Consumer Proposals Explained
The decision to talk to a Trustee or Debt Counsellor can be scary but it shouldn’t be, it means that you are taking back control of your financial health for you and your family. Your debt counsellor will discuss all of the options available to you and give you the facts about how to deal with debt. It is important to understand that Trustees not only administer bankruptcies, but also provide other services, including the administration of Consumer Proposals.
What is a Consumer Proposal?
A Consumer Proposal is a legal process available to Canadians through the Bankruptcy and Insolvency Act. A Proposal provides an alternative to Bankruptcy and other options. It allows a debtor to make an offer to creditors to pay all or part of their outstanding debt over a specific period of time. Once a Proposal is accepted by the creditors, it becomes a binding legal agreement.
What are the advantages of a Proposal?
- bankruptcy can be avoided, but a Proposal is administered under the Bankruptcy and Insolvency Act and therefore provides the same protection from harassment and collection activity as a bankruptcy;
- creditors receive more than they would in a bankruptcy, but a Proposal typically costs less than repaying creditors via a Debt Counselling service or through debt consolidation;
- certain assets may have to be disposed of in a bankruptcy. However, in a Proposal, control over all assets is retained by the debtor. Of course, the terms of the Proposal must take into account the value of the asset(s) that would otherwise be available to the creditors in a Bankruptcy.
How does a Consumer Proposal work?
- the first step is to have a free confidential consultation with a person qualified by law to administer proposals, such as one of our Trustees;
- if a proposal is determined to be the best option, the Trustee can help the debtor determine the terms of the proposal;
- in considering the terms, it is important to be fair to both the debtor and the creditors;
- once the proposal and related legal documents are signed and filed with the federal government, a Stay of Proceedings comes into effect that protects the debtor;
- a meeting of creditors may be, but is not usually required to consider the proposal;
- a court hearing may be, but is not usually required to consider the proposal;
- once the proposal is approved (or deemed to be approved) by the creditors and the court, all parties are bound by the proposal and the debtor is then required to fulfill the terms of the proposal;
- once the terms of the proposal are completed and the promised funds are paid to the creditors, the debtor’s responsibility for the remaining unpaid debt is forgiven in accordance with the Bankruptcy and Insolvency Act.
Who can make a Consumer Proposal?
Any insolvent person can make a Proposal. If your non-mortgage debts are less than an amount set by the Bankruptcy and Insolvency Act (currently $250,000), you can file a Consumer Proposal. This process is a little more stream-lined than the alternative – a Division I Proposal.
What are the major differences between a Consumer Proposal and a Division I Proposal?
- a Division I Proposal is available to all insolvent persons, whereas a Consumer Proposal is only available to individuals with total debts (excluding a mortgage on their principal residence) of less than $250,000;
- a Consumer Proposal must be completed within five years. While there is no set limit on a Division I Proposal, though it typically does not exceed five years;
- there is always a creditors’ meeting in a Division I Proposal (within 21 days of filing), whereas there is only a creditors’ meeting in a Consumer Proposal if requested within 45 days;
- if there is a meeting in a Consumer Proposal, approval requires a simple majority of the dollar value voted, whereas a Division I Proposal requires a simple majority in number of creditors voting and a two-thirds majority in dollar value voted;
- court approval is required in both cases. However, there is typically “deemed” court approval for a Consumer Proposal if no creditors request court review;
- if a Division I Proposal is rejected, the debtor is automatically bankrupt, whereas rejection of a Consumer Proposal merely leaves the debtor back in the same position as before the Consumer Proposal was filed; a second Consumer Proposal cannot be filed if the first has failed;
- while the fees and disbursements in either type of proposal generally come from the money paid by or on behalf of the debtor, the cost of a Consumer Proposal is determined by the Bankruptcy and Insolvency Act; a Division I Proposal can be more expensive because of the potential for more time negotiating with creditors and dealing with court matters.
How much should I offer to my creditors?
Every situation is different, there is no “magic” number or percentage to offer to unsecured creditors in a proposal. A proposal must result in greater realization to creditors than they would have received in a bankruptcy, but this is sometimes difficult to determine. If unsecured creditors are not likely to receive much in a bankruptcy, they will often accept as little as twenty cents on the dollar of the amounts they are owed, and in some circumstances, they may accept even less.
What happens to secured creditors?
Although proposals are generally designed for the benefit of unsecured creditors, how you deal with your secured creditors can be built into the terms of the proposal. For example, if you wish to continue to pay on your mortgage and car loan as previously agreed, that can be stated in the proposal document. If on the other hand, you have a car loan on which you don’t feel you can afford to continue payments, the terms of the Proposal can state that you will be returning the vehicle to the secured creditor. The secured creditor can then sell the vehicle and file an unsecured claim in the proposal process for any resulting shortfall on the amount owed.
Is a Consumer Proposal better for my credit rating?
In Newfoundland & Labrador, a bankruptcy is typically on your credit rating for six to seven years from the date of filing.
A “debt retirement plan” or equivalent term through “Debt Counselling” is typically on your credit rating for three years from completion to the satisfaction of the creditors.
A proposal is on your credit rating for three years from completion as confirmed by the federal government agency that oversees insolvency matters in Canada.
A bankruptcy has a slightly more negative rating (“R9” as opposed to “R7”) than the other two options noted.
Depending on your circumstances and your ability to repay your debts, a proposal could allow you to have a better credit rating quicker, and at a lesser financial cost than the other two options.
Can I borrow again after filing a Proposal?
Although the proposal will result in a negative mark on your credit rating, and will likely result in higher interest rates being available to you for up to three years after completion of the Proposal, there are a number of things that you can do to improve your credit rating, even before the proposal is completed.
For example, if you are able to set aside some savings, you can obtain a secured credit card with the savings as a “security deposit”. Responsible usage of the secured credit card can improve your credit rating.
In any case, it is best that you have your financial situation reviewed by one of the debt professionals at Janes & Noseworthy so that we can help you determine the best option for your specific case.
Janes and Noseworthy, Licensed Insolvency Trustees, has been helping NL deal with debt for 35 years – It’s ok to hit a financial rough patch – and it’s ok to get help. Call us at 1-800-563-9779 or email: firstname.lastname@example.org.