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Smythe Insolvency Helps You Understand Consumer Proposals

If you are facing overwhelming debt, and are struggling with your financial situation, you may think that your only way out is to declare bankruptcy. However, you have other options for debt relief. One option that many individuals aren’t aware of is called a consumer proposal. This option allows you to propose an alternative repayment plan to your creditors and negotiate your debt down to a fraction of what you owe, which you can pay back in one manageable monthly payment. To help you better understand this process, the team at Smythe Insolvency has compiled a list of our most frequently asked questions regarding consumer proposals and how they work. If you have additional questions not listed here, please feel free to reach out to us.

What Is a Consumer Proposal?

A consumer proposal is a formal offer to your creditors that allows you to settle your unsecured debts. Secured debts, such as your mortgage or car loan, cannot be included. 

A proposal is a debt relief solution that allows you to get things back on track with your finances and is an alternative to bankruptcy.

The amount you pay back with your proposal is significantly reduced and, in some cases, a consumer proposal can reduce your debt by as much as 80%. Most creditors are motivated to accept proposals, even if they are only receiving a fraction of the amount they’re owed, because while they don’t recover all of their money, they generally receive more than they would if someone was to declare bankruptcy. 

This process is an excellent option for individuals who need help repaying debts but have a steady income that allows you to make monthly payments.

A consumer proposal can only be facilitated by a Licensed Insolvency Trustee (LIT), formally known as a Bankruptcy Trustee. Licensed Insolvency Trustees are licensed by the federal government and are regulated by the Office of the Superintendent of Bankruptcy

What Are the Benefits of Filing a Consumer Proposal?

Every person has a unique financial situation, which means they’ll need to consider all their options when deciding how to best solve their problems. A consumer proposal is an excellent alternative to filing bankruptcy and offers numerous benefits. Some of the best parts about filing a consumer proposal include:

  • Interest Stops: As soon as you file a consumer proposal, interest will stop accruing on your debts, which will make it easier for you to repay what you owe and get your financial situation under control.
  • Collection Calls Stop: Your creditors will have to stop the incessant collection calls when you file a consumer proposal.
  • Protection from Legal Action: A consumer proposal protects you from legal action by your creditors, including wage garnishments, freezing of bank accounts, and collector calls.
  • No Forfeiture of Assets: Because you make an agreement with creditors to pay off a portion of your debt, you will not have to surrender your assets.
  • One Monthly Payment: You can make a single monthly payment that is significantly lower than having to pay all your creditors individually.
  • Possibility of Early Payment: If you have the funds to do so, you can potentially pay off your debts early, allowing you to complete the process sooner than planned.
  • Avoid Bankruptcy: You will avoid bankruptcy, which would otherwise negatively impact your credit for years.

What Debts Can Be Included in a Consumer Proposal?

A consumer proposal covers virtually all forms of debt, except secured debt.  All unsecured debts are eligible to be included in the consumer proposal process. Unsecured debts are debts that are not secured by some form of collateral. These types of debt include:

  • Credit card debt
  • Unsecured lines of credit
  • Personal loans
  • CRA debt
  • Student loan debt
  • ICBC debt

What Debts Cannot Be Included in a Consumer Proposal?

Consumer proposals can eliminate almost all debts, but there some that can’t be included. Unsecured debts, like credit card debt and CRA debt, are fair game but secured debts cannot be included. Some common examples of secured debts are:

  • Mortgages
  • Car loans

Some other debts that cannot be included in your consumer proposal are:

  • Child support payments
  • Spousal support payments
  • Student loans (*if it hasn’t been 7 years since your last date of study)
  • Fines imposed by a court
  • Money owing for things stolen
  • Property or services obtained through fraudulent circumstances
  • Award of damages by a court for intentionally inflicting bodily harm or sexual assault

All of these types of debts cannot be included in a consumer proposal, and creditors of secured debt can still attempt to collect the collateral if you don’t make payments.

What Are the Disadvantages of Filing for a Consumer Proposal?

