Consumer Proposals

Every year, millions of people find themselves facing insurmountable financial troubles. For many, financial hardships aren’t a result of wrongdoings or poorly planned actions; in many cases, families aren’t prepared to face the sort of financial pressure that can arise seemingly out of nowhere, especially without savings.

When debt gets too high and earnings too low, wiping the slate clean can be the only way to turn things around once and for all. However, there are some additional measures that can be the saving grace a family needs, all without the need to take the extreme steps toward filing for bankruptcy. Consumer proposals, for instance, can be an effective way of managing a tumultuous financial situation without taking any outstanding measures to help families get back on track.

What Is A Consumer Proposal? 

A consumer proposal is a legally binding debt relief solution that is administered by a Licensed Insolvency Trustee (LIT). A consumer proposal involves working with the LIT to develop a proposal for your creditors. The proposal is meant to offer a fair debt repayment deal for you and your creditors. Typically, the amount you owe will be reduced to an amount that is affordable for you while still being fair to the creditors. 

What Happens When You File For A Consumer Proposal?

When you file a consumer proposal you’ll work closely with a LIT who will deal with your creditors, file your paperwork, and help you every step of the way. Entering a legal proceeding without any idea of what might happen is a scary thing, especially when your money is involved. Here are a few things you can expect when you file for a consumer proposal.

  1. Your LIT Files Your Consumer Proposal – The first step involves your LIT filing your consumer proposal with the Office of the Superintendent of Bankruptcy (OSB). Once filed, you won’t have to make anymore payments to your creditors directly. Moreover, any wage garnishments by your creditors or collection agencies will stop immediately. Similarly, by law, debt collectors and creditors can no longer contact or harass you about your debt. 
  1. The Proposal – Once filed, your LIT will work on getting a proposal ready for your creditors. In it, they’ll explain your financial situation and why you can only pay the offered amount. 
  2. Your Creditor’s Choice – Your creditors will have 45 days to review the proposal. They’ll have the option to either accept or reject the proposal

What Happens If The Creditors Reject Your Proposal? 

If your creditors reject your consumer proposal, you’ll be able to review it and resubmit with new changes that will hopefully lead to an acceptance. If you’re unable to come to an agreement with your creditors, you’ll have to consider other options for debt relief, such as declaring bankruptcy. 

What Happens If The Creditors Accept Your Proposal? 

If your creditors accept your consumer proposal, you’ll officially begin fulfilling the agreement you made with them. Depending on the offer made, you’ll be responsible for paying a lump sum amount of cash or periodic payments to your LIT, who will then distribute the payments to your creditors. 

As mentioned, in general, you’ll have a maximum of five years to repay the agreed-upon portion of your debt. Once the payments are made and you’ve reached the end of your proposal, you’ll be released from your debts.  You’ll also receive a “certificate of full performance” to prove your fulfillment of the program. 

How Does The Creditor Consumer Proposal Voting Work? 

The acceptance or rejection of your consumer proposal depends on the amount of debt owed to the creditors and not the number of creditors who voted. For the proposal to be accepted, the dollar value of the creditors who voted must equal 50% plus 1. For example, if you owe $100,000, and the dollar value of the creditors equals $50,001, then the proposal will be accepted. However, if the dollar value is below that, then it will be rejected. 

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Are There Any Qualifications?

Unfortunately, consumer proposals aren’t for everyone, everyone’s financial situation is different and therefore not everyone can benefit from the same help. In order for you to be deemed eligible to file a consumer proposal there are several other conditions, besides being insolvent, which you must fulfill:

  • Be an individual; businesses are not allowed to file consumer proposals
  • You have more than $5,000 worth of unsecured debt but no more than $250,000 (this does not include your mortgage)
  • Have a stable income to ensure that you’ll be able to make monthly payments
  • Be unable to pay off your debts in full with interest
  • No prior consumer proceeding still open. The debt specialist handling the previous filing must have a discharged status
  • If you have a pending consumer proposal, you may not file another until all claims in your previous proposal have been fully serviced or you’ve filed for bankruptcy

Find out what happens if your creditors reject your consumer proposal.

Benefits Of Filing A Consumer Proposal

While it’s understandable that seeking any type of debt relief is a hard choice you should understand that filing a consumer proposal can be beneficial to both you and your finances.

