel as though you don’t have a choice in the matter? There are times when you become so overwhelmed by your obligations that you feel as though bankruptcy is the only option… even if you would rather not take that step.
If you have a job but are unable to make all your minimum payments, let alone actually pay down the principal on your debt, you don’t have to resort to bankruptcy. A consumer proposal is a way to avoid bankruptcy and meet your obligations in a way that is manageable in the context of your current financial situation.
What is a Consumer Proposal?
A consumer proposal is an option for an individual with over $5,000 but less than $250,000 in unsecured debt. It’s also possible create a consumer proposal as a couple, as long as, together, you have less than $500,000 in unsecured debt.
Unsecured debt includes obligations like credit cards, lines of credit, loans and even unpaid income tax. With a consumer proposal, you are asking your creditors to accept a lower monthly payment over a set amount of time. Your proposal is voted on by all the creditors involved. If the majority of your creditors accept your terms, it is binding for all of your creditors. Under the Bankruptcy and Insolvency Act, once your proposal is accepted your interest is frozen and you are protected from any legal action. This can be a great
This can be a great way to meet your obligations without running into the issues that come when creditors raise interest rates, or adopt other policies that might not be beneficial to you.
Here’s an example of how it works:
Say you have $50,000 in consumer credit. After looking at your net income, minus all of your living expenses such as rent, utilities, and food, maybe you determine that you can comfortably afford to make a payment of $500 a month to your creditors. Your consumer proposal might then to be to pay back $25,000 by making payments of $500 over the course of 50 months.
You can miss two payments, and those missed payments would then be added on to the end of your term, lengthening it by another two months. If, however, you miss a third payment during this process, the proposal is annulled and the creditors will be back on you for their money, including the interest accrued since the time you filed the proposal.
Since creditors may get less under bankruptcy, many creditors are willing accept an arrangement that returns half of that amount back to them. The other consideration is the fact that you have been making payments for years, including interest. There is a good chance that your creditors have already more than received back everything that they lent you. Accepting your consumer proposal means less in overall interest received, but it is usually better than the risk of bankruptcy.
Arranging your Consumer Proposal
You can’t just submit a consumer proposal to your creditors, however. Like bankruptcy, a consumer proposal needs to be arranged by a licensed bankruptcy trustee. Your representative will assess your financial situation to see if there are any other options, such as improving your spending habits or looking into a debt consolidation loan. If it’s determined that a consumer proposal is the best choice for your situation, the trustee will prepare all the paperwork detailing income and expenses, payment terms, as well as your assessment certificate and the actual consumer proposal.
This is the information creditors will consider when deciding whether or not to accept your proposal. For many consumers who have regular income, and who are on the verge of succumbing to their debts anyway, a proposal is a good option for everyone. Creditors get some of their money back, and consumers are able to keep their heads above water and avoid bankruptcy.
All of the creditors on your credit report will report an R7 until the payments are completed, then the note of having completed a consumer proposal will remain for another three years. Since this is only for unsecured debts, this will not cover your mortgage or car loan. You also can’t get out of your obligations for support, alimony or student loans. While this arrangement may not work for everyone’s financial situation, a consumer proposal may be the best way for many to recover from their debts without losing their assets to bankruptcy.
Consumer proposal could be a great help for everybody. But, can’t we really tighten up our belt by just living based on what we can? I know it wouldn’t be that simply, yet for sure we could live in a debt free life.
I don’t believe on bankruptcy proposals. It’s just a matter of discipline on your spending habits. Any proposal is useless unless you’re willing to change your habit.
Tell that to my friend who was seriously disabled and depleted her life savings paying for all the medical expenses while she was waiting for the insurance payment that finally came 2 years after the accident and it was reduced.
I support consumer proposals in these sort of cases.
I think Howard was talking about people in general – there are many who abuse this option. Yes there are people who have fallen on hard times through no fault of their own, and proposals can help them – sorry to hear about your friend.
Been hearing of this for a while but never actually stopped to learn more about it. I guess bancruptcy is akin to death in that way for me, never really want to think about it until I have to. I actually learned a bit from your article without becoming depressed. Good show.
