Consumer proposals are one of the chief alternatives to filing for bankruptcy in Canada. But even if you’ve heard the term, do you really know what a consumer proposal entails and why it might be a better option than an all-out bankruptcy?
A consumer proposal is a legally binding agreement between you and your creditors to pay a reduced amount of the debts you owe within five years. Creditors will often agree to such arrangements because they prefer to receive less money on a regular schedule, rather than wait endlessly for full payment that may never come. As such, your monthly payments are lower than what you would otherwise pay, and they don’t increase — even if your income rises.
Because of its legally binding nature, a consumer proposal must be administered and mediated by a licensed bankruptcy and insolvency trustee, according to the rules governed by the Bankruptcy and Insolvency Act of Canada.
While fees vary, it can cost about $750 to file a consumer proposal and another $750 to administer if it’s accepted by your creditors. The trustee you’re working with will also take a cut (sometimes 20 per cent) of your agreed-upon payments as a service fee.
With a consumer proposal, you do not need to give up your assets or potentially make income surplus payments as you would if you declared bankruptcy.
However, bankruptcy and consumer proposals share many similarities. Both are a matter of public record that can negatively affect your credit. (A consumer proposal stays on your credit file for no longer than three years from completion, while bankruptcy is noted on your credit report for six or seven years.)
Both prevent your creditors from calling, pursuing you in court or garnishing your wages once you enter the process, thanks to a stay of proceedings.
Finally, both methods can include unsecured loans, lines of credit, CRA income tax debt and credit card debt, but exclude secured debts (like a mortgage) and student loans that are less than seven years old.
A consumer proposal is one of the last ways to avoid bankruptcy. If you miss two or more payments of your consumer proposal, you may have to file for bankruptcy anyway.
Another route you can take to get your debt under control is a debt management plan, which is administered by a credit counsellor at a non-profit credit counselling agency. The counsellor approaches your creditors and organizes a repayment plan that works with your budget and schedule. They will also likely be able to significantly reduce or eliminate your interest payments. You give the credit counselling agency one payment per month and your counsellor will distribute the money to your creditors.
While a debt management play may sound similar to a consumer proposal in that you can consolidate your unsecured debt into one monthly payment, there are some significant differences between the two. A debt management plan is voluntary, and creditors who choose not to participate can still contact you or garnish your wages. More significantly, you must repay all your original creditors in full. In a consumer proposal, you don’t have to pay back the full amount you owe, and all calls and garnishments from creditors cease.
A consumer proposal has to be recommended by a licensed bankruptcy and insolvency trustee and it’s not an option for everyone.
First off, you must live or operate a business in Canada and have debt of over $1,000. You must also be insolvent, which means you cannot make your debt payments, or your unsecured debt exceeds your assets. Unlike eligibility for bankruptcy, your debt cannot exceed $250,000 (excluding your mortgage).
You and a spouse (or any two individuals) can file a joint consumer proposal if the debts between the two of you are substantially the same. You can also file a consumer proposal during a bankruptcy, but the date of the consumer proposal will be listed as the same as the bankruptcy, so you can’t add debts incurred during bankruptcy to a consumer proposal.
Even if you are eligible for a consumer proposal, it may not be the best choice available for your debt situation. A consumer proposal is best suited to those who have some money to pay their creditors monthly, who own assets they don’t want to lose during bankruptcy, and whose income would make bankruptcy prohibitively expensive due to the surplus payments required.
Aaron Broverman has been a personal finance journalist for over a decade. His work has appeared on such outlets as Yahoo Finance Canada, Bankrate and Creditcards.com, Money Under 30, Wealth Rocket, CBC.ca and Greedyrates.ca. This former Toronto transplant via Vancouver now lives in Waterloo with his wife and son. When he’s not writing about your money and how to use it, you’ll find his nose in a comic book relating to the work life balance of Spider-Man and the clumsy brute strength of The Hulk.