What You Need to Know About Filing a Consumer Proposal
If you need immediate debt relief and a long-term debt solution, a consumer proposal can be a great alternative to bankruptcy. While it is ultimately your decision, a consumer proposal is often preferred when it is an available option as it has many advantages over filing for bankruptcy.
If you have debt of between $5,000 to $250,000 (excluding a home mortgage) and do not want to declare bankruptcy, a licensed insolvency trustee, acting as a proposal administrator, can help you file a consumer proposal in Kingston. If it is approved by the majority of your unsecured creditors, a consumer proposal will give you more time to pay your debts and impact your credit rating less than filing for bankruptcy would.
What is a Consumer Proposal?
A consumer proposal is a formal procedure under the Bankruptcy and Insolvency Act that is intended to result in a legal agreement with your unsecured creditors to modify your obligations to them. Your consumer proposal, prepared by a Kingston licensed insolvency trustee, may propose that these creditors accept a percentage or what you owe and/or extend the time period for repayment. The intent of a consumer proposal is to rearrange the terms to make your debt payments feasible.
How Do I Apply?
You need to meet with a consumer proposal administrator so he or she can first assess your financial situation and provide advice about the type of proposal recommended for you. If you opt for a consumer proposal, it will be submitted to the Official Receiver within 10 days if you agree to the terms, which are prepared by your administrator with your unique situation taken into account. Along with the proposal, the administrator must also submit a report to the Official Receiver, listing the creditors, his or her opinion about whether the proposal is fair and reasonable, and if it is believed that you can follow through with the plan.
A copy of the consumer proposal and report is also provided to your creditors with a statement of affairs (which contains the list of your assets and liabilities), information related to your personal affairs and budget information.
What’s the Approval Process?
After your administrator has submitted the proposal, your creditors have 45 days to respond. Over this period, any of the creditors to whom you owe 25% or more of the debt may request a meeting to review and accept or reject your proposal. The meeting, if held, must be held 21 days after being requested. If, after 45 days of filing the proposal, no meeting is requested, the proposal will be adjudged as being accepted, which means that it is approved and no later objections will be considered.
If a creditors’ meeting is called, each creditor’s acceptance or refusal will be regarded as a vote for or against the proposal. Usually, creditors will inform the administrator of the proposal of a no vote by way of a voting letter and usually they will include a counteroffer to the proposal for the debtor to accept or reject or make a counter-offer.
To establish whether your proposal is accepted, the number of votes will correspond to the total dollar value of the proven claims. The vote is decided by a majority of the dollar value (i.e., 50% plus 1). For example, if a claims total is $30,000 and the creditors who accept the proposal together make up at least $15,001, then the proposal is deemed accepted and the other unsecured creditors must also accept the proposal.
If your proposal is not accepted by the majority of the dollar value, a modified proposal can be resubmitted or you can consider other options to resolve your debt (e.g. bankruptcy). When a proposal is accepted or deemed to be accepted by the creditors, the OSB has 15 days to ask the administrator to apply to court for review and approval of the proposal. If the OSB does not request the administrator to apply to court, then the proposal is deemed to be approved by the court.
Upon acceptance of the proposal, you will have obligations to fulfill; you will be required to make a lump sum payment or a series of payments to the administrator, attend two credit counselling sessions, and adhere to any other conditions of the approval proposal.
Once you meet the conditions in full, you will be legally released from the debts in your consumer proposal. If you fail to meet the conditions, however, the proposal may be deemed annulled. In limited circumstances, an annulled proposal may be revived.
Similarities of Consumer Proposals to Filing for Bankruptcy
A consumer proposal will stop legal actions against you (e.g. wage garnishment) from unsecured creditors and stop interest charges from accumulating, just like filing for bankruptcy will. Both arrangements are legally binding on most unsecured creditors and both are also similar in that there are certain obligations are not affected or included (e.g. secured debts, student loans less than seven years old, child and spousal support).
The main advantages of a consumer proposal (over bankruptcy) are:
- You get to control of all of your assets (e.g. car, home);
- Settlements are based on your ability to pay;
- You don’t pay surplus amounts based on your income, so your payments are fixed and don’t rise with your income;
- You can arrange a longer period to pay (up to 5 years) than in bankruptcy;
- You can miss up to two payments before having to file for bankruptcy;
- Your credit rating will be less derogatory than bankruptcy once the proposal terms have been met. An R7 rating results from a consumer proposal, while an R9 rating (the worst rating possible on an R1 to R9 scale) results if you file for bankruptcy;
- Your credit rating will be impacted for 3 years after your last consumer proposal payment, while a bankruptcy remains on your record for 6 years.
The disadvantages of a consumer proposal (over bankruptcy) are:
- Your secured debts, such as a home mortgage or car loan, are not included;
- You must give creditors a larger amount in total than they would otherwise receive under bankruptcy; and
- There is a $250,000 limit for credit claims (excluding a home mortgage).
- It helps to know that a well-planned, well-devised consumer proposal is rarely refused.
If you are experiencing calls from creditors and are stressed about your financial situation, a consumer proposal is an option to consider discussing with a professional at F.J. Zielski & Associates. If you would like a free confidential, professional review your individual circumstances to find out if a consumer proposal would benefit you, contact us.