Consumer Proposals: A Smart Alternative to Bankruptcy

In today's financial landscape, many individuals find themselves grappling with overwhelming debt. The thought of bankruptcy often looms large, but there is a lesser-known option that can provide relief without the severe consequences of declaring bankruptcy: the consumer proposal. This blog post will explore what consumer proposals are, how they work, their benefits, and why they might be the right choice for you.

A financial advisor explaining consumer proposals to a client.

Understanding Consumer Proposals

A consumer proposal is a formal agreement between a debtor and their creditors to settle debts for less than the full amount owed. It is a legally binding arrangement that is administered by a licensed insolvency trustee. This option is available to individuals who owe less than $250,000 (not including mortgage debt) and are struggling to meet their financial obligations.

How Consumer Proposals Work

1. Assessment of Financial Situation: The process begins with a thorough assessment of your financial situation. This includes evaluating your income, expenses, and total debt.

   
   

2. Proposal Creation: Based on this assessment, the licensed insolvency trustee will help you create a proposal that outlines how much you can afford to pay back over a specified period, typically up to five years.

   
   

3. Creditor Approval: Once the proposal is drafted, it is submitted to your creditors for approval. A majority of creditors (in terms of dollar value) must agree to the proposal for it to be accepted.

   
   

4. Payments: If approved, you will make regular payments to the trustee, who will then distribute the funds to your creditors. Once the terms of the proposal are fulfilled, any remaining unsecured debts are discharged.

   
   

Key Benefits of Consumer Proposals

Choosing a consumer proposal over bankruptcy comes with several advantages:

• Avoiding Bankruptcy: A consumer proposal allows you to avoid the stigma and long-term consequences associated with bankruptcy. It can help you maintain your assets, such as your home and car.

  
  

• Reduced Payments: You may be able to negotiate a lower total repayment amount than what you owe, making it easier to manage your finances.

  
  

• Protection from Creditors: Once a proposal is filed, creditors cannot take legal action against you to collect debts, providing you with peace of mind during the repayment period.

  
  

• Credit Impact: While a consumer proposal will still affect your credit score, it is generally less damaging than a bankruptcy. It will remain on your credit report for three years after completion, compared to six to seven years for bankruptcy.

  
  

• Structured Repayment Plan: The fixed payment schedule can help you budget more effectively, allowing you to regain control of your finances.

  
  

Who Should Consider a Consumer Proposal?

A consumer proposal may be a suitable option for individuals who:

• Are struggling to keep up with monthly debt payments.

• Have a steady income but cannot pay off their debts in full.

• Wish to avoid the long-term consequences of bankruptcy.

• Have unsecured debts, such as credit cards, personal loans, or medical bills.

  
  

Real-Life Example

Consider the case of Sarah, a 35-year-old single mother with $40,000 in credit card debt. After losing her job during the pandemic, she struggled to make payments and faced constant calls from creditors. Instead of filing for bankruptcy, Sarah consulted a licensed insolvency trustee who helped her create a consumer proposal. She proposed to pay back $15,000 over three years, which her creditors accepted. This allowed her to keep her home and focus on rebuilding her financial future.

The Process of Filing a Consumer Proposal

Filing a consumer proposal involves several steps:

1. Consultation with a Licensed Insolvency Trustee: The first step is to meet with a licensed insolvency trustee who will assess your financial situation and explain your options.

   
   

2. Preparation of the Proposal: The trustee will help you prepare a proposal that outlines your repayment plan.

   
   

3. Filing the Proposal: Once the proposal is finalized, the trustee will file it with the Office of the Superintendent of Bankruptcy (OSB) and notify your creditors.

   
   

4. Creditor Meeting: If creditors wish to discuss the proposal, a meeting may be scheduled. However, this is not always necessary.

   
   

5. Approval and Payments: If the proposal is accepted, you will begin making payments according to the agreed-upon schedule.

   
   

Important Considerations

While consumer proposals offer many benefits, there are some important factors to consider:

• Fees: There are fees associated with filing a consumer proposal, which are typically included in your monthly payments. Make sure to discuss these with your trustee.

  
  

• Impact on Credit: As mentioned earlier, a consumer proposal will impact your credit score, but it is generally less severe than bankruptcy.

  
  

• Not All Debts Are Discharged: Certain debts, such as student loans (if you have been out of school for less than seven years), child support, and alimony, cannot be included in a consumer proposal.

  
  

Comparing Consumer Proposals and Bankruptcy

To better understand the differences between consumer proposals and bankruptcy, let's look at a side-by-side comparison:

| Feature | Consumer Proposal | Bankruptcy |

|-----------------------------|---------------------------------------|-------------------------------------|

| Debt Limit | Up to $250,000 (excluding mortgage) | No limit |

| Asset Protection | Most assets can be retained | Some assets may be liquidated |

| Credit Impact | Remains on credit report for 3 years | Remains on credit report for 6-7 years |

| Payment Structure | Fixed payments over a maximum of 5 years | No fixed payments; may be required to pay surplus income |

| Legal Protection | Creditors cannot take legal action | Automatic stay on creditor actions |

When to Choose Bankruptcy

While consumer proposals are a viable option for many, there are situations where bankruptcy may be the better choice:

• If you have debts exceeding $250,000.

• If you have little to no disposable income to make payments.

• If you have significant assets that may be at risk in a consumer proposal.

  
  

Conclusion

Consumer proposals offer a viable alternative to bankruptcy for individuals struggling with debt. They provide a structured repayment plan, protect your assets, and allow you to regain control of your financial future. If you find yourself overwhelmed by debt, consider consulting a licensed insolvency trustee to explore whether a consumer proposal is the right choice for you.

By taking proactive steps to address your financial situation, you can pave the way for a brighter financial future. Don't hesitate to seek help and explore your options. Your path to financial recovery may be just a proposal away.