What Does “Reasonable” Mean When You File a Consumer Proposal or Bankruptcy in Canada?
There is a new trend in the insolvency world. The term “reasonable” has always been a part of our lexicon, but until recently, very few creditors were bothering to define it. That is all changing.
When you offer your creditors a consumer proposal, (a legal procedure whereby you offer and your creditors agree to accept less than 100% of what you owe them on your debts) the creditors are provided with enough information to determine how much they may be likely to receive if you filed an assignment in bankruptcy in Canada. The creditors will want more money in a proposal than they would get in a bankruptcy, otherwise it would be in their best interests to simply let you go bankrupt. A proposal is still a good deal for the debtor, because they can stretch the payments out over a longer period of time to make the monthly payments more affordable. The information presented to the creditors will include a monthly budget showing your household income and expense. You and your trustee attest that the proposal and your budget are “reasonable”.
In the past, very little attention was paid to the line by line expenses listed on a person’s budget. The reasonable test seemed to mean you were offering a greater benefit (more money) to your creditors with your consumer proposal than they would receive if you filed for bankruptcy – which made it reasonable for the creditors – and on paper you could afford to make the monthly payment – which made it reasonable for you.
It has become apparent that due in part to the dramatic increase in the number of proposals being filed these days, the creditors are reviewing the budgets in detail for items that, in their opinion, may not be reasonable.
For example, a typical single person household spends anywhere from $150 to $300 per month on food. If a single person’s budget included $600 for food, the creditors may question that expense.
A more obvious example: the family budget includes $400 for smoking. The creditors won’t tell you to quit smoking, but they may point out that if you cutback or quit then you could afford to repay more of your debt.
Any and all expense items seem to be fair game for creditor review. The term “reasonable” has evolved to mean “necessary to maintain a standard of living”. Items that might be classified as luxuries or extravagant are being singled out. Keep in mind that one person’s luxury might be another person’s necessity. What matters now is whether or not your budget reflects a certain frugality towards your own living expenses so that you can repay a greater portion of your debts.
This may be a temporary change in attitude – a way of trying to slow down the rate at which people are filing proposals. Or it may represent the new “reality” that we have to live with.
So what does this mean to you? If you are filing a consumer proposal and expecting your creditors to accept less than 100% repayment of your debts, you must demonstrate that you are cutting back on your own living expenses as well.
What is reasonable? Each creditor has different standards, so contact a licensed bankruptcy trustee in Canada for more information (they will all provide you with a no-charge initial consultation).