Seeking out a consumer proposal is a big step toward becoming debt-free. All the time, people make their financial situation worse by refusing to accept that they can’t tackle it on their own. If you have questions about the process, Debt Help BC is here to answer them.
How Does a Consumer Proposal Work in BC?
Consumer proposals are regulated by the Bankruptcy and Insolvency Act. They are a way to stop collection actions and discharge the unsecured debts you owe while providing your creditors with some compensation.
It is an alternative to bankruptcy that does not force you to give up any assets. Instead, you make a set monthly payment for a period of up to 5 years with no interest charges. When you file a consumer proposal, you will also have to attend two credit counselling sessions that will help you manage money and use credit in the future.
When Should You Seek Debt Relief?
There are consequences to filing a consumer proposal. It will hurt your credit score and make it harder to get a new loan or line of credit in the future. But that damage to your credit history will only last for 3 years after the proposal is completed.
These are some of the signs that you should start thinking about debt relief:
- You are only making minimum payments on your credit cards;
- You are overdue for utilities and don’t know where to find the money;
- You are struggling to keep up with all of your bill payments;
- It would take you more than two years to pay off your total debts at the rate you’re able to pay.
The Consumer Proposal Process
Only licensed insolvency trustees can help you with a consumer proposal. The first step to getting debt relief is talking to a professional. They will walk you through the process step by step, but this is a preview of what you can expect.
Step 1: Assess Your Finances
When you first start working with a licensed insolvency trustee, the first thing they are going to do is assess your finances. They will review your income, expenses, and the size of your debts to determine your options.
Depending on your circumstances, a consumer proposal may not be the best way forward. In some cases, better money management or debt consolidation may be the best way forward. If you’re not earning enough or you don’t have much in the way of assets, bankruptcy could save you more money.
Step 2: Determine How Much You Can Pay
The trustee will work with you to create a personal budget that allows you to both keep up with payments and offer your creditors enough that they accept the proposal. A consumer proposal works best for people who are working but not earning enough to keep up with their debts. They can benefit from a significant reduction in their debt and relief from interest rates.
Step 3: Creditors Vote
Once the licensed insolvency trustee has submitted your proposal, your creditors vote on it. Their votes are weighted according to how much you owe them. If creditors representing 50% of your total unsecured debts plus one dollar agree, then all of your creditors are bound by the terms of the proposal.
Step 4: Reassess
If the creditors reject your proposal, that doesn’t mean you’re out of options. Creditors typically reject repayment plans that don’t let them recover enough of their funds. If they think they can recover more money out of bankruptcy, they may hold out for better terms. You can re-submit with more generous repayment terms. However, if the creditors accept, you’ll skip this step.
Step 5: The Repayment Process
Now is when you can start making progress on your debt. You now make a single monthly payment to the licensed insolvency trustee, who then disburses those funds to the creditors as per the agreement. The payment amount is set in stone unless you decide to change it.
Even if your income goes up thanks to a raise, promotion, or a second job, your payments don’t change. If you receive a windfall such as an inheritance or a large payment all at once (even lottery winnings), you keep all of it. Many people prefer to avoid declaring bankruptcy because of the surplus income payments that come with it.
Step 6: Amending a Proposal
While your creditors cannot change the terms of the proposal, you can. There are two reasons you may want to amend the terms:
- Your circumstances have changed, and you can no longer afford payments. If the creditors do not accept an amendment, you can change the proposal into bankruptcy.
- You are earning more income and want to complete the terms of the proposal sooner than later.
Proposals stay on your credit report for 3 years after the date of completion, so getting out of debt sooner can pay off, especially if you’re considering taking out a mortgage in the near future.
Step 7: Rebuild Your Credit
When you start fresh after a consumer proposal, you have an opportunity to start over. Although it will result in a hit to your credit history, you can start rebuilding your credit. You will have to start by securing a new credit card.
If you’ve had trouble controlling your spending in the past, it may be best to live without one for three to six months. It will get you in the habit of only spending money you have. However, credit is a useful thing to have.
You can start by getting a secured credit card, which requires a deposit that matches your credit limit. In many ways it works more like a debit card, but it allows you to re-establish your credit history.
If this sounds like a process that will benefit you, we can help you with consumer proposals on Vancouver Island. Give us a call to book a free consultation. A licensed insolvency trustee will help you find the best path out of debt.