Filing a Consumer Proposal: Understanding The Alternatives to Bankruptcy
Facts about Consumer Proposals
The Bankruptcy & Insolvency Act of Canada basically provides two ways of dealing with your personal debt problems: Bankruptcy and Consumer Proposal.
A consumer proposal is a repayment plan that is formulated in accordance to the consumer’s ability to pay. It may require paying back only a portion of the debt, or the amount in full, depending on the circumstances. A consumer proposal may be in the form of a lump-sum payment and/or monthly payments over a maximum period of 60 months.
Effect of Filing a Consumer Proposal
The filing of a consumer proposal will automatically stop all interest charges going forward, as well as most legal proceedings and/or executions against your property or your earnings.
Proposals must be formally accepted by the prescribed majority of your creditors (more than 50% of your total debt) and must also be approved by the Court. After filing a consumer proposal with the Licensed Insolvency Trustee (the Administrator), in most cases, the creditors will simply send the Administrator a proof of claim form including the creditors’ vote either “for” or “against” the proposal.
After a 45 day period elapses, the Administrator will add up the votes “for” and “against” the proposal and advise you and the creditors of the result.
In certain circumstances, the Administrator may have to call a meeting of creditors (in the rare event one is requested) in order to have creditors vote on the proposal in person. If the proposal is voted down, it is usually possible to amend the existing proposal in order to simply provide a better return to creditors than the original amount offered under the proposal.
If a consumer proposal is not accepted, however, you are NOT automatically bankrupt, but you are basically back where you started. Often there are few other alternatives than to proceed with an assignment in bankruptcy if the proposal is not accepted, and if it cannot be negotiated to terms that are acceptable to the creditors.
Who Can File a Consumer Proposal
A consumer proposal is reserved for consumers with total consumer debt that is more than $1,000.00 and less than $250,000.00, excluding the mortgages on their primary residence.
If the aggregate of a consumer’s debt is more than $250,000.00, then a consumer proposal may not be filed.
The alternative is a commercial proposal, the caveat being that if the commercial proposal is not accepted by the requisite majority of creditors, then the debtor is deemed (automatically) bankrupt. Unlike a consumer proposal, a commercial proposal cannot be withdrawn by the debtor after it is filed.
Proposal Versus Bankruptcy
Unlike a bankruptcy, when you file a consumer proposal, you don’t lose any of your assets and you do not have to report your future earnings or any other personal financial information to the Trustee after the proposal is approved.
Instead, you simply make the payments in accordance to the proposal terms agreed upon between you and your creditors.
The payments are made to the Administrator, and the Administrator holds the funds in trust, pending distribution of the funds to all your creditors. Unlike a bankruptcy, you can still apply for credit and you can still possess and use a credit card during the proposal.
Further, if you come into any money, assets, inheritances, lottery winnings, etc., you do not have any obligation to pay the proposal off any sooner (or pay any greater amount) than the agreed upon terms.
Finally, the record of your consumer proposal is purged (removed) from the credit bureau just 3 years following its completion, unlike a bankruptcy which remains on public record for 7 years after the discharge from bankruptcy.
How to File a Consumer Proposal
A Licensed Insolvency Trustee (Trustee) is the only one who can file a consumer proposal for you.
You will need to book a consultation with a Trustee and be prepared to provide a disclosure of your assets, liabilities, income and expenses. The Trustee, who will act as the Administrator under your proposal, will assist you in determining how much you can afford to offer your creditors, based on your asset base, family income and living expenses.
The Trustee must ensure the proposal is both fair and reasonable for both yourself and your creditors.
The Trustee’s mandate is not to simply try to maximize the return to creditors nor minimize it. The Trustee’s responsibility is to ensure a fair return to creditors is one that is both affordable and reasonable, for you the consumer as well.
Licensed Insolvency Trustee
Only a Licensed Insolvency Trustee can facilitate the filing of a consumer proposal.
Beware of the debt-settlement companies who advertise debt-settlement options that are similar to consumer proposals. These private companies, many who claim to be not-for-profit, are NOT licensed or regulated by Industry Canada like a Licensed Insolvency Trustee is.
Further, they cannot provide you with legislative debt relief from your creditors like a Licensed Insolvency Trustee can. Unlike a Licensed Insolvency Trustee, unregulated debt-settlement companies’ fees are not regulated or controlled by the Bankruptcy and Insolvency Act or by Industry Canada.
