What is a Consumer Proposal?
If you have been asking yourself “what is a consumer proposal” you have come to the right page.
A consumer proposal is a legally binding arrangement between you and your creditors which is negotiated through a Consumer Proposal Administrator (a Licensed Insolvency Trustee).
A consumer proposal is the most popular alternative to bankruptcy in Canada.
As a legal agreement you will receive an immediate “stay of proceedings,” which will provide instant protection from debt collectors and allow you to repay a portion of your unsecured debt owing; usually when you make a consumer proposal you will be repaying approximately 30% to 50% of your unsecured debt to your creditors over a period of time lasting up to 60 months.
No consumer proposal may last longer than 5 years because people must see “a light at the end of the tunnel.”
When you make a consumer proposal with your creditors you will have to agree to pay a certain percentage of what you owe while your creditors will agree to forgive the balance of your unsecured debts.
How Does a Consumer Proposal Work?
Your Proposal Administrator will file the proposal agreement with the OSB (Office of the Superintendent of Bankruptcy), and once this occurs you will stop making payments on your unsecured debts to your creditors.
Your consumer proposal will also provide an “automatic stay”, which will prevent any legal action for collection against you and any wage garnishments – whether in place or planned – will be stopped.
After the Proposal Administrator has filed the proposal with the OSB they will notify your creditors, along with a note about your financial situation and the causes of your money problems that have caused you to file a proposal with your creditors.
Once the creditors have received the proposal in writing they have 45 days to accept or reject the proposal agreement.
In some cases a meeting of creditors will be requested so the creditors can learn more about your financial situation
When is a Meeting of Creditors Held?
A meeting of your creditors will be held if any creditors who have at least 25% of the provable claims of your debt requests such a meeting to occur. The creditors must request this meeting within 45 days of the proposal being made to the creditors.
Another way in which a meeting of creditors will be held is if the OSB (Office of the Superintendent of Bankruptcy) directs the LIT (Licensed Insolvency Trustee), who is acting as the consumer proposal administrator, to call a meeting of creditors within 45 days.
The meeting must take place within 21 days of the meeting being called.
At this meeting the creditors will vote whether to accept or reject the proposal, or vote to make changes to the proposal. If the proposal is accepted all creditors – even those that voted to reject the proposal – will be bound by the terms of the proposal agreement.
If the meeting of creditors is not requested within 45 days the proposal will have been considered accepted by the creditors.
Voting to Accept or Reject the Proposal Plan
At the creditors meeting your creditors will vote on whether to accept. Each creditor will get a number of votes that corresponds to the dollar value of their proven claims; if the creditor is owed $30,000 they will have 30,000 votes. The vote to accept or reject the proposal is decided by a majority of votes of the dollar value (50% plus 1).
For example, if the total claims are $100,000 then the creditors must vote at least $50,001 accepting the proposal regardless of the number of creditors who voted to reject or accept the proposal. For example, if 10 creditors who have a total of $20,000 in claims and they all vote to reject the proposal but 1 creditor has a claim of $60,000 towards the $100,000 total claims then the proposal will be deemed accepted even though 10 creditors voted to reject the proposal and only 1 creditor voted to accept the proposal.
Once the proposal has been accepted then there is a 15 day period in which the OSB or any other interested party can ask the LIT to have the bankruptcy court review the proposal. If no request is made in the 15 day period the proposal will be deemed as accepted by the Court. You will now be bound by the terms of the proposal, as will all of your creditors – including those that voted to reject the proposal.
What are the Benefits of Filing a Consumer Proposal?
Once you have filed a consumer proposal there will be several benefits to you including:
- You will stop paying on your debts to your creditors;
- Your LIT (Proposal Administrator) will handle all communications with your creditors;
- Wage garnishments will stop;
- Interest charges on your debts will stop;
- Your creditors will be prevented from contacting you in any manner;
- You will repay only a portion of the debt that you owe;
- You will be able to keep all of your assets, including those that would be lost in bankruptcy;
- Your income does not impact the cost of your proposal (unlike in bankruptcy, where “surplus income” payments could be required;
- Once the proposal has been agreed upon, the terms of the proposal will not change even if your income increases;
- The effect on your credit will not be as serious as with bankruptcy (Generally bankruptcy results in an R9 credit rating (which is the worst on the scale from 1 to 9), while a proposal generally results in an R7 credit rating;
- Many people feel better paying off a certain portion of their debt and getting their financial situation under control.
Benefits of a Consumer Proposal to Your Creditors
You might be wondering why your creditors would agree to forgive a portion of your debt. The reason for this is that you creditors don’t want you to go bankrupt because they will often receive nothing if you go bankrupt. The one rule of whether a proposal will be accepted is that your creditors must be “better off” than if you were to file bankruptcy.
Am I Qualified to File a Consumer Proposal?
A proposal is a popular alternative to bankruptcy in Canada and is a viable alternative if:
- Your debts are between $5,000 to $250,000 (this $250,000 debt limit does not include your home mortgage);
- You cannot afford to repay your debts in full with interest charges;
- You have a steady income;
- You were not able to get a debt consolidation loan;
- You want to avoid bankruptcy because you would be subjected to surplus income payments;
- You want to avoid bankruptcy because you were bankrupt before;
- You want to avoid bankruptcy because you have asset that would be lost in bankruptcy.