For Canadians struggling with crippling debt, filing for insolvency through bankruptcy or a consumer proposal may seem like the only way out. In fact, there were more than 32,000 consumer insolvencies in the first quarter of 2019 alone, a 6.1% increase from the year prior and the largest jump since the global financial crisis of 2008. While most of us have some general knowledge about bankruptcies, many of us are less familiar with consumer proposals.
What are consumer proposals?
A consumer proposal, sometimes called a consumer debt proposal, is a legal option for insolvent debtors that isn't as severe as filing for bankruptcy. Administered by a Licensed Insolvency Trustee (LIT), a consumer proposal allows someone to pay back only a percentage of their total debt, extend the amount of time they have to pay it back, or both. This of course depends on whether or not creditors accept the consumer proposal and the repayment terms.
How do I file a consumer proposal?
The consumer proposal process starts with speaking to a Licensed Insolvency Trustee (LIT). A Licensed Insolvency Trustee is a legal professional who’s experienced at dealing with extreme cases of debt. Your trustee will work with you to come up with a legally-binding proposal to submit to your creditors.
What happens when I file a consumer proposal?
If the proposal is accepted by your creditors, all collection efforts will immediately stop, as well as mounting interest and penalties, and any wage garnishments. Then, you need to begin making monthly payments through your Licensed Insolvency Trustee who will disperse the money to your creditors. Upon filing a consumer proposal, a stay of proceedings is put in place, stopping all legal and collection activity, giving the debtor peace of mind while attempting to settle their debt.
Why would a creditor reject a proposal?
A consumer debt proposal is typically a last resort for creditors, who perceive the debt may not be repaid. In many cases, creditors agree because they want to recover some of the funds that would otherwise be lost forever. As a result, most consumer proposals are accepted by creditors; however, creditors have the right to reject a consumer proposal. When a consumer proposal is rejected by a creditor, it’s typically due to the belief of the creditor that the proposal is in fact not a better realization than a bankruptcy process.
How long does a consumer proposal last?
You have a maximum of five years to complete the proposal. You also have the ability to pay off your consumer proposal early if you choose to (more on that in a bit) but you cannot fall behind by more than three months’ payments, otherwise the consumer proposal is automatically deemed annulled.
How much does a consumer proposal cost?
Consumer proposal fees and expenses must be in accordance with the Bankruptcy and Insolvency Act (BIA) and should be discussed directly with the Licensed Insolvency Trustee (LIT) you are working with. Typically, an LIT will work with you to determine the total amount you can offer your creditors in a consumer proposal. (For example, $36,000 over 5 years or 60 months, which works out to $600 a month.) The LIT in turn can take proceeds of that proposal as per the Act. It’s important to note that you should never be billed directly for any services related to filing a consumer proposal.
Consumer Beware: Only an Licensed Insolvency Trustee (LIT) can file a consumer proposal. There are “debt relief” companies offering consumer proposals, which may try to charge you massive fees only to refer you to an LIT, who will then charge their own fees. Never trust a company or agency that charges for referrals, including referrals to qualified LITs. Consumers can contact LITs directly without the need to go through an agency.
Is a consumer proposal bad and how does a consumer proposal affect my credit?
A consumer proposal is a process that allows insolvent debtors to settle their debts and avoid bankruptcy. It’s not considered a “good” thing per se, but it’s also not viewed as negatively as a bankruptcy. During the time you’re bound by the proposal, your credit rating will show as an R9, which is the worst credit rating you can have (credit bureaus use an R1-R9 scale, with R1, of course, being the best and R9 being the worst). But remember, it's only temporary. After you’ve completed the consumer proposal, your credit rating moves up to an R7 for three years. Then after those three years are up, the debts included in your proposal will be removed from your credit file entirely. A bankruptcy, on the other hand, is an R9 during the period of bankruptcy, and it remains an R9 for six to seven years following your discharge, depending on the province.
Can I get credit while in a consumer proposal?
