Consumer Proposal vs. Settling Your Debts On Your Own
December 30th, 2014 by A Licensed Insolvency Trustee
You are having problems paying your bills, and you’re interested in eliminating your debt without resorting to personal bankruptcy. You are worried, because you can no longer deal with your debt situation by borrowing additional monies.
If you were to choose credit counselling, you would repay your unsecured consumer creditors between 100 and 130 cents on the dollar by making monthly payments over up to five years. The advantage here is that your new monthly payment would be more manageable. The downside is that you repay 100% of your debts, and possibly a bit more (interest continues accruing as you pay). Most consumers should explore other options as well.
There are two ways to eliminate your debt at substantial discounts, without resorting to personal bankruptcy: (1) making a consumer proposal, and (2) settling your debts on your own.
In addition to reading this article and others on this site, you can get up-to-date information about your specific situation by visiting a Licensed Insolvency Trustee. A Trustee is qualified to advise you of all your options in detail. Your first visit is free, no-obligation, and confidential.
A Comparison of Consumer Proposal vs. Settling Debts on Your Own
Ideally, when choosing between making a consumer proposal and settling your debts on your own you should address these six questions:
- What is involved in making a consumer proposal?
- What is involved in settling your own debt?
- Under what circumstances are these two debt resolution options available?
- What are consumer proposal pros and cons?
- What are the advantages and disadvantages of settling your own debt?
- What are four good reasons for making a consumer proposal?
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What is involved in making a consumer proposal?
To successfully make a consumer proposal you must proceed through five steps:
- You must meet in person with a Licensed Insolvency Trustee
- With the Trustee’s help, you must complete a document containing details about your debts and your household budget
- You must wait while your Licensed Insolvency Trustee makes a proposal, which must then be approved by your creditors. The proposal will set out the percentage of your debt that you are going to repay, the payment period – not to exceed five years – and the amount of your monthly payment. The Trustee will file your consumer proposal with the Office of the Superintendent of Bankruptcy and submit it to your creditors.
- You must wait (again!) for a short period while your creditors vote on whether or not to accept your consumer proposal. Each creditor receives one vote for each dollar of debt owing to that creditor. So, if you owe more than fifty percent of your total debt to one creditor, that creditor will have veto power over the acceptance of the proposal. If a simple majority of the votes cast are in favour of your consumer proposal, then all of your creditors are bound by the result.
- If the consumer proposal is accepted by your creditors (and most are), you typically must make monthly payments over three to five years. Also, you must be careful – if you fail to make three consecutive monthly proposal payments to the Licensed Insolvency Trustee, your consumer proposal will be annulled, and you will no longer have protection from your creditors.
When can you make a consumer proposal? Unlike settling debts on your own, if you want to make a consumer proposal there is no requirement that your debt be unpaid for a minimum of six months. There are, however, conditions which you must satisfy before you can make a consumer proposal. One of those conditions is that you be insolvent.
To make a consumer proposal, a consumer must meet with a Licensed Insolvency Trustee in person. The Trustee will determine whether or not the consumer is “insolvent” as defined under the federal Bankruptcy and Insolvency Act.
You are insolvent if you meet two conditions: first, that you are unable to pay your financial obligations as they become due; and second, that the total dollar amount of your debts is greater than the total dollar amount of your assets. Virtually everyone meeting with a Licensed Insolvency Trustee will satisfy the first condition. Some, however, will not meet the second condition because they have substantial equity in their homes. In many instances, an individual could pay all of their outstanding debts if they were simply to sell their home and use the proceeds from the sale to pay off their debts.
What is involved in settling your debt on your own?
If, for any reason, you have not made a payment on an unsecured debt for six months or more, you may be in a position to settle that debt on your own.
Although it is possible to settle an unsecured consumer debt which is more than six months old, there is no guarantee that your creditor will be interested in settling, especially for an amount lower than the current amount of the debt. Creditors and their authorized collection agents aim to maximize their financial return when attempting to collect an unpaid account. They would much prefer to recover 100 percent of the outstanding balance compared to 50 percent. On the flip side, they would also prefer to recover 30 percent than nothing at all!
The key to settling on your own is to convince your creditor that an amount lower than 100 percent is all they can hope to receive. However, this may be an uphill struggle.
If you have an unsecured consumer account that has been unpaid for more than six months there is a chance that your creditor will accept a one-time payment equal to less than 100 percent of the outstanding balance as settlement in full. If, however, you have made a payment on your account anytime in the past six months, the odds are remote that your creditor will consider accepting any payment from you other than payment in full to resolve your account.