Filing a consumer proposal isn’t always the best option for every financial situation and filing a proposal does have a few disadvantages:

  • Secured debts can’t be included: A secured debt is when you are required to put up an asset as security or collateral for the loan.  Common types of secured debts are mortgages and car loans, in which the item being financed becomes the collateral for the financing.
  • It will negatively impact your credit score: A consumer proposal will affect your credit rating, but less drastically than a personal bankruptcy and you can begin rebuilding your credit throughout your proposal.  It’s important to note that your credit score is only one part of what lenders use to determine whether they’ll loan you money or give you credit and filing for a consumer proposal provides you with a pathway to becoming credit-worthy.
  • It will show on your credit report: Your consumer proposal will be noted on your credit report 3 years after you pay off all the debts included in the proposal (or 6 years after you sign the proposal) and you will be considered a high-risk borrower.
  • Student loans that are less than 7 years old can’t be included: You can still file a consumer proposal, but if you have not been out of school for longer than seven years, you will still be responsible for student loan payments after your proposal is complete
  • Your proposal could be rejected by your creditors: This is very rare, but if your creditors do reject your proposal, they often do so with a counter-offer. If they do make a counteroffer, you and your Trustee can either accept or reject it or make another counteroffer.

How Much Debt Do I Need to Have Before I Can File a Consumer Proposal? 

You can file for a Consumer Proposal in British Columbia if you have between $1,000 and $250,000 of unsecured debt (excluding your mortgage).

If you’re are dealing with more than $250,000 of unsecured debt, you may still be able to file, but some different rules will apply to your proposal. A Licensed Insolvency Trustee (formally known as a Bankruptcy Trustee) will be able to fully explain this option to you.

What Happens to My Assets in a Consumer Proposal?

A consumer proposal will usually not affect your assets. If you continue to make the monthly payments on your mortgage and car loans as required, you will be able to keep those assets. In addition, if your creditors accept your proposal, you will be able to keep your other assets as well. Any money you have invested in certain funds will be protected when you file a consumer proposal. However, our team will be able to give you more specific information about what will happen to specific assets during the process, as it can vary from case to case.

Can My Spouse and I File a Consumer Proposal Together?

Yes, you can and in fact it’s often encouraged that spouses file a joint Consumer Proposal if they have joint or common debts. This will allow you to manage your family’s financial situation together. 

It’s not required that all debts included in the Consumer Proposal are joint debts, but the debts that are in both people’s names should be the majority of the debt included. 

Can My Spouse and I File a Consumer Proposal Together?

Yes, you can and in fact it’s often encouraged that spouses file a joint Consumer Proposal if they have joint or common debts. This will allow you to manage your family’s financial situation together. 

It’s not required that all debts included in the Consumer Proposal are joint debts, but the debts that are in both people’s names should be the majority of the debt included. 

Do I Get to Keep My Credit Cards in a Consumer Proposal? 

When you file your consumer proposal, you are typically required to hand over all your credit cards to your Licensed Insolvency Trustee. It might be difficult to obtain a new credit card while you’re completing your proposal, but you will be to use a prepaid or secured credit card during your proposal to help establish credit during your consumer proposal.

Do I Get to Keep My Car in a Consumer Proposal? 

Yes, you can keep your car in a proposal. If you keep up to date with your car loan payments as they come due, you can keep this (and any other) asset.

How Is a Consumer Proposal Different than a Bankruptcy?

Though a consumer proposal and bankruptcy both provide a way to relieve debt, there are some key differences between the two options. Understanding these differences will help to make it easier when deciding which option is best for your situation. The primary differences between these two debt relief solutions include:

  • Assets: In a consumer proposal, you will not have to surrender your assets, whereas, if you declare bankruptcy, you might have to.
  • Pre-Approval: A consumer proposal requires pre-approval by your creditors before it can be accepted. However, a bankruptcy is automatic, even though your creditors can still attempt to oppose your discharge.
  • Negotiated Payments: In a consumer proposal, your monthly payment amount will be negotiated upfront and agreed upon by you and your creditors. In contrast, payments during a bankruptcy are set by legislation and can potentially increase if your income rises.
  • Early Pay-Off: You may have the opportunity to pay off your consumer proposal early. On the other hand, bankruptcies have a pre-determined length set during the legislation.
  • Required Duties: You’ll have fewer required duties during a consumer proposal than you would during a bankruptcy. One example of this is that you don’t have to report your income and expenses in a consumer proposal.

What Percentage of Debt Do You Repay in a Consumer Proposal?

