Does seeing debt in your account books give you anxiety?
Maybe the debt is…
- From that unpaid shopping spree and perpetual grocery bills piling up for months.
- A remnant of that small business you started during the pandemic.
- A product of those student loans even after seven years of putting aside part of your monthly wage towards their payment.
Tackling debt once and for all need not be a pipe dream. You can reorganize your financial priorities in 2022 with Consumer Proposals.
Understand What Consumer Proposal Is
A consumer proposal outlines a legal agreement negotiated between your creditors and you.
You must appoint a Licensed Insolvency Trustee (LIT) to help with your consumer proposal. They are the ones who help draft, negotiate and execute the proposal.
The consumer proposal determines the settlement terms between your creditors. These terms will include a flexible payment plan that allows you to repay (and discharge the rest) your non-secured debt in an affordable manner.
As per a consumer proposal, you are not likely to pay 100% of your debt. So your burden lessens.
Why would a creditor go for it then? They would rather recover this money through a consumer proposal, even if it’s not the entire amount, because the alternative would put their rights on the backburner.
Consumer Proposal Process Explained
Step 1: Obtain a debt assessment from your chosen LIT, who will help you understand your financial situation and how much you can afford to repay your debts.
Step 2: Draft your consumer proposal with your LIT with critical provisions such as monthly payment plans and the overall term of your proposal.
Step 3: The LIT will file the Proposal with the Office of the Superintendent of Bankruptcy (OSB), which also regulates a LIT, to keep the proposal on record. Once you file the proposal with the OBS, any collection efforts against you will be prohibited.
Step 4: Get approval of the proposal from your creditors. Not all creditors have to vote in favour of your resolution. There might also be some discussions and negotiations at this stage.
Approval by creditors claiming a simple majority of the debt amount is sufficient. The creditors get 45 days to accept or reject your proposal.
Step 5: Follow the consumer proposal and fulfill all the payment requirements included in the proposal.
Why Is Consumer Proposal Worth Doing
Once the consumer Proposal is filed with the OSB, and the creditors agree to the terms you have offered, they are legally bound by it. They cannot hound you for repayments outside of the laid-down payment plan or take any undue advantage. You can also ask the OSB questions related to your consumer proposal.
This legal protection is a safety net as you go about repaying your debt, and it helps you consolidate the repayment process with zero interest obligations.
When To Consider Getting A Consumer Proposal
You should consider getting a consumer proposal in the following specific circumstances:
- You want to find a way to stop CRA wage garnishment.
- You know for sure that you cannot repay the entire debt amount.
- Multiple creditors are sending you collection letters or have filed lawsuits against you.
- You are on the verge of bankruptcy.
- You have a tax debt with the Canada Revenue Agency.
When Not To Consider Getting A Consumer Proposal
A consumer proposal may not be a viable option if:
- A significant portion of your debt is secured since a consumer proposal cannot cover it.
- You do not have a stable income to help make periodical payments as per the consumer proposal.
- Your student loans are less than seven years old, which will require alternate student loan forgiveness relief.
- You prefer informal and non-binding repayment arrangements.
- A previous consumer proposal has been annulled. You cannot file another consumer proposal for the same debt.
The Pros and Cons of a Consumer Proposal in 2022
A consumer proposal’s feasibility is mainly dependent on your financial situation. Your LIT will outline the relevant advantages and disadvantages to you.
The overarching benefit of a consumer proposal is its ability to regain some immediate financial control over your debt by staving off collection efforts. You get up to five years to make your repayment.
The most significant disadvantage of a consumer proposal is related to how long bad credit stays on your credit report due to its effect on your credit rating. It can be for a minimum of three years after you have fulfilled all obligations under the proposal or six years from the date of filing, whichever comes earlier.
Pros of Consumer Proposals
Cons of Consumer Proposals
Federally regulated assistance from licensed insolvency trustees:
A LIT will ensure that you get the best possible outcome based on your financial situation.
You are considered a high-risk borrower:
Since a consumer proposal is seen as a last resort before filing for bankruptcy, institutions or other individuals will consider you a risky applicant for any loans. This will require credit repair.
A significant percentage of your debt gets waived off:
You don’t have to pay 100% of your debts. It could be any percent you and the LIT are able to negotiate with the creditors, and the waiver can be as high as 75% (or more), depending on your circumstances.
Legally binds you with a three-strike policy:
You are taking on an additional legal obligation with a consumer proposal. It’s your legal duty to make the payments as per the proposal to prevent the reinstatement of your debt with no refund.
Flexibility with payment options:
You can choose among lump sum payments, floating payments, percentage payments, front-end loaded or back-end loaded, and many more.
It gets activated once filed with the OSB and pending creditors approval:
As mentioned, you need the support of the majority of your creditors for the approval of the consumer proposal. If your LIT and you cannot negotiate your case well, the creditors are free to refuse the proposal.
The creditors can no longer charge interest:
The terms of the consumer proposal freeze the amounts you will have to pay. Creditors cannot demand additional or hidden interests, such as bankruptcy surplus income payments.
The fact of your consumer proposal may be on public record.
Improvement in your financial situation is irrelevant:
With other debt instruments, your debt obligations may increase if your income increases, in the form of expedited payments, higher interests, etc.
It can bind you for up to 5 years, depending on your financial situation:
If you are looking for a quick exit from your debt obligations, this might not be a good solution.
Can be cheaper than other debt repayment options:
Since this is an option that combines no interest and waiving off to an extent, the monthly payments can amount to lesser than what you would pay if you go for other alternatives.
It doesn’t cover secured debt but affects it:
The consumer proposal adds an R7 rating on your credit report and can affect your credit rating for up to six years. Even though the debt it covers has nothing to do with any secured debt, a consumer proposal may impact your home or mortgage.
Alternatives to Consumer Proposal
Your LIT will help you determine whether a consumer proposal is the most viable option. If not, there are other alternatives as well. These may include:
- Debt management plan/credit counselling: A non-binding consolidation of some debts which doesn’t allow for any debt reduction.
- Debt consolidation plan: Banks and credit unions may combine all your debts to make it a single loan for a better interest rate.
- Personal bankruptcy: Legally declaring (here’s how to file bankruptcy online) that you have insufficient funds to pay outstanding loans.