What is a Consumer Proposal?
We’ve spent a significant amount of time discussing how to file a consumer proposal, consumer proposal pros and cons, and comparing filing for bankruptcy vs consumer proposal, however we realized that some of you might simply be looking to start with the fundamental question, “What is a Consumer Proposal?”.
Consumer Proposal BC
A consumer proposal is a debt repayment plan that can help you get out of debt if you’re struggling to pay your bills in British Columbia and have unsecured debts. This means debts that are not secured by any collateral like a house or car.
Some examples of debts that can be included in a Consumer Proposal are (but not limited to):
- Credit card debt
- Personal line of credit
- Payday loans
- CRA and income tax debt
- ICBC debt
- Student loan debt (if it’s been more than 7 years since you’ve been a student)
When you file a consumer proposal in BC, you work with a Licensed Insolvency Trustee (LIT), who is a federally regulated professional. Your LIT will negotiate with your creditors on your behalf and create a proposal to submit to them. The proposal outlines how much you can afford to pay back each month, usually over a period of up to 5 years, and how your creditors will be repaid.
Once your LIT files your proposal with the Office of the Superintendent of Bankruptcy (OSB), your creditors will have 45 days to vote on whether to accept it or not. If the majority of your creditors vote in favor of the proposal, it becomes legally binding for all of them, and you will be required to make the agreed-upon payments to your Insolvency Trustee for the duration of the proposal.
How Does a Consumer Proposal Work?
A consumer proposal is a formal agreement between you and your creditors that is administered by a Licensed Insolvency Trustee. Here’s a step-by-step breakdown of how filing a proposal works:
1. Contact a Licensed Insolvency Trustee
If you are considering a consumer proposal, you will need to reach out to a Licensed Insolvency Trustee. The Trustee will review your financial situation and help you determine whether a consumer proposal is a suitable option for you.
Using a licensed insolvency trustee is essential when dealing with insolvency because they are the only professionals licensed by the Canadian government to administer insolvency proceedings, such as bankruptcies and consumer proposals.
2. Develop a Proposal
If you and your Licensed Insolvency Trustee decide that a consumer proposal is the right choice, your LIT will work with you to develop a proposal. This proposal will outline how much you can afford to pay your creditors and how long it will take to pay off your debt. Your Trustee will also prepare all the necessary paperwork.
3. File the Proposal
Once the proposal is developed, your Licensed Trustee will file it with the Office of the Superintendent of Bankruptcy (OSB). The OSB will review the proposal to ensure that it meets the requirements of the Bankruptcy and Insolvency Act.
Your creditors will have 45 days to vote on the proposal. If a majority of your creditors vote in favor of the proposal, it becomes legally binding for all your unsecured creditors, even those who voted against it.
When your consumer proposal is accepted, you will start making payments to your Trustee based on the terms of the proposal. Your LIT will distribute the payments to your creditors.
6. Certificate of Full Performance
Once you have completed all the payments required by the proposal, as well as two mandatory financial counselling sessions, you will be released from all debts that were covered in your consumer proposal. You will receive a Certificate of Full Performance from your Licensed Trustee office and you will no longer owe money to the creditors who were included in the proposal.
Benefits of a Consumer Proposal
A consumer proposal offers several benefits to individuals struggling with debt, including:
1. Debt Reduction
You can negotiate a significantly lower amount of debt that you need to pay back to your creditors, and combine all of your debt payments into one interest-free monthly payment that is affordable and fits within your budget.
2. Interest Relief
Interest charges on your debt will stop accruing as soon as you file your consumer proposal, which can help you save money.
3. Creditor Protection
Your creditors will not be able to take legal action against you or contact you for payment once your proposal is accepted.
4. One Monthly Payment
You will make a single monthly payment to your Licensed Insolvency Trustee, who will distribute the funds to your creditors.
5. Financial Counselling
As part of the process, you will receive financial counseling to help you manage your money and set financial goals to set you up with a strong financial foundation in the future.
Consumer Proposal vs Bankruptcy
A consumer proposal and bankruptcy are both government debt relief programs available to individuals in British Columbia who are struggling with debt. Here are some key differences between the two:
To file a consumer proposal, you must have at least $1,000 in unsecured debt and be able to make payments on the proposal.
There is no minimum debt requirement for bankruptcy. However, you must meet certain income and asset limits to be eligible to file bankruptcy.
2. Impact on Credit
Both a consumer proposal and bankruptcy will have an impact on your credit rating. A consumer proposal will remain on your credit report for 3 years after you complete your proposal payments or 6 years after you sign the proposal.
A bankruptcy will remain on your credit report for 6 to 7 years after discharge.