The answer to this question will depend on what your creditors are willing to accept. In most cases, creditors will agree to accept a proposal that offers to pay only a percentage of what is owed. Creditors are willing to accept proposals because it still allows them to recover more of the debt than a bankruptcy would. This means you will likely only have to pay a percentage of what you owe, which helps you get out of debt faster.

Can I Include My Student Loans in My Consumer Proposal?

Yes, you can include your student loans in your proposal if it’s been seven years or more since you completed your last day of study.

A Consumer Proposal is the only option to reduce government and private student loans, other than personal bankruptcy.

Can Debt I Owe to Canada Revenue Agency Be Included in My Consumer Proposal?

Your Consumer Proposal can include all debts to Canada Revenue Agency (CRA) including: 

  • Personal income tax debt
  • GST
  • Payroll remittances
  • Corporate tax

If you want to settle your CRA and government debts for less than the entire amount that you’re owing, filing a Consumer Proposal is the only process in Canada that allows you to do this—other than filing for personal bankruptcy. Both options can only be filed by a Licensed Insolvency Trustee (formally known as a Bankruptcy Trustee).

When you file for a Consumer Proposal, it will stop any further interest from accumulating on your debt and will automatically stop any legal action that the CRA has already taken (frozen bank accounts, wage garnishment, etc.).

Can a Consumer Proposal be Rejected?

If your creditors are unhappy with the terms of your proposal, they can choose to reject it. It is the responsibility of your LIT to create a proposal that your creditors will accept. Once the proposal is created, your creditors will have time to review the specifics of the consumer proposal, and then acceptance of it will be put to a vote. The majority of creditors will have to agree to the proposal for it to be accepted. Your LIT will follow these guidelines to help increase the chances of a successful proposal:

  • The terms of your proposal should ensure that your creditors will receive more than they would if you were to file bankruptcy.
  • The proposal meets the minimum expectations of your creditors.
  • The monthly payments are affordable and realistic for you to make every month.

How Long Does a Consumer Proposal Stay on My Credit Report?

The longest a consumer proposal will now remain on your credit report is 6 years from the date you file based on new guidelines set out by the Superintendent of Bankruptcy. A consumer proposal will be noted on your credit report for three years after completion of your Consumer Proposal or six years from the date of filing, whichever comes first.

If you complete your consumer proposal payments in the typical five-year timeframe, the notice will be removed from your credit report one year later (that is, six years from the date you filed).

If you complete your payments in two years, the notice will be removed five years from the date you filed your proposal.

If you complete a lump sum proposal, the notice will be removed from your credit report in about three years and you will still need to attend two counselling sessions to receive your certificate of completion.

Why Can Only a Licensed Insolvency Trustee File a Consumer Proposal?

Licensed Insolvency Trustees (also known as Bankruptcy Trustees) are the only professional licensed by the federal government and regulated by the Office of the Superintendent of Bankruptcy. A strict code of ethics and rules of professional conduct is upheld and all LITs must comply. And LITs are the only professionals who can help you file a Consumer Proposal or Personal Bankruptcy.

Can I Pay Off My Proposal Early?

Yes, it is possible to pay off your proposal early. Even though your monthly payment amount will be fixed once your creditors accept the terms of the proposal, you can choose to put more toward your month payment if you get a raise at work or can afford more. Paying off your proposal early will allow you to begin the recovery process sooner, so you can start rebuilding your credit.

How Do I File a Consumer Proposal?

To file a consumer proposal, you’ll need the help of a Licensed Insolvency Trustee. You’ll first want to meet with a debt professional to see if you qualify for a consumer proposal. If your debts are high, and you’re not making enough income, you may not be eligible to file a consumer proposal for debt relief and may have to look into filing for personal bankruptcy. Our team will be able to assess your situation and determine the best course of action for you. Once we decide that a consumer proposal is the right choice, we will help you draft one. We’ll take into consideration your debt amount, your income, your expenses, and your creditor’s expectations, helping to increase the chances of a successful proposal. After drafting the proposal, we’ll present it to you for final approval and signing before sending it off to be filed.

Contact Us for More Information

If you are interested in learning more about consumer proposals and how they work, please reach out to us at Smythe Insolvency. We are conveniently located across Greater Vancouver and Vancouver Island to help clients find a way out of their debts and begin rebuilding their credit. Contact us today to set up a consultation where we can discuss your situation.

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