In November 1992 the Bankruptcy Act received a broad overhaul for the first time since 1966. If you can imagine the changes that had taken place in Canadian society between those years you can understand that this was due; probably overdue. One of the main changes to the Act, other than re-naming it the Bankruptcy and Insolvency Act (BIA), was the introduction of something called a Consumer Proposal. It was a game changer.
A proposal of any kind is really an offer or a proposition, where one party extends that offer to another party in the hope that it will be accepted and both parties will mutually benefit from the new arrangement. Proposals had been around for 72 years, from the time the Bankruptcy Act was first made into law. But the proposals that were in use before 1992 were primarily intended for business and corporate use and were very difficult for the ordinary insolvent debtor, the ordinary non-business person, to use. There were many obstacles and speedbumps in the process which made it expensive and that alone drove people to use the bankruptcy itself as the only practical way they could resolve the debt problems.
Some trustees, in Toronto primarily Murray Hahn of the firm Clark, Henning & Hahn, tried to be as creative as they could and use the proposal option to allow their customers to try to reach a deal with their creditors. Up to a point it worked OK, but in the long run there were simply too many administrative problems and the initiative turned into a major problem for the government and the courts. But at least the need for a proposal regime designed for the consumer debtor had been established.
So in 1992 Parliament made the necessary amendments to the Act and November 30th of that year it became law. Interestingly the new Consumer Proposal system turned out to be pretty much what Murray had come up with on his own, only the law had now been tweaked to remove as many of the previous speedbumps and obstructions as possible. Anyway, we now had something called a Consumer Proposal for people to use.
At first very few people even considered the Consumer Proposal. All they thought about was Bankruptcy and, I guess, it took trustees a while to get use to the Consumer Proposal process themselves, so it was hard for them to explain it properly as a viable option to the tried and true bankruptcy process. So the first few years saw relatively few Consumer Proposals in use, but over time this began to change. Word got out. People, including trustees, got more familiar with it and therefore more comfortable with it, too. So today, 2016, roughly half the filings under the BIA are for Consumer Proposals, instead of the meagre number of the first few years.
So what exactly is a Consumer Proposal? Well, as they say, it isn’t rocket science. It is, however a very effective alternative to a Bankruptcy. Let’s start with what I said earlier: a proposal of any kind is an offer, a proposition. So that’s what a Consumer Proposal is, an offer. But really, it is a very specific and unusual offer.
A Consumer Proposal in Toronto or anywhere else in the world can only be made through a Licensed Insolvency Trustee (LIT) by an Insolvent Person. (I capitalized that term because it is legally defined under the BIA.) An Insolvent Person is someone who can demonstrate that he is unable to pay his debts as they generally come due. For most people that simply means they can’t meet their minimum monthly payments.
So, the Consumer Proposal is one of the options or solutions that the BIA provides for people who have run into serious debt trouble. The other main option, of course, is a Bankruptcy, but the Consumer Proposal is very different – on many levels.
The first noticeable thing about a Consumer Proposal, as opposed to a Bankruptcy, is that the debtor does not offer up all his property to the trustee for the general benefit of his creditors. As a matter of fact, his property, such as a house or investment, is not generally part of the negotiations. Instead, the debtor offers money to his creditors, in terms that he can actually perform. Since he couldn’t meet his minimum monthly payments the new terms will be something less that the regular monthly payment total. Sometimes a lot less.
For instance, let’s say the debtor’s debts amounted to $50,000.00, to 10 different creditors, 7 credit cards, 2 lines of credit and 1 personal loan. The minimum monthly payments total $1,000.00. His circumstances have deteriorated over the past year and he no longer can come up with the $1,000.00 every month. So, he makes a Consumer Proposal offering $500.00 a month, all he can afford.
Since the BIA puts a maximum time limit of 5 years to the terms of a Consumer Proposal, our debtor’s Consumer Proposal offer can be 60 payments of $500.00, a total of $30,000.00.
The second thing about a Consumer Proposal is that it operates very much like a Consolidation Loan, except there is no loan. If the Consumer Proposal is accepted by the creditors and approved by the court it becomes legally binding on all the unsecured creditors. This makes it effectively the new amount that the debtor owes and once our debtor has paid the $30,000 he will be out of debt. But to whom does he pay this $500 a month? To the trustee, of course, though with a Consumer proposal the trustee is called the Administrator.
