Over the past few years there has been a significant uptake on filings of Consumer Proposals by Canadians requiring debt relief. In fact the OSB, Office of the Superintendent of Bankruptcy, has reported that almost 50% of insolvencies filed in 2015 were not bankruptcies but instead consumer proposals.
We have found more people are aware of the existence of a proposal in the last few years. This in part is due to overwhelming change in marketing and exposure by Licensed Insolvency Trustees. Once the client begins discussions on their specific debt issues, they often want to know the benefits of a consumer proposal vs bankruptcy.
Given that each situation is unique, we must point out that there is no one size fits all solution in determining whether a proposal is best for you or a bankruptcy is the only option. Bankruptcy is a drastic and serious solution, avoiding bankruptcy is preferred for good reason.
Significant reasons why a consumer proposal could be better than bankruptcy:
- Creditor Protection: A proposal protects you from your creditors. Once your proposal is filed with your creditors, any garnishments will stop and your assets can not be seized. Bankruptcy will result in the seizure of specific assets based on your allowable exceptions. Important to note that each province has specific exceptions.
- Assets: The single, most dominate rationalization for filing a proposal by Canadians relates specifically to assets. You get to keep all your assets, in particular your home. Most families will avoid any debt reduction solution that could result in losing their home.
- Manageable Payments: A consumer proposal is designed specifically for you. There are no pre determined standards that will dictate how much you pay. You make a proposal to your creditors, usually a percentage of your unsecured debt. The payment is a reflection of your ability to pay and your income timing. As long as you have a reliable income source, you will qualify to make a proposal. There is no interest added to the payment during a proposal. In general, a proposal payment will be structured to last 48 to 60 months.
- Avoids Bankruptcy; Avoiding bankruptcy can be critical for some consumers. It may be they just do not want the stigma of bankruptcy. On occasion bankruptcy will adversely affect their ability to work, whether it is to retain professional designations or business licensing and legal requirements.
- Cost: Filing a consumer proposal has no cost directly associated with the process. There are no filing fees, administration fees or consultant fees paid independently of the proposal payments. The only payments are those made by you to your Licenced Insolvency Trustee who sorts out the entire process including making payments to your creditors to repay your debt.
- Qualification: If you are insolvent, unable to pay your debts. If you have $1000.00 to $250000.00 of unsecured debt (excluding mortgage debt), you have an ability to repay a portion of your debt and your creditors agree to your proposal, then you are a candidate for a proposal.
- Process of a Proposal: A Consumer Proposals (“CP”) is significantly less complicated than a bankruptcy, making it easier for the consumer to navigate and complete. The depth of regulation, the volume of mandatory documents and the level of legal complexity is higher in bankruptcy. Given that they are less restrictive, CPs can be managed and filed by a Consumer Proposal Administrator through a Licensed Insolvency Trustee firm. There are generally no court appearances required and no monthly reporting to the trustee. Once your proposal is submitted to your creditors they have 45 days to agree to the terms and conditions. The creditors can choose to accept, decline or ask for a meeting of creditors. Your administrator or trustee could amend your initial proposal if the creditors do not agree to your terms.
- Instant Financial Improvement: The moment a proposal is approved by your creditors you are on your way to a financial recovery. The terms of the proposal are legal and binding and as such, you can move on. If you get a new job, make more money, sell an asset, get a bonus or tax refund then that revenue is yours to keep. You will never be required to pay more money even if you make more money!
- Credit Rating: People are often concerned about their credit rating with a consumer proposal vs bankruptcy. The reporting agencies will treat them differently, a proposal is an R7 and bankruptcy an R9. As well a proposal will stay on your credit bureau for 3 years after receiving your certificate of completion and a bankruptcy will remain for 6 years after receiving your certificate of discharge. One thing to keep in mind, your credit rating could already be demolished by missed payments and collection processes. Credit repair will take effort and time. Your creditors will need to see you have changed your habits and have been rehabilitated.
As we indicated at the onset, it is important to note that each situation is unique. Each stakeholder in the process will have a standpoint which could change the landscape as it relates to you. Sitting down with a trustee or proposal administrator to review your situation is the first step. They will get you a plan to stabilize your finances and protect you from your creditors.
Talking to your local LIT, will clarify how a proposal could work for you and your family.