If your debt is more than six months overdue, you will likely be dealing with a debt collection agency. These companies work on behalf of creditors to collect overdue accounts. Collectors are trained to attempt to obtain payment in full during their initial contacts with a debtor. You will be told, “we won’t accept anything other than payment in full”. In response, one strategy is to keep a cool head and politely suggest to the collector that he or she contact you at a future date if the creditor becomes interested in discussing a discounted settlement for a one-time lump-sum payment.
If you persist in this, you may eventually find that the collection agency is willing to negotiate. However, your creditor may choose to sue you instead. It all depends on what they hope to achieve. If you have convinced the collector that payment of 100% is impossible, and if the debt is on the small side ($5,000 or less), the creditor may be less likely to sue, simply because going to court is costly.
Approaching your creditor about settlement typically results in one of three responses:
- Your creditor will not consider a potential settlement
- Your creditor will consider a settlement on the condition that you provide certain documentation confirming your financial situation
- Your creditor will consider a settlement without asking for any documentation regarding your financial situation
Some creditors will only consider a settlement if they are satisfied that you are experiencing financial hardship (which makes it unlikely that they will ever recover the entire balance owing). In this scenario, your creditor may ask for documentation to prove that you are experiencing financial hardship. They may request copies of your T4s from recent taxation years, a copy of your most recent paystub from your employer, or possibly the completion of a one or two-page form in which you list your assets, liabilities, monthly income and monthly living expenses.
Settling an outstanding account with a one-time payment for an amount less than 100 percent of the outstanding balance can be relatively straightforward. What can be much more challenging is determining how close you can get to obtaining the best possible settlement. There is a big difference between settling your outstanding $10,000 credit card bill for $8,000 or $2,000!
However, this is key: do not promise a solution that you are unable to follow up on.
Keep these rules in mind when communicating with your creditor or their representative:
- Never admit legal liability for the debt in writing.
Inform your creditor or their representative, verbally or in writing, that you are prepared to settle a specific account by making a one-time lump-sum payment for either (i) a specific dollar amount, or (ii) a payment equal to a specified percentage of the current outstanding balance.
- You can negotiate with your creditor – haggle as if you are at a bazaar on your vacation!
- Get it in writing! Do not consider settling any account until you receive a written settlement letter from your creditor or their authorized representative confirming the details of the settlement.
If you settle an account with your creditor, you must retain for your records all documents regarding the settlement, including the settlement letter, your proof of payment and a receipt for your payment. Unlike consumer proposal and bankruptcy, debt settlement is not overseen directly by the courts. This means that your creditor could potentiallY “come back for more” in the future. To defend yourself in this circumstance, full documentation is key.
Under what circumstances are these two debt resolution options available?
The availability of these options, and which one is preferred, depend on the following three factors:
- The types of debts that can be eliminated
- The dollar amount of debt that can be eliminated
- Whether or not you can pick and choose the debts you want to eliminate
Consumer Proposal vs Debt Settlement: Types of debts that can be eliminated
The following chart lists five categories of debt, and indicates which debts can be eliminated by settling a debt on your own or by making a consumer proposal.
Secured debt is debt for which your creditor has collateral that can be seized in the event you default on your debt. Two common examples of secured debt are mortgages on real property and liens arising from the purchase or lease of an automobile.
Non-dischargeable debt includes certain types of debt that cannot be eliminated by “settling on your own” or by making a consumer proposal or filing for bankruptcy. These debts include monies owing for child support or spousal support and government fines, as well as civil judgments against a debtor involving fraud.
Unsecured debt includes monies owing on unsecured credit cards, lines of credit, and personal loans (excluding student loans) as well as monies owing to utilities. “Unsecured” means the creditor’s funds are not secured by collateral in case of default.
Monies owing to the government include income tax and GST/HST returns owing to the government by small, unincorporated business owners. These debts can be discharged via consumer proposal, but not via debt settlement.
Student loans are a special category of debt because they are harder to discharge than other consumer debt. In some cases, they may be discharged via consumer proposal. Depending on who issued the student loan, it may be possible to resolve them via debt settlement. See our page on Student Loan Debt.
In summary, “settling debts on your own” is only available in connection with resolving unsecured consumer debt, and this solution might or might not be available for eliminating student loan debt. In contrast, if you file a consumer proposal and it is accepted, you will be in a position to resolve your debts including monies owing to the government, some outstanding student loans, and unsecured consumer debt.