Because a consumer debt proposal drops your credit rating down to the aforementioned R9, the lowest rating, lenders are unlikely to take you on as a borrower. Your best bet is to attempt to obtain a secured credit card, which you load with your own money so you cannot overdraw or default. Plus, a secured credit card can help to rebuild your credit following the completion of your consumer proposal.
Can I pay off a consumer proposal early?
After you’ve entered into a consumer proposal and have been making on-time payments for a while, you may just want it to be over with. The good news is that YES, you can pay off a consumer proposal early, ahead of the deadline date. Even better news, it can be paid down early without a penalty charge or interest. The sooner you complete the payment obligation, the sooner your credit rating will move up from an R9 (the worst credit rating) to an R7.
Can I pay off my consumer proposal with a personal loan?
Some people might think they can get a loan to pay off their consumer proposal sooner, but the truth is if you're doing a consumer proposal, you probably won't qualify for a loan. And remember, you'll have to pay interest on that new loan, whereas the consumer proposal is interest-free. So it doesn't make much sense to get a loan to pay off a consumer proposal if you're going to pay interest on that loan.
How can I pay off my consumer proposal early?
There are a number of ways to pay off your consumer debt proposal sooner than your scheduled completion date:
- If you were to come into some money or a family member gives you money, you could put it towards the consumer proposal.
- If you are able to decrease some of your expenses, you could increase your monthly payments and pay off the proposal sooner.
- Make bi-weekly payments to the LIT instead of monthly payments, so you can pay it off a little earlier.
- You could also take any extra funds you get, like your tax return or overtime pay, and put it towards your proposal.
- Maybe your circumstances improve and you start earning more money; or you no longer have certain costs to cover, such as daycare; or other loans have been paid off, like your car loan. Or you've taken on a side job or side hustle. These funds could now go towards paying off the consumer proposal sooner, and the best part is you can do so without taking on new debt and incurring interest charges.
Can I refinance other debt to pay off a consumer proposal early?
There are also instances where it might make sense to pay off your consumer proposal early through new financing. For example:
- When your mortgage renews, you could add the balance of your consumer proposal to the amount you are remortgaging. This would save you the monthly consumer proposal payment, but remember, you could be paying off your mortgage for the next 20 years.
- If you are buying a home and need to take on insurance, the Canada Mortgage and Housing Corporation (CMHC) wants you to be out of a consumer proposal for 2 years (plus have job stability, etc.). In this case, if you can’t clear the consumer proposal early using the methods listed above, you may want to try to get a loan from your bank or credit union. But make sure you can afford the loan payments and eventually the mortgage payments, too. After all, you filed a consumer proposal in the first place because you ran into financial difficulties, so don't set yourself up for failure by taking on too much.
Should I pay off my consumer proposal early?
There are no penalties for paying off a consumer debt proposal early, either as a lump sum or with advanced payments. It also gets you out of debt quicker and speeds up the process of having negative information come off your credit report. However, you need to make sure that by paying off your consumer proposal earlier you aren’t jeopardizing your finances. If you’re making greater payments, this could make it harder to afford other expenses. Plus, if your income doesn’t support a larger payment, you could wind up defaulting on your proposal and other debts.
What happens if I default on my consumer proposal?
If you do not consistently make your payments or default on your consumer proposal for three months (three months in arrears), the proposal can become void and you will be unable to file another one, which means you're back to square one and your creditors can start collections again or take legal action.
Is a consumer proposal worth it and is it the best way to resolve debt?
Is it worth it? That really depends on your personal circumstance, so be sure to weigh the pros and cons of each of the consumer proposal questions above. If you have other questions about debt or you're just seeking debt relief in general, give us a call at 1.800.267.2272 and we'll set you up with a free credit counselling appointment. One of our caring, certified Credit Counsellors will be able to lay out all of your debt consolidation options for paying off your debt, giving you the pros and cons of each option, and then provide you with your next steps. Credit counselling is confidential and completely free!