Before answering the question: what is a consumer proposal, it is worthwhile to briefly review the history of its evolution.
Prior to 1992, consumer proposals did not exist. Instead, individuals that were unable to pay their debts had to look to bankruptcy or business proposals to obtain relief.
In 1992 the Federal Government introduced legislation permitting a consumer debtor to file a consumer proposal to resolve their financial issues.
The introduction of the option to make a consumer proposal offered the individual a streamlined way to rid themselves of debt, maintain ownership of property and avoid the stigma of bankruptcy. (Bankruptcy was far more stigmatizing prior to the 1990s).
The government also wanted a way to reduce the number of bankruptcy filings in order to improve the financial metrics of the country. Fewer bankruptcies meant greater consumer confidence and improved trade.
But what is a consumer proposal? What does it do? And how is it different from making a bankruptcy or settling debts on one’s own?
What is a consumer proposal?
Simply put, a consumer proposal is a binding agreement or contract between a debtor (a person that owes money) with creditors to either settle the debts owing (compromise what is owing) or to pay the creditors in full over time without interest.
A consumer proposal must be filed through a licensed insolvency trustee office. It cannot be filed by a lawyer or a debt-settlement company or non-profit credit counselling companies.
What is a consumer proposal – Video
What is a consumer proposal? – Key Elements
- Can only be made by people who are in debt, not companies. A self-employed (sole proprietor, not a corporation) can make a consumer proposal, even if the majority of the debts owed are business related.
- A consumer proposal cannot be filed by someone who had a prior consumer proposal annulled (cancelled) without court permission. But if you are in a bankruptcy, you can file a consumer proposal to exit or bring an early end to the bankruptcy!
- Total debts must be less than $250,000 in order to qualify to file a consumer proposal. When determining the amounts owing, all debts are computed, including secured debt (car loans/leases, boat loans etc.,) but excluding mortgage owing against the individual’s principal residence. Mortgages against a second home or cottage must be included in the calculation of total debt outstanding.
- The consumer proposal settles unsecured debt; it does not compromise secured debt.
- Once filed, a consumer proposal brings an immediate halt to collection activity or legal activity to recover unsecured debt.
- A consumer proposal stops recovery efforts by the Canada Revenue Agency to collect taxes owing;
- A consumer proposal must be completed within 5 years and is automatically cancelled if default occurs.
Drafting a consumer proposal: The ‘Reasonable and Fair’ test
Many companies advertise that debts can be settled at or around 30% of unsecured debt. They claim that you can reduce or settle your debts by 70%. This is not quite true in all cases.
The reality is that creditors will look at each consumer proposal to determine if the amount proposed is reasonable and fair.
Typically, the creditors will want to know what they would receive if the individual were to file bankruptcy. (The creditors do not want the debtor to file a bankruptcy, they only want to know what they would receive if the debtor had to liquidate their non-exempt assets).
In a bankruptcy, the creditors would receive a dividend or payout based on any mandatory bankruptcy payment plus any realization of property (i.e., the recovery of the value/equity in non-exempt property; eg. savings accounts, RESPs equity in real property, non-registered investments etc).
Bottom-line is that if the recovery in a bankruptcy is projected to be greater than in a consumer proposal, it is reasonable to assume that the creditors would reject the consumer proposal. For example, if a bankruptcy would yield a payment to creditors of 60 cents on the dollar owing, then they would likely reject a consumer proposal if it offered 30 cents on the dollar.
But each case is unique and the drafting of a consumer proposal must take into account a number of factors, not the least of which is the reasonableness and fairness to the person making the proposal. As such, there is no consumer proposal calculator that can reliably compute expected payments.
Creditors vote on the acceptance of the consumer proposal and the votes are tallied 45 days post-filing. A simple majority (over 50% of the votes based on dollar value; i.e. each creditor gets one vote for every dollar that is owing to it) is required for acceptance; there is no need for all creditors to accept it. If they reject the proposal, there is an opportunity to amend the proposal in order to have it accepted.
If the creditors are not willing to accept any proposal that is offered, there is no need to worry because there is no automatic bankruptcy and the proposal debtor can explore other options.
Consumer Proposal Payment Terms:
Once a reasonable and fair amount to be paid is determined, the consumer proposal must provide for its completion over a period of 5 years or fewer. A consumer proposal can be completed in less than a year, or can be drafted to provide for manageable payment over 5 years.