Consumer Proposal vs. Debt Settlement: Dollar value of debts that can be eliminated
If you want to eliminate your debt by negotiating a one-time lump-sum payment with a creditor for less than 100 percent of the outstanding balance, there is no restriction on the dollar amount you can attempt to deal with.
In contrast, it is uncommon for a Trustee to file a consumer proposal for less than $10,000 in total. The Trustee is likely to suggest other debt solutions for this relatively small amount. At the other end, consumer proposal is not available if you owe a total of more than $250,000 to your creditors, excluding monies owing on your mortgage. If you owe more than this amount, you may consult a Trustee about a Division 1 Proposal – similar to a consumer proposal, but geared to larger amounts of debt.
Can you choose which debts are eliminated?
You may want to eliminate only one overdue debt, out of several accounts that you have. Can you choose to eliminate one debt, and leave the other accounts open and unaffected?
A Consumer’s Ability to Cherry Pick the Accounts They Want to Resolve: Consumer Proposal Vs Settling Debts on Your Own
|Consumer proposal||Settling debts on your own|
|If you make a consumer proposal then it is necessary for you to include each and every one of your debts in the following debt categories in your consumer proposal: Unsecured consumer debt, Monies owing to the government, Student loans||If you choose to settle your debts on your own then you have total flexibility when it comes to choosing which of your unsecured consumer debts you want to settle (and possibly one or more student loans)|
If you choose to settle your debts on your own, you may choose which of your unsecured consumer debts you want to settle (and possibly one or more student loans).
What are consumer proposal pros and cons?
There are seven advantages to making a consumer proposal.
1. All lawsuits against you involving unsecured creditors will be stayed or terminated.
If you make a consumer proposal that is approved by your creditors, all lawsuits against you – in connection with monies owing to certain creditors, unsecured consumer debt, monies owing to the government and student loan debt – will be stayed as long as you make your monthly consumer proposal payments. However, making a consumer proposal does not prevent your secured creditors from using the courts to realize upon their security.
Making a consumer proposal can be very helpful if you own real property in your own name, and you have been or may be sued. This can happen when an unsecured creditor initiates a lawsuit in an attempt to obtain a judgment against you so that they can place a lien on your property. By making a consumer proposal before your creditor obtains a judgment against you, this result is averted because the lawsuit is stayed (cannot proceed) as long as the consumer proposal is in effect. Thus, the original unsecured debt will be discharged when the proposal is completed.
2. All wage garnishments against you will be terminated.
If you file a consumer proposal that is accepted by your creditors, all wage garnishments against you will end except for those involving child support and spousal support.
3. All collection activity against you will cease.
If you file a consumer proposal that is accepted by your creditors, all collection activity against you involving unsecured consumer debt, monies owing to the government, and student loan debt will cease. Note that making a consumer proposal does not prevent your secured creditors from attempting to recover monies from you.
4. Consumer proposal resolves debts owed to the government, and most unsecured debts.
A key advantage of successfully filing a consumer proposal is that you will be in a position to eliminate your indebtedness for (1) monies owing to the government, (2) most unsecured debt, and (3) many student loans, through paying monthly installments over three to five years.
5. No additional interest accrues on your outstanding debt.
When your consumer proposal is filed, interest stops accruing on your outstanding debt. If, however, you fail to make three consecutive monthly payments on your consumer proposal, the proposal is annulled and your interest will continue to accrue.
6. You are allowed to eliminate your debt with a lump-sum payment if you have the necessary funds.
If creditors approve a consumer proposal, you will typically make fixed monthly payments over three to five years. If, during that time you find that you have sufficient funds to “pay out” the remaining amount owing on your consumer proposal, you are allowed – and indeed encouraged – to do so. A consumer who does this can repair his or her credit rating much sooner, and the creditors benefit by receiving their money sooner.
7. A consumer proposal is a known commodity.
An advantage of making a consumer proposal is the certainty associated with it.
Most consumer proposals are accepted by the creditors (occasionally some negotiation is required, which will be facilitated by the Trustee). Once your consumer proposal is approved by the creditors, the result – release from your unsecured debts – is guaranteed provided you successfully make your monthly payments during the life of the consumer proposal, and fulfill other requirements such as attending credit counselling sessions. Furthermore, collection activity will end, and legal proceedings and wage garnishments will stop as long as you make your monthly payments.
There are five disadvantages to making a consumer proposal.