So our debtor has made a $30,000 Consumer Proposal offer to his unsecured creditors. Now the ball goes over to the creditors’ court. Will they accept it or will they want more money. On the surface of it one might assume that the creditors probably would reject it. They not only would be losing $20,000 in capital, they also lose all the interest they would make over that 5 year span, because the moment the Consumer Proposal is filed all interest charges cease, and it stays that way for the duration of the Consumer Proposal. Depending on the interest rates, the creditors might be losing another 20,000 or more in lost interest.
However, there are some other factors that come into play which act as an inducement to the creditors to look more favourably on some kind of compromise.
The first of these is that if they simply ignore the Consumer Proposal after 45 days from the date of filing they will be stuck with those terms. The BIA makes approval a default unless the creditors get involved and at least voice an opinion on the terms offered.
The second thing is the alternative. It is usually quite evident to the creditors that the debtor is insolvent (otherwise he wouldn’t have been allowed to file the Consumer Proposal in the first place) and that the trustee has reviewed with debtor all the options available to him to resolve the debt trouble. Those other options include bankruptcy, so the debtor’s decision to make a Consumer Proposal instead of a Bankruptcy was a choice, not an obligation. It will likely be that if he has to do the Bankruptcy his creditors will receive a lot less than they would from the Consumer Proposal. In fact it is practically guaranteed that the creditors get more out of a proposal than they would out of a corresponding Bankruptcy. Otherwise why would they accept the Consumer Proposal?
If the Consumer Proposal terms he offered his creditors are not accepted the debtor may, probably will, go bankrupt. The creditors may be sufficiently un-enamoured with our debtor’s offer to want more money, but this can only be negotiated if they request a meeting to discuss it. If there is no request for a meeting at the 45 point the Consumer Proposal is deemed accepted as offered.
If the creditors do demand a meeting there can be some back and forth negotiating – through the trustee/administrator – until a deal is reached, or the creditors finally decide they are not interested in making a deal. In this latter case, the debtor will usually end up filing a Bankruptcy. Fortunately, the vast majority of Consumer Proposals are accepted.
After the creditors have said yes, the Consumer Proposal must be approved by the court. Fortunately this seldom, very seldom, requires an actual court hearing. 99.9% of the time the court approval of the Consumer Proposal is automatic, after a 15 day wait from the time the creditors said yes.
Once the court approval is obtained the rest is up to our debtor. The monthly payments start and must be kept up, with very little margin of error. If the Consumer Proposal falls 3 full monthly payments in arrears at any time over the next 5 years it will be deemed annulled. In other words, our debtor has a two month cushion to work with. He can enlarge this cushion by pre-paying the proposal if he has the means. For instance, let’s say 6 months after the court approved the Consumer Proposal our debtor gets a new job, making more money. The terms of the Consumer Proposal don’t change, so perhaps now instead of only paying the minimum $500 he can afford to $700 a month. It’s an open contract, so he he’s free to do that. If he does, after 5 such payments he will have added another 2 months to his cushion. That cushion can save the Consumer Proposal a year or two later if he runs into temporary trouble and can’t make even the $500 for a few months, so it’s a great idea to put as much as possible into the Consumer Proposal if he has the means.
When our debtor has paid the full $30,000 he will be officially out of debt to those 10 creditors he had at the beginning.
The effect of a Consumer Proposal on a person’s future credit prospects, as well as the speed with which he recovers his “good name” will depend on a lot of factors, like every credit granting decision. But one point always present in the process of determining whether to do a Bankruptcy or a Consumer Proposal is the reality of the current situation. An Insolvent Person can’t pay his debts the way the creditors have the right to demand. Unless that problem is resolved our debtor will never recover his “good name”. So the most practical and effective way to approach these decisions is to take a realistic look at the circumstances and determine what the priorities should be. It’s not much good gazing at the horizon if you’re going to trip over something at your feet.
As a final bit of information on Consumer Proposals I’d like to point out that our experience shows a large majority of Consumer Proposals in Toronto are successfully performed and they are fully paid in an average of 50 month – 10 months early. A win for everyone.