  • Surplus income isn’t something you need to worry about, as it is with a bankruptcy 
  • Your assets will not be seized
  • Your payments will never change or increase, even if you get a higher income. 
  • The negative impact on your credit report and credit score will not be as severe, compared to bankruptcy. A consumer proposal will usually lead to an R7 credit rating, whereas a bankruptcy will lead to an R9
  • You only need to pay back a portion of your debts

If you had to resort to bankruptcy and need to rebuild your credit, read this.

Disadvantages Of Filing A Consumer Proposal

While filing for a consumer proposal could be exactly what you needed to get your finances back on track, it’s important to remember that a consumer proposal will not:

  • Allow you to pick which debts will be included in the process
  • Remove any alimony or child support payments or obligations you currently have
  • Remove your current student debts responsibilities
  • Include your secured debts (mortgage, car loan etc.)
  • Some creditors may not accept your proposal, regardless of your situation
  • If you default on a proposal, you will not be eligible for a second so do not file for assistance unless you are sure you can see it through 
  • Your proposal will stay on your credit report for six to seven years, a factor that will negatively impact future eligibility.

How Does A Consumer Proposal Affect Credit? 

When you file a consumer proposal, you’re asking your creditors to accept repayment of a certain percentage of the total amount you actually owe them, over an agreed amount of time. Throughout the proposal period, your debts still exist in the eyes of the credit reporting bureaus (Equifax and TransUnion) and with the creditor to whom you were indebted. 

When you file for a consumer proposal you’ll be given one of the lowest possible crediting ratings: R7. This will remain on your credit report for 6-7 years (depending on the province you live in) or 3 years after your consumer proposal is complete, whichever comes first. 

This credit rating will affect your ability to obtain credit in the future. However, with time and effort, you can rebuild your credit and regain control of your finances. Just be sure that your credit bureaus are properly updating your credit report. You can send a copy of the “certificate of full performance” to your credit bureaus to ensure they update your credit report. 

Filing A Joint Consumer Proposal

Most types of debt can be shared with another person, for example when you co-sign a loan both individuals are equally responsible. Shared debt is most common among married couples or couples who live together, although this is not always the case. A joint filling is also possible where more than one person co-operates in filing a consumer proposal. The individuals who are filing the consumer proposal must have “all or substantially all” similar debts, there is no actual definition for what “substantially all” means so be prepared for your consumer proposal proceedings to be unique to your current debt situation.

Remember that while you might be permitted to file a joint consumer proposal, each individual is responsible for all of the payments. What this means is that if one of the people who agreed to split the payments can’t afford to pay them, the other person will be solely responsible for the payments. It is also possible for your proposal to be annulled should one or both of you be unable to make the payments.

FAQs Consumer Proposal

What happens if I miss my consumer proposal payments? 

If you miss 3 or more of your monthly payments your consumer proposal will be annulled. Meaning your creditors will be free to hound you and request payment however they wish. 

Can you be rejected for a consumer proposal? 

Yes, there are multiple reasons why you may be rejected for a consumer proposal. One you may not meet the eligibility criteria for a consumer proposal such as having debt between $5,000 and no more than $250,000. Similarly, if all your debt is secured, you won’t qualify for a consumer proposal. Lastly, if your proposal is not deemed fair, your creditors may reject your proposal as well. 

Can you switch from a bankruptcy to a consumer proposal? 

To put it simply, yes you can. After a declaration of bankruptcy, you might consider re-evaluating your situation. For instance, when you find a new job after filing for bankruptcy and consequently earn more income and therefore are liable for greater payments. Switching to a consumer proposal could reduce your monthly payments by extension of the repayment term and further make payments manageable. It is convenient for your creditors as well since you end up repaying greater portions of your debt. 

Can you file for a consumer proposal if you have debt over $250,000?

If your debt exceeds $250,000 we wouldn’t suggest that you try to file a consumer proposal. You could consider filing a Division 1 proposal as there are no limits on the amount of debt you can have under this type of debt relief. Do be aware though that if your Division 1 proposal is rejected by your creditors you will automatically be bankrupt. A debt specialist can assist you in determining whether to file a Division I or a consumer proposal.

Speak With an Expert

Consumer proposals offer a viable alternative to bankruptcy for people under financial difficulties. To gather more detailed information concerning consumer proposals and consequently determine if you qualify, we can’t recommend enough that you speak with a debt specialist. A debt specialist will be able to provide you with information pertinent to your situation and guide you’re through whichever option you choose.

The sooner you get in contact with a debt specialist, the sooner you’ll be able to start your journey towards a better financial future for yourself and your family. If you’re interested in being matched with a debt specialist in your area, Loans Canada can help. 

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