Consumer Proposal – The Top How To Get Out Of Debt Solution
A consumer proposal is one of the more popular “how to get out of debt solutions” in Ontario. Currently, 6 in 10 Ontarians would choose a consumer proposal as a debt relief solution to avoid filing for bankruptcy.
It’s considered the top alternative to bankruptcy in Ontario primarily because it provides the same essential protections that a personal bankruptcy does without the corresponding costs and fees and the financial stigma associated with bankruptcy.
Moreover, many people consider consumer proposals as a better deal for several aspects:
- You offer a settlement to your unsecured creditors where you only need to repay a lesser sum than what you owe in total
- Interest charges stop accumulating from the date you file
- You basically get an easier way to pay off debt with a maximum repayment period of five years.
The consumer proposal is a government-approved debt solution provided for those who have a high level of debt and few assets and simply need more time to pay off the debt.
You will likely qualify for a consumer proposal if:
- You have consumer debt greater than $5,000 but less than $250,000.
- Married couples can have up to $500,000 in debt when filing jointly.
- You can afford to repay a portion of your debts but need more time than your creditors are offering.
- You want to stop all interest charges, wage garnishments, and threats of legal action.
- You don’t want to give up your house or any of your assets to pay off debt.
- You have become insolvent and your total debts are greater than the value of your assets.
- You can no longer keep up with debt payments as they become due.
CONSUMER PROPOSAL PROS AND CONS
A consumer proposal is a legal process under the Bankruptcy and Insolvency Act and as such there are financial benefits and drawbacks that can significantly impact you. Below are the consumer proposal pros and cons.
Consumer Proposal Pros |
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| Allows an individual to avoid personal bankruptcy |
| It is a legally binding arrangement with creditors which means every stakeholder is bound by law. |
| There is an automatic Stay of Proceedings that provides immediate protection from unsecured creditors - wage garnishments, collection calls, collection letters and lawsuits are immediately stopped |
| Interest charges stop on debts included in the proposal, except non-dischargeable debts |
| Covers all unsecured debts including credit cards, lines of credit, payday loans, installment loans, government debts (income taxes, certain student loans, medical service plan premiums) and personal loans, except non-dischargeable debts under Sec.178 |
| You can amend payments without additional fees if you are having problems making the monthly payments |
| Your monthly payments may be less than they would be in a bankruptcy if you have high surplus income. |
| Filing a consumer proposal can be the first step in improving your credit rating |
| You won’t have to forfeit your assets as long as you can continue making the payments for them |
| You can pay off a consumer proposal early without a penalty charge or interest. |
| A consumer proposal can result in a reduction in your total debt and you pay less than you owe. |
| You may keep your credit cards during a proposal. |
| Timely, full payments in an active consumer proposal are considered in a credit check by some lenders for loan approval. |
Consumer Proposal Cons |
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| It is not private as it is a legislated process and will require full disclosure of pertinent personal and financial details |
| A proposal requires the pre-approval of your creditors through a voting process. |
| The Stay protection does not apply to secured creditors who can legally seize assets if you default on payment |
| Interest charges continue on secured debt and non-dischargeable debts |
| Secured debt and non-dischargeable debts under Sec.178 cannot be included |
| If you miss 3 monthly payments the proposal can be annulled |
| You must have steady income or funds to be able to afford to pay for the Consumer Proposal. |
| Your credit rating will be affected but less severe than a bankruptcy |
| You may have to surrender assets to secured creditors if you cannot afford to keep paying for them. |
| Paying out your proposal early can disrupt term savings and other financial goals. |
| There is a risk that creditors may reject your proposal if they deem the offer unfair or materially insignificant. |
| Your card provider may limit access to credit or even suspend credit. |
| You will likely be charged high-interest rates on loans obtained during the proposal. |
WHY FILE A CONSUMER PROPOSAL INSTEAD OF JUST FILING PERSONAL BANKRUPTCY?
One significant reason is that consumer proposals are a more agreeable solution for both the debtor and the creditors.
For the debtor, it provides a legal way to repay a portion of the debt owed without giving up any valuable possessions and at affordable repayment terms that typically last up to five years. In many cases, debts can be reduced by up to 70%.
Another reason many debtors would favour a consumer proposal is the certainty that there is an exact payment to be made each month – the amount is fixed, and never changes. In a bankruptcy you have the uncertainty of surplus income, if you earn more, you pay more, which would affect the length of your bankruptcy.
The best feature that many debtors find attractive is asset retention. Your assets are not seized by the trustee, who is acting as a consumer proposal administrator, as it would be in bankruptcy. You get to keep all your assets as long as you can manage the monthly payments.
For creditors – creditors like consumer proposals more than they do a bankruptcy for the reason that the solution allows them to recover a greater portion of the debt owed whereas in a personal bankruptcy, they would usually take a loss. Most creditors are likely to accept a consumer proposal offer if they receive more than they would recover if you filed for bankruptcy.
In many instances, if a debtor has no assets, and has low income, a personal bankruptcy may be less costly and would therefore be the best option. However, if income levels are expected to increase, and if a debtor owns significant assets, a consumer proposal should be considered.
Each case is unique and there is no one size fits all debt solution. Many factors have to be taken into account – your income, your debt levels, your total assets, and other alternatives that may be more affordable. It is always best to speak with a licensed insolvency trustee, who is the only debt professional in Canada who is permitted by law to administer consumer proposals and bankruptcies.
To find out if filing a consumer proposal in Ontario is the best solution for you. A trustee will review your financial situation, give you a debt assessment, and go through different options with you so you can compare the cost and benefits of each.
CONTACT A CONSUMER PROPOSAL TRUSTEE
A consumer proposal is just one of the debt help solutions offered by Richard Killen & Associates. “Can you pay off a consumer proposal early?” You can speak to any of our licensed insolvency trustees to learn more about all your options for how to get out of debt solutions, including consumer proposal, debt consolidation, credit counselling, insolvency counselling programs, and personal bankruptcy.
