What Is a Consumer Proposal?
A consumer proposal is a legal agreement between you and your creditors to repay part of the debt that you owe. The arrangement is governed by Canada's Bankruptcy and Insolvency Act and is proposed to your creditors by a bankruptcy trustee as an alternative to you declaring personal bankruptcy. The amount that the trustee will propose you repay is largely based on your income and what you own. What makes consumer proposals attractive is their potential to significantly reduce the amount of debt you are required to pay your creditors. However, this comes at a cost.
A consumer proposal can only be arranged by a government licensed bankruptcy trustee. It costs about $750 to file a proposal, and if it's accepted by creditors, it costs another $750 to proceed. The trustee also retains 20% of future payments under this arrangement as a fee for administering the proposal. To be legally binding, the creditors who hold the majority of an individual's debt must agree to the proposal. Once they do, the agreed amount is repaid typically over 4 to 5 years. The maximum repayment length possible is just under 5 years.
While a consumer proposal is an alternative to declaring personal bankruptcy, it is promoted by some as an option to lower monthly payments, consolidate unsecured debts into one monthly payment, and eliminate personal debts. While these are great reasons to consider pursuing a proposal, it's also important to consider the drawbacks and other alternatives to filing a proposal to make sure you're making the right decision that you'll be satisfied with in the long run.
Advantages and Disadvantages of Filing a Consumer Proposal
All debt or interest relief alternatives to bankruptcy have both advantages and disadvantages and are not suitable for everyone. Some of the pros and cons of filing for a consumer proposal are outlined below.
- It can substantially reduce the amount of debt you are required to pay your creditors
- It can be an effective way of consolidating debt if:
- You can't afford to repay all of what you owe
- You have stable income
- You have enough money in your budget to make monthly payments
- It will pause active collection on student loan payments
- Can be a good option if:
- It is one of the last ways to avoid bankruptcy (however, it is still a legal insolvency process just like bankruptcy)
- It's not a private matter. A consumer proposal is filed as a permanent public record and is included on an online searchable database
- There are many costs associated with consumer proposals, they usually take longer than filing for bankruptcy, and they impact your credit for roughly the same length of time as bankruptcy
- The Court must approve it
- Creditors can choose to reject the proposal. If they do, you may need to offer them additional funds to convince them to proceed
- You might need to sell some of your assets (such as a vehicle, your home, or investments) or include their value in your proposal (essentially buying them back)
- You may need to file for bankruptcy if you miss more than 2 payments
- Secured debts cannot be put into a proposal
- Student loans less than 7 years old can't be included
- It can put certain professional licenses at risk, and the permanent record of your insolvency may also affect some future employment opportunities
Beware of the Big Debt Rip-Off
Consumer Proposals have become the latest method for a growing number of for-profit companies and their sales people to take advantage of vulnerable, unsuspecting consumers. Don't let this happen to you! Many debt relief companies are now claiming to offer Consumer Proposals as an easy way to get out of debt. There's a problem. Only a licensed bankruptcy trustee is allowed to file paperwork for a consumer proposal. The debt relief companies charge thousands in fees only to refer you to a bankruptcy trustee who then charges his or her own fees.
How to Prevent Getting Ripped Off
- Talk to a non-profit Credit Counsellor about your financial and debt situation first. They will review your whole financial picture with you and help you look into and understand all of your options to resolve your debt problems and get your finances back on track.
- Never pay anyone for consumer proposal services except for a licensed bankruptcy trustee.
- Ask how the person helping you is compensated. Many people who will seek to advise you on your debts work on commission. Make sure the "solution" they are suggesting is in your best interest - not theirs.
- Credit Counselling Canada is an association of local, non-profit credit counselling organizations who do not work on commission. If a consumer proposal is actually one of your best options, they’ll tell you and refer you to a bankruptcy trustee they trust for free.
How a Consumer Proposal Can Impact Your Credit
Once you enter into a consumer proposal, a special notation is placed on your credit report in the public records section. Anyone who you allow to look at your credit report can see the public records section. The notation indicating that you've filed a consumer proposal is almost identical to the bankruptcy notation. To most banks and credit unions, they see them both as the same thing. This makes it extremely difficult to borrow money from a bank or credit union for the many years this notation stays on someone's credit report.
In addition to this, it is possible that your creditors will report an “R7” rating on any debt included in the proposal. This "R7" rating means that creditors are receiving your payments through a third party. In this instance the third party would be your trustee. When you send a payment to your trustee, they distribute the agreed upon dollar amounts to all of your creditors once all applicable fees have been paid.
If you are making payments to secured creditors, like for a car loan, outside of your consumer proposal, those creditors will report on those debts separately. Creating and sticking to a realistic budget will make this easier.
If you are able to maintain a good payment history on a secured debt while you're making your proposal payments, this can help you re-build credit afterwards.
Contact Us for More Information About Filing for a Consumer Proposal in Canada
There are quite a number of options between financial difficulty and bankruptcy. A consumer proposal might be one good option for some people, but it's not the best option for everyone. To find out what other options you have, speak with one of our professionally trained Credit Counsellors today, in person or over the phone. Our appointments are free, non-judgmental, and completely confidential.
Related Articles of Interest
- Canadian Consumer Proposals
- What is the difference between a consumer proposal and bankruptcy?
- Debt Consolidation, Another Option - Filing for a consumer proposal
- Attend a budgeting workshop or a webinar to avoid defaulting on a consumer proposal
- The Office of the Superintendent of Bankruptcy in Canada
- List of Licensed Bankruptcy Trustees
- Insolvency Terms & What They Mean
- Credit Counselling Society office locations