Key Takeaways
When you file a consumer proposal, there is no guarantee that your creditors will accept it. However, if you offer an amount to your creditors that is more than if you filed for bankruptcy and you can afford the payments, then it should be accepted by your creditors. If creditors don’t accept your original consumer proposal, you can still negotiate toward an amount that both sides will accept.
In Canada, if you cannot repay your outstanding debts, there are two legal options to reduce your debt, bankruptcy and consumer proposal. In a bankruptcy, you agree to surrender all of your assets above exemption limits to a Licensed Insolvency Trustee. You may also have to pay a monthly amount based on your income and amount of people in your household. In a consumer proposal, you can keep all your assets and agree to pay a monthly amount to a Licensed Insolvency Trustee for all your unsecured debts.
In personal bankruptcy, there is no negotiation process for your monthly payment; it is instead based upon a formula set by the Office of the Superintendent of Bankruptcy. A consumer proposal differs because you can offer any amount you feel is reasonable to your creditors, and they can either accept it, reject it or negotiate a higher amount.
Why Would Creditors Agree to Have Your Debts Reduced?
Creditors are willing to accept a reduction of their debts in a consumer proposal if they receive more money than in bankruptcy. Creditors will know that if you filed a consumer proposal with a Licensed Insolvency Trustee, you might decide to file for bankruptcy if they do not accept your proposal. Therefore, it would be in the creditor’s best interest to accept a reduction of their debt by accepting your consumer proposal than if you choose to file bankruptcy.
How Much Should You Offer Your Creditors?
In deciding how much to offer your creditors, the Licensed Insolvency Trustee will first calculate how much you will have to pay in bankruptcy based on your income and assets. Once this amount is calculated, you have a starting amount for offering your creditors.
For example, say you have $50,000 of debt, and if you decide to file for bankruptcy, you would have to pay $12,000 to your creditors based on the Licensed Insolvency Trustee's calculation. If, instead, you choose to file a consumer proposal, you could offer $15,000 or 30% of your debts owing. In this example, creditors would receive $3,000 more than if you filed for bankruptcy, so it would be beneficial to accept the consumer proposal.
The consumer proposal will also have a lower monthly payment than bankruptcy because bankruptcy is to be completed from 9 months to 36 months, while a consumer proposal can be completed in up to 60 months.
Who Handles the Negotiation?
The Licensed Insolvency Trustee and you will negotiate with your creditors. The Trustee will handle all communications with your creditors so that they can represent your offer to the creditors. The Trustee will help both sides reach an agreement on a total amount acceptable to both sides.
If there is any additional information you want to share about your current and future finances, the Trustee can share this information as part of the negotiation process.
What to Expect?
The Licensed Insolvency Trustee will send a copy of your consumer proposal to all known creditors upon signing your consumer proposal. They will have 45 days to prove their debt owing and vote on your consumer proposal. For the consumer proposal to get accepted, the majority of the creditors in dollar value must vote in favour. If a majority is not reached by the 45th day, the Trustee will call a Meeting of Creditors within 21 days and begin negotiations with the creditors.
Before or after the 45th day of filing your consumer proposal, the Trustee will reach out to you to see if you are willing to increase your offer and by how much. The Trustee will work with both you and the creditors to come to an agreed amount for the consumer proposal to be accepted.
Once both sides have agreed upon a new amount, the Trustee will prepare an amended consumer proposal for you to sign and provide to the creditors. The creditors will then provide an amended voting letter to the Trustee where they vote in favour of your consumer proposal.
What if Creditors Don’t Accept My Offer?
It is very rare for creditors not to accept your consumer proposal after negotiations. As long as you are willing to negotiate fairly with your creditors, the consumer proposal should be accepted.
If both sides can’t agree, you can withdraw your consumer proposal. There is no automatic bankruptcy if your consumer proposal is not accepted. Going forward, your options would be to continue paying your debts as before the consumer proposal, file for bankruptcy or file another consumer proposal in the future.
Conclusion
Filing a consumer proposal can be stressful, with the biggest worry being whether your creditors will accept your consumer proposal. The good news is that most consumer proposals are accepted as offered, and only 10% to 20% require any further negotiation. When determining an amount to offer your creditors, you should make sure that it is an amount you can afford to pay and offers creditors more than if you were to file for bankruptcy. If you do this, you will likely have a successful consumer proposal. You can find out more if a consumer proposal is right for you.
If you are considering a consumer proposal to reduce your debts, the Litvack Group would be happy to have a Free Consultation to discuss your financial circumstances and review your options. Contact us today!