Key Takeaways
Consumer proposals are a bankruptcy alternative and can be a good option for those individuals who are struggling to make their minimum monthly payments and want to avoid bankruptcy. It has many benefits to help you become debt free. Speak with a Licensed Insolvency Trustee to see if this is a good option for you.
So you're wondering is filing a consumer proposal worth it?
There are several factors to consider when deciding if consumer proposals are the right choice for you:
How Does a Consumer Proposal Work?
When you file a consumer proposal, you work with a Licensed Insolvency Trustee (LIT) to negotiate a payment plan with your creditors. Only a Licensed Insolvency Trustee can file consumer proposals in Canada. The Licensed Insolvency Trustee will review your financial situation and propose a plan that outlines how much you will pay each month and for how long. Consumer proposals include all unsecured debts such as credit cards, lines of credit, tax debt, lines of credit and student loans.
Your creditors will then vote on whether to accept the proposal. If the proposal is accepted, you will be required to make the agreed-upon payments until the proposal is completed. A consumer proposal must be completed within 60 months, so the payment amounts are the lowest if the proposal is completed over 5 years.
Benefits
No More Interest Payments
One of the benefits of a consumer proposal is that it stops all the interest accruing on your debts each month. This means that a credit card balance with a 20% interest rate, will now be reduced to 0% during the consumer proposal. If you keep up your payments during the proposal, your creditors cannot charge you interest, resulting in you keeping that extra money for yourself.
Reduces Debts
Depending on your income and assets, you may actually get your debts reduced. Basically, where creditors receive more money through your consumer proposal than a bankruptcy they may be willing to reduce the amounts owed to them. However, you must complete the consumer proposal payments for your debts to become discharged.
Also, the monthly payment for all unsecured debts could be reduced, even up to 70%. That is some serious savings! Unlike a debt consolidation loan where you still have to pay the full amount outstanding plus interest charges.
One Monthly Payment
It can be hard to keep up with all your debt payments with different due dates throughout the month. Sometimes it may feel like you need your accountant to keep track of all the payments. The benefit of a consumer proposal is that you only have one affordable monthly payment for all your unsecured debts. You will still have to manage your other payments like rent, vehicle payments and vehicle insurance, but all your debt payments will have merged into one consumer proposal payment. This may be lower monthly payments than you are currently paying for all your debts.
Stops Collection Activity
Constant collection phone calls, voice messages, emails and text messages can be very annoying and overwhelming. You want to live your life and not be harassed with calls regarding payments that you already know about. Consumer proposals are a government-regulated debt solution option that forces all collectors to stop contacting you. Do you hear that?... silence from harassing collection calls. Now your phone will be reserved for people you actually want to talk to.
Keep all Your Assets
It is your stuff, so you should keep it. In consumer proposals, you can keep all your assets including vehicle, house, TV, laptop, tax refunds and whatever else you may own. When filing personal bankruptcy you may have to give up some of your assets to the Trustee. Therefore, everything you owned before signing the consumer proposal will also be kept afterwards.
Promotion or Windfall
Are you hoping to get that promotion at work? Don't worry if you get that promotion after filing an accepted consumer proposal, your monthly payment won't change. While in bankruptcy, your extra hard-earned money could be paid to your creditors. Do you really want that increased pay or overtime pay to go to your creditors? I didn't think so.
Do you play the lottery each week hoping to win millions? Well, I mean who doesn't. Dreaming of quitting your job and taking that long vacation. Now in bankruptcy, if you win the lottery or receive an inheritance, that money will go to your Trustee who will pay off your creditors and give you the remaining amount, if any. However, in a consumer proposal, you can keep all that money if it happens after you filed your consumer proposal.
Any extra money you earn can be used to complete your consumer proposal early. The consumer proposal is open-ended, so once it is approved it can be paid off at any time within the 5 years from the initial filing of a consumer proposal.
Avoid Bankruptcy
Another benefit of a consumer proposal is that it can help you avoid personal bankruptcy. Bankruptcy can hurt your credit score and can make it difficult in the future to become approved for loans or credit cards. A consumer proposal, on the other hand, does not have the same negative long-term consequences. While it will still appear on your credit report, it is not as damaging as bankruptcy and may be easier to explain to potential lenders. A consumer proposal allows you to pay back a fair amount to your creditors based on your debts, assets, and income.
Are all Debts Included?
Most debts will be included in consumer proposals, but not all will be discharged. The following debts may not be discharged:
Spousal Support and Child Support Payments
If you have any spousal or child support payments they will continue to be payable during the consumer proposal. Also, any arrears outstanding will still be payable even after the consumer proposal is completed.
Student Loans
Government student loan debt may be dischargeable if it has been more than 7 years since you last finished your studies. In this case, once you file a consumer proposal you no longer make monthly payments towards this debt. If the consumer proposal is successful then this debt will be discharged.
If you finished school less than seven years after filing the consumer proposal, then the debt will not be dischargeable and you will need to continue making monthly payments during the consumer proposal.
Secured Debts
Secured debts are backed by collateral, a tangible asset (such as a car or house) that the lender can seize if the borrower fails to make the required payments. They are generally not included in a consumer proposal unless the asset is returned to the financial institution. For example, if a vehicle is returned before all payments are completed, the shortfall still owing to the lender will be included in the consumer proposal.
Court fines or Tickets
If you have any outstanding court fines or traffic or parking tickets then unfortunately you will still need to pay them as they will not be discharged in a consumer proposal.
Will a Consumer Proposal Affect my Credit Rating?
Okay, so the consumer proposal has lots of benefits. So, what is the downside? Well, it will get reported on your credit report as an R7 rating, while bankruptcy is recorded as an R9 rating. Basically, it just tells lenders that you are on a payment plan. So yes, it will show up on your credit record and will likely lower your credit score, but by how much it will affect that no one knows for sure.
The R7 Rating is temporary. Once you finish the proposal it will come off after a period, along with all the debts included in the consumer proposal. Think of it as being in the penalty box, once you serve your time you can get back out there. However, you can immediately start to improve your credit score while you are in the consumer proposal. For example, you could obtain a secured credit card while in the consumer proposal.
Will My Consumer Proposal be Accepted?
Most consumer proposals are accepted by creditors as originally filed. However, some creditors may not accept your initial proposal. This doesn't mean your consumer proposal won't get accepted, but the creditors may want the proposal amount to be higher. The Licensed Insolvency Trustee will assist both sides with finding an agreed to amount for the consumer proposal to be accepted. About 99% of the time both sides can reach an agreed to amount for the proposal to be accepted.
Conclusion
Before deciding if a consumer proposal is your preferred debt relief solution, it is important to carefully consider your financial situation and all your available options. It is worth seeking the advice of a Licensed Insolvency Trustee to help you make an informed decision.
In conclusion, a consumer proposal can be a good option for individuals who are struggling to make their minimum monthly payments and want to avoid filing for personal bankruptcy and become debt free. It can help you get out of debt more quickly and avoid the long-term consequences of personal bankruptcy. However, it is important to keep in mind that it is not a magic solution and will still require you to pay back a portion of your debts. It's also important to consider the cost and impact on your credit score. Carefully consider your financial situation and all options before deciding if a consumer proposal is worth it.
If you would like to have a free, no-obligation consultation with a Licensed Insolvency Trustee to discuss your financial situation and if a consumer proposal is the right option for you, we would be happy to speak with you.