How do Consumer Proposals Work?
A consumer proposal is an alternative and less severe alternative to bankruptcy. This debt solution allows you to consolidate your unsecured debts and pay all or a portion of it back in interest-free monthly installments. A consumer proposal is prepared by a Licenced Insolvency Trustee (LIT) and sent to your creditors in order to negotiate your terms. If you choose to go with a consumer proposal, you will protect your assets from creditors.
The terms of consumer proposals, the amount you would have to pay back is negotiable. In some cases you have to pay back 100% of your debts but typically creditors will agree to a proposal that gives them a percentage of what you owe since consumer proposals allow them to get more back than they would if you filed for bankruptcy.
In order for the proposal to be successful, your LIT will work with you to figure out how much you can afford and how much your creditors might be willing to accept, based on your financial circumstances. Your creditors will then vote whether or not to accept your proposal. In most proposals, the amount you have to pay is made in monthly payments to your LIT over an agreed-upon period of time that is no longer than five years. However, you can make a lump-sum payment or a combination of a lump-sum payment and monthly payments.
But it’s important to bear in mind that not all consumer proposals are accepted all the time. Your LIT will work with you to assess your unique financial situation, and figure out how much you can afford within your budget and how much your creditors may be willing to accept. You will need a majority vote of your creditors saying yes in order for your proposal to be accepted.
This is only the tip of the iceberg when it comes to how consumer proposals work, below we will go through the process of consumer proposals more in-depth.
What is the process for consumer proposals?
There are three main steps when it comes to the process of how consumer proposals work.
1. Your LIT will meet with you, begin drafting your proposal and submit it
In the first step, you will meet with your LIT and begin discussing your financial situation. Your LIT wil take notes on what debts you owe, which debts qualify as unsecured debts (your mortgage and car loan are not included), your income and what assets you have. After drafting your proposal, your LIT will file it with the Office of the Superintendent of Bankruptcy (OSB).
Once your proposal is filed, you no longer have to make direct payments to creditors. In addition to stopping your payments, if your creditors were garnishing your wages or have filed a lawsuit against you, these actions are also stopped.
2. You LIT will send your proposal to your creditors
After filing your proposal to the OSB, your LIT will also send your proposal to your creditors. Your proposal will include a report on your personal financial situation and the cause of your financial difficulties.
3. Wait for a response and fulfill your obligations
Your creditors will have 45 days to either accept or reject your proposal. If your proposal is accepted, there are some conditions that you have to follow which include attending two counselling sessions, be responsible for paying all your payments to the LIT who will then pay the creditors, and be required to adhere to any other conditions outlined in the proposal.
What debts can be included in a consumer proposal?
The only kind of debts that are included in a consumer proposal are called unsecured debts. Unsecured debts aren’t like a mortgage or a car loan which is secured by a collateral property. Type of unsecured debts can include but are not limited to:
- Credit cards
- Lines of credit
- Personal loans
- Payday loans
- Income taxes
- Highway / Bridge tolls
- Student loans (as long as you’ve been out of school for more than 7 years)
Normally, secured creditors are not affected by consumer proposals, in most cases you will have to continue making your payments as usual under your agreed arrangements.
There is an option in the consumer proposal to surrender and return your secured assets, like your vehicle or house, to the lenders and stop making payments for those assets. IDepending on provincial laws, the sale of these assets will be held by the secured creditor and included in your proposal.