1. Consumer proposal involves a very formal, highly structured process, lacking in flexibility.
As you read earlier in this article, to make a consumer proposal you must to meet with a Licensed Insolvency Trustee in person, and provide the Trustee with a list of the names of all of your creditors and the amounts owing to them. Your creditors have the right to vote on accepting your consumer proposal. If your creditors approve your consumer proposal, you must make monthly payments. If you fail to make three consecutive monthly payments, your consumer proposal is annulled. These rules, contained in Canada’s Bankruptcy and Insolvency Act, cannot be modified by you or your Trustee.
2. You must make regular monthly payments to the Licensed Insolvency Trustee.
If your creditors approve your consumer proposal, you must make monthly payments over time – typically between three and five years. This requirement can be difficult for debtors who do not receive a regular paycheque, individuals with seasonal employment, and those experiencing periods of unemployment.
3. You must include all of your debts in a consumer proposal.
When you make a consumer proposal, you must include all of your debts, excluding secured debts such as mortgages, and non-dischargeable debts. In some cases, this can present a problem. If you list a loan from your employer or a family member, they will be notified of the consumer proposal, and they will learn that they will be receiving less than what they lent you.
4. You are unlikely to resolve your outstanding debts for less than 35 cents on the dollar.
If you owe monies to an unsecured consumer creditor and they do not sue you before the expiry of the relevant limitation period in your province, you will be able to avoid paying a penny to that creditor. However, if you make a consumer proposal, you will not be able to take advantage of the expiry of a limitation period. For more information on limitation periods, see our webpage, “The Difference Between Secured and Unsecured Debt.”
Furthermore, most creditors require that the consumer pay at least 35% of their outstanding debt via a consumer proposal. The exact proposal percentage will be calculated by your Licensed Insolvency Trustee, taking into consideration information about your income and household budget.
5. Successfully filing a consumer proposal does not guarantee the elimination of debt.
If your creditors approve your consumer proposal, there is no guarantee that you will eliminate your debt. The rest of the story is up to you! It will be necessary to make your monthly payments over the life of the consumer proposal, as your proposal will be annulled if you fail to make three consecutive monthly payments.
What are the advantages and disadvantages of settling your own debt?
There are six advantages to settling your own debt:
1. Debt settlement is a very informal, flexible debt resolution option
Unlike consumer proposal, debt settlement is not a formal process with direct court oversight. Therefore, there are fewer rules. There is no requirement that you meet in person with anyone before you can settle your debts, nor is there a requirement that you must be insolvent. Finally, there is no requirement that you (i) owe a minimum of $10,000 or (ii) owe less than $250,000 to your creditors, excluding mortgage debt, before you can settle your debts on your own.
2. You can pick and choose which debts you want to resolve
If you choose to settle your own debts, you can cherry-pick how you wish to deal with your various accounts. A person who has a loan from their employer will typically want to repay that loan in full. In contrast, you might choose to resolve your outstanding credit cards by either negotiating one-time settlements for less than the entire balance owing, or to avoid paying the debts altogether by waiting for the expiry of a limitation period and hoping your creditor does not choose to sue you.
3. You have flexibility regarding when you want to resolve debts
If you choose to resolve one or more unsecured consumer debts by settling your debt on your own, you can simply wait and contact your creditors from time to time, until a favourable settlement is available. If you have accumulated a few hundred or a few thousand dollars in savings that can be used for potential settlements, you can contact each one of your creditors’ representatives and determine which creditor can offer you the most generous deal on a potential settlement. Keep in mind that your creditors or their collection agents may contact you frequently while your debt is outstanding.
4. There is no requirement that you make monthly payments
In contrast with a consumer proposal, if you settle your debt on your own there is no requirement that you make monthly payments. This can be a major advantage for people who do not earn regular paycheques, have low incomes, or experience unemployment regularly. Ideally, if you are not making monthly payments to your creditors, you might be able to afford to set aside monies to resolve your debt.
5. Ideal for debtors in dire financial straits
In a tight financial situation, settling your debts on your own can be preferable to making a consumer proposal in which you are required to make monthly payments.
If you are able to take advantage of the passage of time and learn about limitation periods – and with a little bit of luck – you may be able to explore potential settlements with your creditors, and eventually settle with them.
6. You can switch strategies
If your situation changes in the future, you can simply switch to another debt resolution option – likely a consumer proposal, or potentially personal bankruptcy.
There are seven potential disadvantages to settling your own debt:
1. You may require advice or assistance
You might not feel that you know enough or have the confidence to settle your debt on your own. If you find yourself in this position, you might want to do one of the following:
- Read more articles on this site dealing with debt resolution solutions such as consumer proposal and bankruptcy.
