Consumer Proposals Will Increase Under the New Bankruptcy Rules in Canada

Here’s a prediction: the new bankruptcy rules that will come into force in Canada on September 18, 2009 will lead to a significant increase in the number of consumer proposals filed by Canadians.

If you are in financial trouble, you have a number of options, including repaying your debt on your own, getting a debt consolidation loan, credit counselling, debt settlement, a consumer proposal, or bankruptcy. (You can investigate all of your options using our debt options calculator). With all of these options, why do I think consumer proposals will become more popular?

Under the new rules, for many Canadians personal bankruptcy will be a longer and more expensive process. The biggest change is that if you have surplus income of more than $200 per month, a first bankruptcy will last 21 months, as compared to 9 months under the old rules.

For example, the income threshold set by the government for a single person in Canada in 2009 is $1,870 per month in net income. If that person has net income of $2,270 per month they have surplus income of $400 per month, and they are required to pay half of that, $200 per month, to their trustee to be distributed to their creditors. Not only are they paying a “penalty” of $200 per month, but their bankruptcy will also be extended automatically to 21 months, and they will be required to pay that $200 surplus income payment each month, unless their circumstances change.

Even worse, if you are a second time bankrupt, your bankruptcy will automatically last for 24 months, or 36 months if you have surplus income.

Again, under the pre-September 18, 2009 rules a bankrupt with over $200 in surplus income per month might still have been discharged in 9 months. Under the new rules they are automatically bankrupt for 21 months, and they are paying that payment for the entire duration of the bankruptcy.

The other catch is that when you go bankrupt you don’t know how much you will be required to pay, since the payment amount is based on your monthly income. Each month you are required to submit to the trustee your paystubs, and the trustee will then calculate how much you owe. If you receive a raise, or work overtime, or get a bonus, you pay more. Of course if your income drops, you pay less.

So, what can you do if you are in financial trouble, and don’t want to go bankrupt? You can file a consumer proposal. Working with a trustee you can negotiate a settlement with your creditors to repay a portion of your debts, and therefore avoid personal bankruptcy.

For example, if due to your income you would be required to pay $600 per month for 21 months, or $12,600, it may be possible to negotiate a consumer proposal where you pay $250 per month for 5 years, or $15,000.

So why would you offer to pay $15,000 in a consumer proposal when a bankruptcy may only cost you $12,600? Three reasons:

First, a consumer proposal is not bankruptcy, and most people want to do what they can to avoid bankruptcy.

Second, while $15,000 is larger than $12,600 in my example, the monthly payment of $250 is much more manageable than the $600 monthly payment in a bankruptcy. While the proposal lasts longer, it’s a more manageable monthly payment.

Finally, once the proposal is accepted by the creditors, the payment is fixed. In a bankruptcy if your income goes up, your payment goes up. In a proposal if your income increases, your payments don’t change. You have the certainty of knowing exactly what you are required to pay each month. You have peace of mind.

That’s why I believe that the new bankruptcy rules, that make bankruptcy longer and more costly for higher income earners, will encourage a greater number of Canadians to file a consume proposal.

To find out more, consult a Canadian bankruptcy trustee to arrange a no charge initial consultation, and to determine whether a consumer proposal or a bankruptcy is the correct solution for you and your family.