Consumer Proposal: Will My Creditors Accept My Proposal?

As we have discussed many time on the Bankruptcy Canada Trustee Talk blog, a consumer proposal is a great alternative to filing bankruptcy in Canada. The concept is simple: instead of going bankrupt, you offer to pay a portion of the amount owing to your creditors, and if they accept you avoid bankruptcy.

But why would a creditor accept a consumer proposal? If you owe $50,000, why would they accept a deal where you repay perhaps only $20,000?

There are a number of reasons why a creditor would accept a consumer proposal:

First, and most obviously, a creditor would accept a proposal if they expect to generate more money in a proposal than they would generate in a bankruptcy. Obviously if they were going to get less money in a proposal, they would not accept it. Here’s a simple example:

Joe has $50,000 in debt. He supports his wife and three children, and after paying his normal living expenses like rent, utilities, food, transportation and other costs Joe only has $500 per month available to repay his debts. The minimum payments on his credit cards and other debts are $1,300 per month, so he is falling behind.

Joe met with a trustee, and the trustee calculated that based on Joe’s income and family size he would be required to pay $600 per month in surplus income payments, and his bankruptcy would last for 21 months, so Joe would pay approximately $12,600 during his bankruptcy. He’s worried that he won’t be able to afford the $600 per month in payments.

Joe’s trustee suggest an alternative: instead of going bankrupt, Joe could offer a consumer proposal of $300 per month for five years, or $18,000 in total.

Obviously Joe is paying $18,000 in a proposal, instead of $12,600 in a bankruptcy, but Joe is happy with that plan. He wants to avoid bankruptcy, and he wants to repay as much as he can to his creditors, and for him, $300 per month in a consumer proposal is much more manageable than $600 per month in a bankruptcy. Joe decides to file a proposal.

In this example the creditors are likely to accept the proposal because they are getting more in the proposal than they would get under any other alternative.

Whether or not the creditors actually accept the proposal will depend on a number of factors, including Joe’s prior history with the creditor, and the individual criteria that each creditor uses to decide on how they will vote on a proposal. A consumer proposal administrator can explain the likely chances of success for you at your no charge initial consultation.

Second, most creditors want to be seen as “helping the little guy.” Big banks and credit card companies in Canada don’t want to get a reputation for refusing all reasonable settlement arrangements, so if a consumer proposal is reasonable, most of them will accept it.

Finally, creditors want certainty. In a bankruptcy the amount of money they will realize will increase or decrease depending on the bankrupt’s income during the process. In a consumer proposal, once the proposal is approved, the payment amounts are fixed. There is certainty. Each creditor knows what they will get. That’s another example of how a proposal is a “win-win” solution. You have certainty because you know what you are required to pay each month, and your creditor knows what they will be receiving. There are no surprises.

Is a consumer proposal the right solution for you? The answer depends on the size of your debts, who you owe the money to, what you own, and what you can afford to pay each month. Try our free debt options calculator to review your options, and then contact a trustee to arrange for a free, no obligation initial consultation.