A Guide to the Consumer Proposal - What Is It and How Does It Work?
Filing a consumer proposal can make sense for a number of indebted consumers, but not all. In this article we’ll take a look at when it does and doesn’t pay off to use a consumer proposal. We’ll also examine the types of debts that can and can’t be included in it, and give advice for how interested Canadians should file.
What Is a Consumer Proposal?
A consumer proposal is a formal, legally binding arrangement that’s negotiated and administered by a Consumer Proposal administrator, who is also a Licensed Insolvency Trustee (LIT). It protects the individual who’s filing from immediate debt collection from creditors, and was created by the government of Canada as an alternative to filing for bankruptcy.
During the consumer proposal process, you’ll work hand in hand with an LIT to develop a proposal for your creditors. In a nutshell, the proposal is an offer to either pay your creditors a portion of what they’re owed, to receive an extension on your repayment schedule, or both. (Note that the length of a consumer proposal cannot extend beyond five years.)
You’re required to make payments through your LIT, who in turn pays the money owing to each of your creditors on your behalf.
Why File a Debt Consumer Proposal?
Debt consumer proposals remain the only debt settlement program approved by the Canadian government. Filing a consumer proposal offers a number of benefits:
Protect Your Credit Score. Generally speaking, a consumer proposal has less of a negative effect on your credit score than filing for bankruptcy. Consumer proposals tend to result in an R7 rating on your credit report, whereas bankruptcies typically produce a credit rating of R9, which is the lowest possible rating and will most likely hinder you from obtaining credit for the years to come.
Hold onto Your Assets. Are you worried about losing the family home and all your other assets you’ve worked so hard for over your lifetime? Unlike filing for bankruptcy, with a consumer proposal your assets are protected from creditors. You’re able to keep any and all assets included in the proposal, like your home, investments and tax refunds.
Improve Your Cash Flow. Your monthly cash flow can be significantly improved with a consumer proposal, since you’re paying a lesser amount toward and/or extending the period of time allotted to repay your debts. Interest stops accruing on the date that you file, helping you save money compared to consolidating your debts or taking out a second mortgage on your home.
Protection from Creditors. With a consumer proposal, you’ll no longer have to fret over collection calls and wage garnishment. Once your creditors accept your consumer proposal, it is considered binding. If your wages are being garnished, in most cases the garnishment will cease immediately.
Avoid Increasing Payments. In a bankruptcy, the more you earn, the more you’ll pay. Not so with a consumer proposal. Under a consumer proposal, you’re only required to pay a fixed payment, which won’t increase after the consumer proposal has been accepted. If you believe your income will rise in the near future, a consumer proposal is most likely a better option for you than a bankruptcy.
What Debts Can Be Included in a Consumer Proposal?
Any type of unsecured debt (debt not backed by an asset, such as your home) can be included in a consumer proposal. Examples include debts from credit cards, unsecured lines of credit, personal loans, payday loans and income tax owing.
Do you have student loan debt? You can only include it if you’ve been out of school for at least seven years. Otherwise, you’ll be personally responsible for paying it off, even after filing the consumer proposal.
If you have a mortgage or a car loan, you may be wondering if you can use a consumer proposal to reduce your debt obligations for those. Since these are considered secured debts (personal assets like your home and car can be repossessed if you fail to make payment in full and on time), they cannot be included as part of a consumer proposal. You’ll need to keep paying your mortgage and car loan payments on time.
Likewise, creditors can’t go after your home and car after you file a consumer proposal, since those are protected. After filing a consumer proposal, you’ll likely find it easier to pay your mortgage and car loan payments as your monthly cash flow may be freed up.
What Are the Conditions of a Consumer Proposal?
If your consumer proposal is accepted, you will be responsible for adhering to the terms and conditions set out in it. That usually involves making monthly fixed payments (or lump sum payments) over a predetermined time period—most often three to five years in length. Your LIT will then pay your creditors directly as per the terms in your consumer proposal.
Aside from making payments, you may also be required to attend financial counselling sessions. You also won’t be permitted to use a regular, unsecured credit card (although you may be able to get a secured credit card, in which you make a deposit).
It’s a good idea to read your consumer proposal in detail to make sure you understand the terms and conditions set out in it before signing. If you have any questions, be sure to ask the LIT involved.
What Are a Consumer Proposal’s Consequences?
While consumer proposals make sense for a number of Canadians, they aren’t a good idea for everyone, and they can have a number of potential drawbacks to be aware of.
The process of completing a consumer proposal typically takes longer than a bankruptcy. When you lower your monthly payment with a consumer proposal, although you’re improving your cash monthly flow, you’re paying your outstanding debts to creditors over a longer time period. That said, if your financial position improves, there’s nothing stopping you from paying off the consumer proposal sooner.
If you don’t have major financial assets like a home or car that could be seized, or you don’t earn a lot of income, filing for bankruptcy may make more sense than a consumer proposal. During your meeting, a good LIT should explain the pros and cons of filing a consumer proposal versus filing for bankruptcy to help you make an informed decision based on your own unique circumstances.
As I mentioned earlier, filing a consumer proposal doesn’t impact your credit score as much as a bankruptcy does. An R7 credit rating will stay on your credit report for at least three years after the completion of your consumer proposal.
What Are Some Alternative Debt Consolidation and Reduction Methods?
There are some other debt consolidation and reduction methods you could consider aside from filing for a consumer proposal or bankruptcy.
If you own your own home, you might think about getting a home equity line of credit (HELOC) or a second mortgage. Depending on how much equity you’ve built up in your home, you may be able to refinance your mortgage, roll your consumer debt into your mortgage or pay it off with a HELOC at an overall lower interest rate.
Another alternative is a credit card balance transfer. Some credit cards offer promotions where you can transfer your outstanding card and loan balances over to a new credit card and pay zero percent interest for a specified period of time (usually 6-12 months). If you do this, make sure you put an aggressive plan in place to pay off your credit card debt, otherwise you’re not likely to find yourself in a better financial position once the promotional interest rate period is over.
How Does an Indebted Consumer Get a Consumer Proposal?
As mentioned, only an LIT can be your consumer proposal administrator. If you believe that a consumer proposal is right for you, your first step is to contact an LIT. You can find an LIT by visiting the government of Canada website and searching for an LIT in your area. You can also find one with a Google search of the term ‘Licensed Insolvency Trustee in [your city name].’
When meeting with the LIT, the two of you will sit down and come up with a repayment plan that is likely to work for both you and the creditors. After signing the paperwork, the trustee will file it electronically with the government. Your creditors can then choose to accept the proposal, propose something else or reject it.
There are no upfront costs for using the services of an LIT. The fees paid to the LIT are already included as part of your payments made to creditors negotiated on your behalf by your LIT.
Once your consumer proposal has been accepted, you’ll be required to make payments according to the terms and regularly attend credit counselling. Once you finish the credit counselling, you’ll receive a certificate of full performance, as you start the process of rebuilding your credit score.