Fees Under a Consumer Proposal
A Licensed Insolvency Trustee is entitled to collect fees for acting as the Administrator under your consumer proposal, and then overseeing the process which includes preparing all the necessary documentation, filing them with the Official Receiver, sending notices to your creditors, managing the claims and voting process, and then making the monetary distributions to your creditors.
The fees of the Administrator are drawn out of the total payments made under the proposal.
For example: If you owe your creditors a total of $30,000.00 of unsecured debt (unsecured debt meaning debts for which no assets are being held as security, like a car or a house).
If your proposal was an offer to repay 50% of your debt, or $15,000.00, over 48 months, then that would translate into 48 payments of $312.50. The fees of the Administrator would come out of the $15,000.00 you pay under the proposal.
You don’t pay the Administrator’s fees “in addition” to the $15,000.00. The payments you make under a proposal include all fees and applicable taxes. In other words THERE ARE NO HIDDEN COSTS.
What Happens if I Miss Payments Under my Proposal?
The Bankruptcy and Insolvency Act sets out the general scheme and provisions for the filing of, and the administration of, a consumer proposal.
One of the provisions sets out that a consumer proposal can never be in arrears to the extent of 3 months’ payments, and if it ever is, then the proposal is automatically (deemed) annulled by operation of section 66.31 of the Act.
So if we use the above example (the proposal at $312.50 per month), the proposal would be deemed annulled if the proposal payments were ever in arrears to the extent of three months or $937.50, either consecutively or aggregately over the 48 months.
Once the proposal is annulled, the process comes to an end and the rights of the creditors are revived. The balances owed are also revived, less any payments the creditors received under the proposal.
The proposal can, however, be revived one time after it is annulled. But that is only if the Administrator agrees that there was a reasonable explanation for the proposal falling into the 3 months arrears, and so long as there are no objections from the creditors. In order for the proposal to be revived, the arrears must also be paid in full prior to its revival.
Does my Consumer Proposal Release me From all of my Debts?
Once your consumer proposal has been completed, the Administrator will send you your certificate of full performance, or form 46.
This certificate means that you are now legally released from all of the debts that were included in your consumer proposal, except any debts that fall under section 178 of the Bankruptcy & Insolvency Act. Debts that fall under section 178 of the Act typically consist of debts such as outstanding child or spousal support payments, debts that were obtained by fraud or misrepresentation, Federally or Provincially funded student loans that are less than 7 years old since the date studies were completed, and any amounts owed under a restitution order made by the Court (usually for criminal convictions).
For a full explanation of debts that are not discharged under a bankruptcy or a consumer proposal, see Section 178 of the Bankruptcy & Insolvency Act.
What Happens Once my Consumer Proposal is Completed?
As discussed above, once your consumer proposal has been completed, the Administrator will send you your certificate of full performance. Once you receive the certificate, you should do the following:
1. Make several copies of the certificate as it may not be possible to produce the certificate in the future as the Administrator will only keep the records of your proposal for a limited number of years after it is completed.
2. Put copies of your certificate in several different locations in the event of fire, theft or flood damage in your own home. Remember, your certificate can not be reproduced in the future. So for example, you could put one in a safety deposit box, leave another with a family member you are NOT living with, then perhaps keep a few copies in your own home for easy access.
3. You should send a copy of your discharge certificate to both Equifax and Trans Union. These are the two credit reporting bureaus in Canada. Along with your certificate, you should also include a photo ID (copy) as well as your social insurance number along with a letter requesting that the credit bureau update your records accordingly. It is also advisable to send this information by verifiable mail (registered, certified, or courier) to ensure the information actually makes it to both bureaus. Approximately two to three months after sending the aforementioned information, you should conduct a credit bureau inquiry of your own to ensure the records have been accurately updated. If you find any information that is wrong or being reported incorrectly, you will have to deal directly with the credit bureau(s) to get the errors corrected. The Administrator under your proposal has no authority to deal with the credit bureau(s) on your behalf so there is no point in contacting the Administrator in regard to credit bureau issues.
Contact a Licensed Insolvency Trustee at Crawford, Smith & Swallow
Crawford, Smith & Swallow Inc. has been serving the Niagara region for more than 70 years, helping consumers get out of debt and take back control over their finances. We help people choose the right debt relief solution.
Our licensed insolvency trustees will work with you to create a tailored-made debt solution that works for you. We never judge, we are here to help.
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