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Pros and cons of a consumer proposal – Introduction

If you’re struggling with debt, you may have heard of a consumer proposal. This is a formal process where, with the assistance of a licensed insolvency trustee, you make a consumer proposal to your creditors to pay back a percentage of what you owe. Once filed, the consumer proposal stops creditor collections and legal actions against you. A consumer proposal can be a great way to get out of debt, but it’s not right for everyone. Here’s what you need to know about the pros and cons of a consumer proposal.

What is a consumer proposal?

A consumer proposal is a legal process under Part III, Division II of the Bankruptcy and Insolvency Act (Canada) that can be used to deal with overwhelming debt. With a consumer proposal, you make an offer through a licensed insolvency trustee to your creditors to pay back a percentage of what you owe, over a specific period of time. A consumer proposal is an alternative to bankruptcy. Roughly twice as many people with overwhelming debt elect to resolve their issues by filing a consumer proposal over filing a bankruptcy. When you make a consumer proposal, you are asking your creditors to accept less than what you owe, resulting in forgiveness of the rest of the debt.

How does a consumer proposal work?

Most consumer proposals provide for monthly payment over a period of 5 years. There are exceptions, of course and we often structure the payment term over a much shorter time frame (sometimes less than 6 months).

The unsecured creditors review the consumer proposal to vote on its acceptance or rejection; they have 45 days to consider the consumer proposal’s reasonableness and fairness. The creditors will look at the recovery they might expect by accepting the consumer proposal as part of their assessment of the proposal’s merits.

Once accepted by the creditors, the consumer proposal is ‘deemed’ approved by the court; i.e., there is no actual court hearing but the approval of the court is ‘deemed’ or automatic after 15 days from the acceptance of the consumer proposal by creditors.

All legal action by creditors is halted upon the filing of the consumer proposal with some exceptions like debts resulting from child or spousal support.

Garnishments of wages, asset seizures and evictions are stopped as well. Another benefit of a consumer proposal is that it stops creditor calls at home and at work. Your creditors will no longer call, email or text you demanding payment. They must instead comply with the terms of the consumer proposal and communicate only with the trustee. The creditors will receive a dividend payment through the consumer proposal to recover a portion of that they are owed. Any balance remaining after receiving payment through the consumer proposal is forgiven.

What are the pros of a consumer proposal?

The main pros of a consumer proposal are:

You avoid bankruptcy
You keep your possessions
You can continue to use credit cards (if the creditor permits) although we do not recommend this practice.
Your debts are settled at a fraction of what is owed
Credit is better than in a bankruptcy
Garnishments of wages, collection actions, court actions are halted for substantially all debt
Your consumer proposal payments are manageable and interest free

What are the cons of a consumer proposal?

It’s important to be aware of the potential downsides of a consumer proposal before you decide if it’s the right solution for you.

Here are a few of the most common cons:

Your credit rating will be better than bankruptcy, but it won’t be good. You will have an R7 for the duration of the consumer proposal and for a further 3 years after its completion. (We will show you how you can rebuild your credit faster).
You may have difficulty getting credit during the consumer proposal
If you fall three payments behind, the consumer proposal it is automatically cancelled and you’re back to owing the full amounts to your creditors, plus interest (but you are not automatically bankrupt)
If you own a home and your mortgage comes due during the term of the consumer proposal, the mortgage should renew automatically and without issue. But you may have difficulty if you wanted to renegotiate a better rate or if you wanted to apply for mortgage financing at another lender.
The credit bureaus in Canada typically report consumer proposals as filings under the Bankruptcy and Insolvency Act. As a result, some prospective lenders may misinterpret this and think you filed a bankruptcy. In such cases, you may need to provide them with a copy of your consumer proposal to evidence that you did not file bankruptcy.

Is a consumer proposal right for me?

So, is a consumer proposal right for you? The answer to this question depends on your unique financial situation.

Some factors to consider when weighing the pros and cons of a consumer proposal include:

the amount of your debt
your income and your monthly expenses
your assets
And other life factors such as health status, employment security, relationship stability, family planning etc.

What may be a great fit for one person may not work for another.

A consumer proposal can be a great solution for people who are struggling with debt, but it’s important to understand the pros and cons of a consumer proposal before making a decision.

To find out more about whether a consumer proposal is right for you, check out our blogs on What is a Consumer Proposal and Is a Consumer Proposal Worth It? We also have a video titled What is a Consumer Proposal that provides a lot of information in under 5 minutes.

Of course, the best way to learn about your specific options is to contact me or anyone of our professional staff for a free consultation. We’ll help you explore all your options so you can make the best possible decision for your situation, and finally live debt free and stress free!