Consumer Proposals are often the best alternative to going bankrupt.
If you would you like to know whether or not filing a consumer proposal is the right choice in your situation, fill in and submit our Free Case Evaluation form.
One of the trustees at Hoyes, Michalos will respond to you in the 24 hours following the submission.
To learn more about this important option, follow the links below:
The concept behind a consumer proposal to creditors is similar to a Debt Management Plan: you can afford to repay a portion (or all) of your debts; you simply need more time to pay.
Unlike a Debt Management Plan, a consumer proposal to creditors is a legally binding procedure that is administered for the courts by a licensed trustee in bankruptcy.
Proposals to creditors are best suited to persons with debts in excess of $5,000 (to a maximum of $75,000), who have the ability to repay a portion of their debt.
Any person, including someone who has declared bankruptcy, whose debts are less than $75,000, not including a home mortgage, can make a consumer proposal.
It is possible to make a joint consumer proposal. Two or more consumer proposals may be joined when there is a financial relationship, such as when a husband and wife have both co-signed for the same loan or credit card. Total debts must not exceed $150,000 if two people are filing a joint consumer proposal.
If the debts are more than $75,000 for a single person, or $150,000 for a couple, the proposal will be made under Division I of Part III of the Bankruptcy & Insolvency Act. (The rules for a Division I proposal are more complex; please contact us for more details).
Please also note that the government of Canada has proposed changing the limit from $75,000 to $250,000 for a consumer proposal. These new rules are not yet law. More details can be found in our article on bankruptcy reform.
Consumer proposals to creditors were created to deal with unsecured debt. An unsecured debt is money owed without collateral. Some examples of unsecured debt include:
The other type of credit that people usually have is called secured debt. Secured debt is money that was borrowed with a condition that if you fail to make your payments one (or more) of your possessions may be seized and sold by the secured creditor. Some example of secured debt include:
In most cases, secured creditors are excluded from your proposal. The exception: if you owe a secured creditor more than the value of the item they hold security over. For example:
"One of your creditors is Acme Finance. You owe Acme $2,500 and they hold security over your stereo system, with a current value $1,500."
Acme is both a secured ($1,500 for the stereo) and an unsecured creditor ($2,500 - $1,500 = $1,000). Under the terms of the proposal, you will have to make an arrangement to pay Acme the $1,500 that they are entitled to (the value of their security) or give them the security (your stereo). The other $1,000 that Acme is owed will get lumped together with all of your other unsecured debts.
Proposals to creditors were created as one of the alternatives to bankruptcy. If you are in financial trouble and you have the ability to repay a portion of your debt, perhaps a consumer proposal to creditors is the right solution for you.
Once you file a proposal, none of your unsecured creditors can garnish your wages or take you to court until the proposal has been dealt with. In fact, if your wages are being garnished and you file a consumer proposal, the garnishment will stop.
In addition, when you file a proposal to creditors, all of your unsecured debts are frozen and no more interest accumulates against them.
As soon as you file a proposal to creditors, rating on your credit report will be revised to either an R7 (paid through a consolidation order, consumer proposal or credit counseling debt management program) or to an R9 (bad debt or placed for collection or bankruptcy) and it will probably remain at this rating until the proposal is completed. In addition, after you complete the proposal, a note will appear in your credit record for up to 7 years from the date that you filed the proposal to collectors.
Your credit rate will be R7 or R9, R9 begin the worst rate, for up to 7 years after you have finished paying your proposal. This marks you as a high risk and you will have to pay a high interest rate if you are able to secure credit. There are a number of things you can do to repair your credit like getting a secured credit card, see our information on repairing your credit.
First, a bankruptcy trustee will help you summarize your financial situation and determine how much of a monthly payment you can afford to make. Then, they'll compare that payment to the total amount of your unsecured debt to determine how many months you will be required to pay. If the numbers appear reasonable for both you and your creditors, the trustee will prepare the documents necessary to file a proposal to creditors.
The second stage, is up to your creditors. Under the Bankruptcy and Insolvency Act ("BIA") your creditors have 45 days to vote for or against your proposal. If a simple majority (50% +1) vote for your proposal then it is deemed to be accepted by ALL of your creditors. Fifteen days after that, if there are no objections, your proposal will be approved by the Court. From that date forward, both you and your creditors are locked into the terms of the consumer proposal.
If 25 % or more of your creditors vote against accepting your proposal, your trustee will call a meeting of creditors. At that meeting (which you must attend) the trustee will help you negotiate with your creditors in an attempt to find an agreement that both you and the creditors find acceptable.
Here's an example:
"You have debts totaling $25,000. After you pay all of your living expenses (rent, utilities, groceries, etc.) you have $500 left to pay bills. You want to leave yourself a bit of a "buffer" for unexpected expenses (like car repairs) so you think you can afford to make a payment of $350/month towards a proposal."
Generally, the threshold that creditors consider reasonable is an offer to repay at least 50% of the amount that you owe. In the example above, that would be $12,500. With a payment of $350 per month it would take you 36 months to pay that amount, so that's probably the proposal to creditors that you would offer (36 monthly payments of $350/month).
If you could only pay $250 a month, then it would take you 50 months to pay $12,500. If you could pay $400 per month, then if would take you 32 months to pay $12,500.
Keep in mind that this is only an example. Your creditors might accept less than 50% or they may ask for more. Each consumer proposal is different and has to be considered on its own merits.
If you file a proposal to creditors, you are required to include all of your unsecured creditors. That goes for family and friends too. All of your unsecured creditors must be treated the same - it's one of the basic conditions of filing a consumer proposal.
Over the life of a consumer proposal you may miss up to 2 payments and the trustee will simply add two more payments to the end of the proposal.
However, if you miss 3 payments the proposal to creditors collapses and is annulled by the Court. If your proposal is annulled, your unsecured creditors may immediately apply to the court to garnish your wages and interest charges are applied to your debts back to the day that you filed your consumer proposal to creditors.
Once you file a proposal to creditors, if you start to run into payment problems, contact your trustee immediately.
If you think a Consumer proposal sounds too easy, don’t kid yourself. A consumer proposal to creditors will only work if you have the ability to make your payments. Remember, your alternative is to file for Ontario bankruptcy. Your personal proposal must offer your unsecured creditors more money than they would receive in a bankruptcy and they have to believe that you are capable of making the payments that you are proposing.
In most cases, a proposal to creditors will cost you nothing as the trustee will be paid out of the proceeds of the proposal. The trustee's fees are set by the Superintendent of Bankruptcy and are described in the BIA. Using our earlier example, if you offered your creditors 36 payments of $350 to retire $25,000 worth of debt, your total payments would be $12,600. The fees for the proposal would come out of that amount.
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