What’s a consumer proposal and why would any accept one?

Consumer proposals have been around for quite a long time, but it’s only been the last couple of years that people have become aware that there is a solution other than bankruptcy to deal with their financial problems.

Briefly, a consumer proposal is a legal procedure whereby you offer to repay a portion of the debts that you owe. That portion might be as low at 10 cents on the dollar, or it may be the entire debt. (In most cases it seems to be between 25 – 50% of the total you owe, but more about that later).

This may sound too good to be true, but wait a minute. Consumer proposals are designed to provide an alternative to bankruptcy. They are not for people that can afford to repay their debts in full. They are designed for individuals that are experiencing financial hardship.

How do you know if you should consider a consumer proposal? Some of the signs of financial problems include: past due accounts, collection calls at home or at work, letters from lawyers threatening legal action, a lack of sleep due to the stress of worrying about your finances, to name a few. If you are experiencing any of these problems you should think about speaking to a professional about your money problems.

How does a proposal work? You start by meeting with a licensed consumer proposal administrator. Be careful who you talk to – in the last couple of years a new industry has been created of people calling themselves “debt consultants”. Only a licensed consumer proposal administrator, who will also generally be licensed as a trustee in bankruptcy, can prepare and file a consumer proposal on your behalf – if you speak to anyone else before you see a consumer proposal administrator you are probably wasting your money. Before you sign any agreements and/or hand over any money make certain the person you are dealing with has a trustee in bankruptcy licence from the government of Canada.

Your trustee will help you prepare your proposal – the offer to repay a portion of your debt. The amount you will be required to repay depends on two tests. The first test is that you have to offer your creditors a greater rate of repayment (more money) than they would receive if you filed for bankruptcy. If you don’t then they won’t accept you offer. The second test is a little less clear, but you need to offer enough of a repayment to entice your creditors to accept your offer. This test takes a bit more explaining:

Let’s say your administrator tells you that if you were to file for bankruptcy in Canada that in all likelihood your creditors will get nothing (this is a common enough situation). You’d think that they’d accept just about any offer in a proposal because anything is better than nothing, but that’s not true. There is a cost to the creditors to keep your account open and to process whatever payments you are proposing. There is literally a point at which the creditors are better off taking nothing than they are dealing with a payment too small to cover their costs.

If you are looking for a good rule of thumb, plan on offering at least one third of what you owe in your proposal – just keep in mind you still have to pass the first test too.

That’s it in a nutshell – obviously there’s a lot more to proposals, but this should be enough to get you thinking. If this sounds like something that might help you deal with your financial problems then spend some more time on the internet reading about proposals (and bankruptcy) to help determine whether or not this might be the solution for you. Read our question and answer blog on consumer proposals (you can even submit your own question anonymously), or contact a trustee licensed by the federal government to file consumer proposals today for a no charge initial consultation.