I couldn`t sleep at night because of my debts, and that`s why I found out about consumer proposal on the internet. It cost me a bit more than bankruptcy, but it made the process much easier. My advice is don`t let those banks ruin your life with their loans, if you can`t comfortably pay them back, book an appointment with a trustee as soon as possible, you don`t have to put up with them.
You don’t want to go bankrupt your business as well as your finances if you’ll just learn from mistakes and demands and all that includes the economy. Take some advices and read. It might help.
Tom, this is such a well written, concise and helpful blog and explanation of Consumer Proposals. Parliament was looking for a way to help insolvent debtors avoid bankruptcy and it looks like they got it right with Consumer Proposals. For years now personal bankruptcies have been declining, and Consumer Proposals have been increasing. Hopefully those debtors going through the process rehabilitate themselves by adopting proper budgeting techniques to take with them and apply into the future.
What is the purpose of a consumer proposal? PS. What is a spammer?
In a bankruptcy (in BC), one can only have a certain amount of home equity, $13,000 and debt equity for things like car loans, $4000.
In a consumer proposal, does the party filing the proposal retain the right to their home and/or car, even if the equity is above these amounts?
This has a lot of good information on consumer proposals. I don’t think it’s the exact fit for me personally – but I think others will find this useful if they need to avoid bankruptcy.
Great info. I hope to never have to use this, but good to know how these things work.
In a Consumer proposal the trustee is required to submit to the creditors a statement of affairs. The statement will, amongst, other things list your assets and outstanding liabilities.It is entirely reasonable for a creditor to reject participation in the proposal if you have substantial equity in assets, for instance your home. Their position is understandable- why should they take a substantial reduction on the debt if you could sell the asset and pay them in full.
Another option, similar in many ways to Consumer Proposal, is a repayment programme through a non-profit debt counselling agency. Most trustee’s indicate this option in their list of debt repayment solutions. They also work very well. Contact Credit Counselling Canada for more information.
Hi – great outline as to how consumer proposals work. But, you didn’t talk about the downside… For example, getting a mortgage after a consumer proposal can be just as big a challenge as after a bankruptcy, and it messes up your credit rating for a long time. Similar to bankruptcy, a consumer proposal should be looked at as a last resort solution, not an “easy out”. If you do decide to proceed with a CP, once you’re done paying it off, re-establishing good credit should be your number one priority, so you can put it behind you as fast as possible.
I don’t really feel that this article was as informative as it could be… I think you need a comparison between a proposal and a bankruptcy to truly understand the best options.
ie, if you are stuck in a consumer proposal for 50 months, and then you have your credit ruined.. How is that different than being bankrupt and not paying, and still having your credit ruined for 7 yrs..
It would be better for you to do a comparison.
I would also want to know who pays for this service, and if they are a persons advocate.
Great questions Bruce. Take a look at this information:
Consumer Proposal – http://irasmithinc.com/bankruptcy_services-personal_consumer-proposal.html
Bankruptcy FAQ – http://irasmithinc.com/faq.html
Some people prefer a CP because they do not wish to have a bankruptcy on their record, especially if it will negatively affect their job or profession.
This is good information. I also did not know what a consumer proposal was until I read this. One good advice I got from my parents is not waiting until it becomes a problem. I think at the very first sign of possible trouble one should look into refinancing, consolidating, what ever you have to do to lower those monthly debts.
I filed for bankruptcy instead of doing a proposal because of the policy about missed payments (that the proposal would be cancelled if a total of 3 payments were missed, which would lead to having to file for bankruptcy in the end anyway).
I just wasn’t comfortable with that kind of risk (there was too much chance of my job ending unexpectedly over the scheduled 5 year period).
My experience through B wasn’t as hard as I thought. I actually felt positive enough after my discharge that I had enough energy to write about the whole experience.
Knowing there wasn’t much out there when it comes to personal bankruptcy stories &/or emotional support needed to make such a huge life decision, I built a website to share my experience with the hope of helping people going through the same thing feel supported and not so alone.
Cheers to anyone out there who has the strength to research their next steps during a difficult time. I wish you all the best.