You’ve been having trouble paying your credit card bills for a while, and things are not getting better. You begin to worry that you may eventually go bankrupt – something you never imagined could happen. Then a friend tells you that there is an option called Consumer Proposal, where you pay a percentage of the total you owe, over a period of up to five years – and then your debts are cleared.
Why Would a Bank Accept Consumer Proposal?
October 6th, 2015 by Wendy O.
Sounds Too Good to Be True!
This sounds good, but could it be true? Why would your creditors "let you off," paying only a portion of what you owe?
As one would expect, it has to do with maximum profit for the creditors. But how?
Here’s the thing. If you are persistently unable to fulfill your monthly payment obligations, you are insolvent. If you are insolvent, you can file for Bankruptcy. If you file for Bankruptcy, your creditors may get very little – but they’ll have no say in the matter.
So, of course, creditors strongly dislike Bankruptcies. They would like to receive more money. Consumer Proposal offers them that opportunity.
The key is, with Consumer Proposal, a debtor with a regular income can make payments for up to five years (the full 60 months is typical). This allows him or her to pay more than they would if they filed for Bankruptcy, as a first Bankruptcy usually lasts either nine or 21 months.
The most important thing creditors look for in a Consumer Proposal is that they will receive more money than they would if you simply went bankrupt. Your Trustee will advise you if your financial situation allows you to make (and perform the terms of) a Consumer Proposal that accomplishes just that.
There is another key difference between Consumer Proposal and Bankruptcy that explains why creditors are so receptive to Consumer Proposals. In a Bankruptcy, the terms are simply imposed on the creditors. The creditors have no choice in the matter – they must accept the terms, or undergo the expense of going to court to extend the Bankruptcy.
In Consumer Proposal, however, the creditors have the opportunity to vote on whether to accept Proposal's terms. They can even make counter-offers.
The creditors’ votes are weighted according to the percentage of your total debts owed to them. In other words, a creditor to whom you owe 40% of your total debts has twice the voting power of one to whom you owe 20% of your total debts. Your Trustee will calculate the votes as they come in (creditors have 45 days from the filing of the CP in order to vote), and will let you know if the Proposal has been accepted at the end of the 45 days. If 50% of the voting dollars vote yes or don’t vote, your Proposal is deemed accepted.
Credit card companies typically accept Consumer Proposals that allow them to recover more than they would in a Bankruptcy. At worst, if a creditor or creditors with more than 50% of the voting dollars makes a counter-offer, there may be a short period of negotiation before acceptance is achieved. They cannot ask for the moon and the stars, however – they know that if they ask too much, y