The number of consumer proposal filings in Canada is growing steadily. According to the Office of the Superintendent of Bankruptcy, consumer proposals have increased by 6.4% over the last year alone. Meanwhile, bankruptcies experienced a decrease of 1.6%.
To understand why over half of all insolvencies filed in 2016 were consumer proposals, we’ve listed the top 10 benefits they offer to qualifying debtors.
1. You avoid bankruptcy.
Bankruptcy is often seen as a debtor’s last resort, and with good reason. Aside from the stigma attached to it, a personal bankruptcy significantly affects your credit score and ability to obtain future credit. It can even impact your ability to work if you need to meet certain legal or business requirements for your profession. A consumer proposal is usually your last chance at financial relief before having to file for bankruptcy.
2. You are protected from your creditors.
As soon as you file a consumer proposal, any wage garnishments, lawsuits, or other collection efforts against you stop. What’s more, once the proposal is accepted, creditors can’t change their mind and take you to court. That’s because a consumer proposal is a legally binding document.
3. You keep your assets.
In a consumer proposal, you can keep your home and your car, as well as all your other assets as long as the overall return to creditors in the proposal is greater than under a bankruptcy. In a bankruptcy, specific assets you can’t pay for will be seized (based on allowable exceptions, which vary in each province) to cover costs.
4. Your proposal payments are manageable.
Consumer proposals are specifically designed based on your ability to pay and the timing of your income. With the help of a Licensed Insolvency Trustee, you negotiate a percentage of your unsecured debt and make the proposal to your creditors. The idea is to repay your debt in affordable, equal monthly payments over a period of three to five years.
5. You pay back less than you’re supposed to.
The whole point of a proposal is to reduce the total amount owed so you are able to repay a portion of your debt. This can mean cutting your debt down by 70% to 85% in some cases! Compare this with debt consolidation loans or debt management plans, where you must repay your debt in full, plus interest.
6. You won’t pay interest on what you owe.
Interest stops accruing on your debt from the date that you file your proposal. Additionally, there is no interest added to your payment during a consumer proposal.
7. There’s no cost.
Apart from your monthly proposal payments, there are no filing, administration, or other fees involved. You just make your regular monthly payments to your trustee, who in turn pays down your creditors.
8. It’s relatively simple.
A consumer proposal is less complicated than a bankruptcy. You aren’t usually required to appear in court and you do not have to make a monthly report to your trustee. So how does it work? You submit your proposal to your creditors, who then have 45 days to accept, decline, or ask for a meeting of creditors. If your initial proposal isn’t accepted, you can amend it.
9. You instantly make your financial situation better.
A consumer proposal is your opportunity to pay off all your unsecured debts, including credit cards, lines of credit, payday loans, and even taxes. If your proposal is approved by creditors, you rest easy knowing that they can’t change their mind and come back after you for your full debt. That’s because, as mentioned above, it’s a legally binding document.
And unlike in a bankruptcy, if your circumstances unexpectedly change for the better – through a raise, new and higher paying job, or windfall from a bonus or tax refund – you are not required to pay more.
10. It does less damage to your credit rating than a bankruptcy.
A consumer proposal has a better rating (R7) than a bankruptcy (R9) on your credit report. A consumer proposal also stays on your credit report for only 3 years after completion, compared to bankruptcy’s 6 years after discharge.
What are the disadvantages of a consumer proposal?
Despite all these benefits, there are cons to be considered, such as:
- You need creditors who hold at least 51% of your debt to approve your proposal. If rejected, you can make changes and resubmit, but your creditors are not obligated to approve it. You may need to consider another avenue if the majority of your creditors decline your proposal.
- If you miss three payments, your proposal can be annulled. This means your creditors can now pursue you for your full debt.
- A consumer proposal takes longer to complete (usually 3 to 5 years) than a bankruptcy to discharge of typically 9 months (or longer if you have “surplus income” or a previous bankruptcy).
- A consumer proposal may actually stay on your credit report longer than a bankruptcy depending on how long it takes you to complete it. For example, after a 5-year plan, your proposal appears another 3 years on your report. Contrast this with a bankruptcy that normally discharges in 9 months. Even though it stays on record for 6 years after discharge, that’s still less time than a proposal.
- Should your financial circumstances change for the worse, it may be difficult if not impossible to change your proposal payment arrangements. You may end up having to file for bankruptcy – and risk having two insolvency proceedings appear on your credit history.
These are the consumer proposals pros and cons you should consider when deciding how to resolve your debt issues. But keep in mind that every situation is unique, and there are requirements you must meet to be eligible for a consumer proposal.
Your next step is to contact a trustee to evaluate your financial situation and assist you in exploring the options you have available to you. Contact us today so you can understand whether – and how – a proposal can work for you and your family.