What is a consumer proposal? How does it differ from bankruptcy and debt consolidation? Learn the basics of how consumer proposals work and when to use them.
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A consumer proposal is a formal arrangement filed by a licensed insolvency trustee (LIT) under the Bankruptcy and Insolvency Act (BIA). It is a viable alternative to bankruptcy if your debts do not exceed $250,000 (not including debts secured by a principal residence).
The process allows you to make a new offer to your creditors to repay your debts on new terms. The terms will include:
The proposal is your offer to creditors and can be as unique as your situation. For example, if you are a seasonal worker you could offer smaller payments during your offseason and increased payments when you are working.
The proposal process requires full disclosure of your financial situation including:
The proposal will include an estimate of what the creditors would receive if you filed for bankruptcy. Be prepared to offer a better return than a bankruptcy otherwise it will be unlikely the LIT will file it or recommend it and unlikely the creditors will accept it.
Make sure the offer you make is affordable and does not stretch you financially. If you were to miss three payments, your proposal could be annulled and you will be back in the same situation you were before filing.
If you are facing overwhelming debt that you can’t repay and your debts are greater than your assets, it might be a good option to consider filing a consumer proposal. You will need a form of income or access to a one-time payment to offer your creditors in order to settle the debts.
A consumer proposal offers the opportunity to:
The main negative is the impact on your credit rating, reporting as an R7 for the length of time it takes you to pay off the debt plus an additional three years.
After the LIT has submitted your proposal, the creditors have 45 days to vote on whether they are willing to accept it. You need the majority in dollar value of voting creditors to agree to the proposal. If a creditor doesn’t vote, they are still bound by the proposal once it is accepted.
The outcomes can be as follows:
The creditors accept the proposal on the terms offered.
Once the creditors accept the proposal it is then a legal binding contract between you and your creditors. Your obligations are to make all payments as agreed and attend two counseling sessions.
The creditors reject the proposal outright.
It is rare for creditors to outright reject a proposal. This usually only happens if they believe credit has been misused, for example, if large amounts of credit were used just before filing they may suspect fraud, or they can become suspicious if the information provided is not correct.
If your proposal is rejected you go back into the same position you were in before, creditors can now pursue payment of the debt and you do not have the legal protection the proposal would have offered had it been accepted.
The creditors reject the proposal but provide a counter offer.
If the creditors provide a counteroffer, you can decide if you want to accept the offer, or go back with your own counteroffer.
Yes, there are no restrictions or penalties in paying off your proposal earlier than planned. You can make lump sum payments or increase your monthly payments at any time to help pay it down faster. Paying it off sooner has benefits on your credit rating.
Technically, it should report as an R7 and this will report for the length of time it takes you to pay off the proposal, plus an additional three years.
However, creditors may report it as an R9 until the proposal is paid off as they believe there is still a chance you may not complete the terms.
Paying off the proposal as soon as you can have a positive impact on your credit rating. After you have paid it off, check your credit report and ensure the proposal is reporting as fully satisfied in the public records section and that each creditor has updated their trade lines accordingly.
You can not miss more than two payments. After that, the proposal can be annulled and you will be back in the same situation as before filing the proposal.
If you do miss payments you must contact the LIT administering your proposal to discuss rescheduling the payments and look at other options available.
A change in your financial circumstance can affect your ability to make the proposal payments as agreed. If this happens, be proactive and deal with it before the proposal is annulled.
It is possible to amend the proposal based on the change in your circumstances. Amending the proposal will require re-submitting the proposal to your creditors for their approval.
If the change to your circumstances is permanent and you don’t see any way in continuing with a consumer proposal, even on amended terms, you can consider filing for bankruptcy.
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