The budget that is prepared with the help of the licensed insolvency trustee is the backbone of the consumer proposal and will determine the amount that can be contributed monthly and the duration of payment.
The budget must contemplate ongoing payment to service secured debt (car loans, mortgage debt etc) and should include foreseeable and unforeseeable periodic expenses in order to ensure success. (We will delve into these concepts in an upcoming post on financial management and credit counselling).
Most proposals are set up to provide a monthly payment –interest free—for a specified number of months, but there can be many variations of this.
A consumer proposal can be completed early without penalty if balloon payments (i.e., additional payments) are made during the consumer proposal term.
But if three payments are missed (defaulted), then the consumer proposal is automatically cancelled. This is referred to as a deemed annulment of the consumer proposal.
Consumer Proposal – What is the Impact on Credit Score
TransUnion and EquiFax–the two credit reporting bureaus in Canada—will show an R7 rating during the consumer proposal and for a further 3 years after the completion of the consumer proposal. While this rating is slightly better than the lowest score (R9-bankruptcy), it is not great.
We at Rusinek & Associates Inc when asked what is a consumer proposal will always advise proposal filers to work on rebuilding their credit score during the consumer proposal term so that by the time the consumer proposal is completed, they are able to qualify for credit much sooner. We never advocate to wait to rebuild credit until after consumer proposal is completed.
What is a Consumer Proposal – Consumer Proposal Pros and Cons
The benefits of filing a consumer proposal
- Immediate relief from creditors. Collections, garnishments of income and law suits are brought to a halt
- Debts are settled at a fraction of what is owed
- Assets are retained; keep your house, car, boat, investments, cottage
- No issue with sponsorship of family from overseas
- Consumer Proposal payments are set at the start of the consumer proposal and do not change (pro and a con)
- In substantially 100% of the time there is no need to attend bankruptcy court
- Assets you acquire and savings you amass during the proposal are untouched by creditors and do not alter the consumer proposal payments
- Applications for work or credit that ask if you have ever filed bankruptcy can be answered “No”, even though the filing of a consumer proposal is under part III of the Bankruptcy and Insolvency Act
- No interference with travel, employment (even if work requires that you be bondable) or self-employment
- No restriction on obtaining credit during or after the completion of the consumer proposal, provided that you qualify for credit
The negatives of filing a Consumer Proposal
While there are many benefits to filing a consumer proposal, there are a few things that you should be aware of when considering filing a consumer proposal. These aren’t really disadvantages of consumer proposal but should be considered nevertheless:
- Payments are established at the start of the consumer proposal. If there are material adverse changes to the budget; i.e., health issues, job loss, significant unexpected expenses (car accident) etc., then it may be difficult to continue making monthly payment. That said, it is possible to amend or alter the payment terms if such issues arise.
- The filing of a consumer proposal is reported as an R7 on the credit bureaus for the duration of the consumer proposal and for an additional 3 years after its completion. Given that most consumer proposals run 5 years, the credit bureaus report the consumer proposal as an R7 for 8 years. By contrast, a first-time bankruptcy filing is reported for only 6-7 years.
- For homeowners, it is likely that the mortgage will need to be renewed at some point during a 5-year consumer proposal. In all cases that we have seen, the mortgage will be automatically renewed without any issue. That said, for those who may want to shop for another mortgage or want to renegotiate for lower payments, it may be difficult to qualify while the consumer proposal is ongoing.
Final thoughts on What is a Consumer Proposal:
Canadians file nearly double the number of consumer proposals as compared to filing bankruptcies to resolve their indebtedness (about 80,000 consumer proposals filed annually versus 45,000 bankruptcies).
Creditors maximize their recover in a consumer proposal because the consumer proposal typically provides a greater return than in a bankruptcy.
Consumer debtors are able to rid themselves of excessive debt by making a consumer proposal with manageable monthly payments that easily fit into their budget and are interest free. At the same time, they are able to retain their property; they keep their home(s), car(s), investments and get a fresh start, free from the stress of threatening creditors.
Oh….one last thing. How much does a consumer proposal cost and how do we get paid? At Rusinek & Associates Inc, we do not ask you to pay anything toward our fee. You simply make your monthly payment as set out in the consumer proposal and we take our fee –which is set by the government–from the creditors when we make periodic dividend payment to them. So there is no added cost to you. We do our best to make sure you save with us.