A consumer proposal is generally considered less damaging to your credit rating than a bankruptcy.
3. Repayment Period
When you file a consumer proposal in BC, you will make monthly payments to your creditors for a period of up to 5 years.
When you file for bankruptcy in BC, you may be required to make monthly payments for a period of up to 21 months, depending on your income and whether it’s the first time you’re filing for bankruptcy.
4. Asset Protection
In a consumer proposal, you get to keep all your assets, including your home and car, as long as you continue to make the monthly payments on top of your monthly proposal payments.
When you file for bankruptcy, certain assets may be seized and sold to repay your creditors.
Both options have their advantages and disadvantages. The best option for you will depend on your individual financial circumstances. It’s always best to consult with a Licensed Insolvency Trustee to understand all your options and make an informed decision.
What Debts Can’t Be Included in a Consumer Proposal in BC
While a consumer proposal can help you deal with most types of unsecured debts, there are some debts that cannot be included in a consumer proposal in British Columbia. These include:
1. Secured Debts
Debts that are secured by collateral, such as a mortgage or car loan, cannot be included in a consumer proposal. These debts must be paid separately or, if you are unable to make the payments, the lender may seize the collateral.
2. Court Fines
Debts arising from criminal offences, such as fines, surcharges, or restitution orders, cannot be included in a consumer proposal.
3. Child & Spousal Support Payments
Debts owed for child support or spousal support payments cannot be included in a consumer proposal. These debts must be paid separately and cannot be discharged through filing for bankruptcy or a consumer proposal.
4. Student Loans
If it’s been less than 7 years since your last date of study, student loans cannot be included in a consumer proposal. However, if it has been more than 7 years since you were a full-time student, or you can demonstrate financial hardship, you may be able to include your student loans in a consumer proposal.
5. Debts Incurred After the Consumer Proposal Was Filed
Any debts that you incur after the filing of your consumer proposal cannot be included in the proposal.
The Disadvantages of a Consumer Proposal
While a consumer proposal can offer several advantages, such as debt relief and protection from creditor harassment, there are also some potential disadvantages to consider, including:
1. Negative Impact on Credit Score
Filing a consumer proposal will have a negative impact on your credit score, and it will stay on your credit report for up to three years after you complete the proposal.
2. Difficulty Obtaining Credit
After filing a consumer proposal, it may be more challenging to obtain credit or financing in the future. Many lenders may consider you a higher risk borrower, and as a result, may charge higher interest rates or require a cosigner.
3. Risk of Proposal Rejection
There is a risk that your proposal may be rejected by your creditors, and if this happens, you will need to renegotiate or consider other options, such as bankruptcy.
4. Limited Debt Relief
As we mentioned above, a consumer proposal may not be able to address all of your debts, as certain types of debts, such as your mortgage and child support payments, cannot be included in a proposal.
What is a Division 1 Consumer Proposal
A Division 1 consumer proposal is a type of proposal that is designed for individuals with significant debt and is different from a regular consumer proposal in several ways.
The main difference is that there is no maximum limit to the amount of debt that can be included in a Division 1 proposal, whereas a regular consumer proposal is only available to individuals with less than $250,000 in unsecured debt. This makes a Division 1 proposal a suitable option for individuals with high levels of debt, such as business owners or professionals with significant personal or business-related debts.
Another difference is that a Division 1 consumer proposal is more complex and requires more documentation than a regular consumer proposal. A Division 1 proposal may require detailed financial statements, cash flow projections, and other supporting documents to demonstrate your ability to make payments on the proposal.
Similar to a regular consumer proposal, a Division 1 proposal is a formal, legally binding agreement between you and your creditors to settle your debts. It allows you to make payments to your creditors over a period of up to 5 years, without having to file for bankruptcy. The terms of the proposal are negotiated between you and your Licensed Insolvency Trustee and must be approved by your creditors.
If you are considering a Division 1 consumer proposal, it’s important to speak with a Licensed Insolvency Trustee who can assess your situation, explain the important differences from a standard consumer proposal, and help you determine whether it is the right option for you. They can help you understand the process and the requirements, as well as the potential benefits and drawbacks of this type of proposal.
Let’s do a final summary of “what is a consumer proposal”. A consumer proposal can be an excellent option for individuals struggling with debt who want to avoid the negative consequences of bankruptcy. It is a legal process that allows debtors to negotiate with their creditors to reach a manageable payment plan, potentially reducing their overall debt and interest charges. However, it is crucial to consult with a licensed insolvency trustee to determine if a consumer proposal is the best solution for your specific financial situation. With their expertise and guidance, you can navigate the process with confidence and move towards a more secure financial future.