- Consult with a Licensed Insolvency Trustee. Your first, no-obligation appointment is free and confidential. A Licensed Insolvency Trustee knows the options, and is trained to advise you on how to resolve your particular situation.
2. You must be comfortable taking risks
Settling debts on your own is not for the faint of heart! This debt resolution option is best suited to risk-takers and people who are very confident dealing with difficult discussions. Settling debt on your own will typically mean that you will receive payment demands from creditors and collection agencies. There is a risk that you will be sued, or that you might not be able to negotiate a favourable settlement.
3. No settlements can be arranged until your debts remain unpaid for a minimum of six months
Your creditors are likely to refuse to discuss a potential settlement with you until your account has not been paid for a minimum of six months. If you are currently making payments to a creditor in connection with a particular account and you wish to attempt to settle this account, you will need to stop making payments on this account.
4. Interest will typically continue to accrue on your outstanding account
If you stop making payments to a creditor on an unsecured consumer debt, interest will continue to accrue on your account. Some creditors, however, do freeze a consumer’s outstanding balance and stop charging interest on it once the account has not been paid for six months (don’t count on this, however).
5. You must anticipate collection calls and notices
If you owe monies to your creditors, you will receive demands for payment both in writing and by telephone. The first six months that your account is unpaid your creditor will typically use its in-house collection department to attempt to collect monies owing. Once your account has been unpaid for six months, your creditor will do one of the following:
- Continue with collection efforts using their in-house collection department
- Assign your account to a collection agency for collection on a commission basis
- Sue you
- Sell your account to a collections company that will continue to pursue you
6. Your creditor might sue you
Your creditor might choose to sue you. Once a creditor sues a debtor, the debtor is in a much weaker position than if the creditor had not sued the debtor. Addressing a lawsuit is a stressful and time-consuming process. However, if you have experienced representation in court, a settlement is still possible.
7. You might not be able to negotiate a favourable settlement
Your creditor is under no legal obligation to negotiate a settlement with you. However, if a creditor is not prepared to sue you, they run the risk of not recovering any monies at all. Several factors can make it more likely that your creditor will (i) negotiate a settlement with you, and (ii) negotiate a more generous settlement with you.
- The longer your debt remains unpaid, typically the more generous the settlements which may be available
- If you can demonstrate financial hardship, your creditor will typically be more inclined to agree to a settlement
- If you are in a position to advise your creditor or their authorized collection agent that the relevant statute of limitation has expired, your creditor might be prepared to agree to a settlement
- If your creditor or their authorized collection agent has engaged in illegal, unprofessional, or socially unacceptable conduct during their attempts to collect the debt, you might be able to leverage this fact by threatening to report them. See the Financial Consumer Agency of Canada’s webpage, Dealing with a debt collector.
What are four good reasons for making a consumer proposal?
A great many debtors, once they have explored their options, find that consumer proposal best suits their needs as an insolvency solution. In 2018 alone, over 70,000 Canadians filed a consumer proposal!
Here are four good reasons to make a consumer proposal instead of attempting to settle debt on your own:
1. You don’t feel comfortable settling your own debt
You might feel, for whatever reason, that settling your own debt is not for you. Having read the material above, you may feel that the amount of effort it will take to try to negotiate a settlement directly with your creditor(s), the risk of being sued, and the collection calls and letters you will receive, will cause more stress than you can comfortably handle.
2. Your wages are currently subject to garnishment
Making a consumer proposal can be an attractive debt resolution option if you are currently subject to a wage garnishment. If you make a consumer proposal, any wage garnishments against you – excluding those for child support and spousal support – will be terminated.
3. You have been sued and you own real property
Making a consumer proposal can be very attractive if you are sued and you own real property in your own name. If you are sued and your creditor obtains a judgment against you, they can put a lien on your real property. In the future – when you refinance or sell the property – your creditor will likely recover most or all of their original judgment against you, plus post-judgment interest. Making a consumer proposal before you are sued will prevent this scenario.
4. You owe a substantial amount of money to the government
Making a consumer proposal can be an effective way to eliminate tax debt. A Licensed Insolvency Trustee can discuss the possibilities with you.
Talk to a Licensed Insolvency Trustee Today!
Canada’s Licensed Insolvency Trustees are specially trained, government-licensed professionals, and are the only individuals who can file a consumer proposal or bankruptcy on your behalf. They understand the stress involved in financial difficulties, and can advise on practical solutions. Your first, confidential appointment is free.