If you have a job but are unable to make all your minimum payments, let alone actually pay down your debts on things like payday loans, you may have wondered if bankruptcy is the only way to get out from under all your debt. There is another option you should consider before bankruptcy, filing a consumer proposal.
A consumer proposal is an option for anyone with over $5,000 but less than $250,000 in unsecured debt, or $500,000 per couple. Unsecured debt might include credit cards, lines of credit, loans and even unpaid income tax. With a consumer proposal, you are asking them to accept a lower monthly payment over a set amount of time. Your proposal is voted on by all the creditors involved, if the majority accepts, it is binding for all creditors. Under the Bankruptcy and Insolvency Act, once your proposal is accepted your interest is frozen and you are protected from any legal action.
For example, say you have $50,000 in consumer credit. Since they may get less under bankruptcy, many creditors would accept an arrangement that returns half of that amount back to them. After looking at your net income, minus all the living expenses such as rent, utilities and food, maybe it’s determined that you could comfortably afford $500 a month to your creditors. The proposal would then be to pay back $25,000 by paying $500 over 50 months. You can miss two payments, the payments would then be added on to the end. If you were to miss a third payment during this process, the proposal is annulled and the creditors will be back on you for their money, including the interest since the time you filed the proposal.
Like bankruptcy, a consumer proposal needs to be arranged by a licensed bankruptcy trustee. They will assess your financial situation to see if there are any other options, such as improving your spending habits or looking into a debt consolidation loan. If it’s determined that a consumer proposal is the best choice for your situation, the trustee will prepare all the paper work detailing income and expenses, payment terms, as well as your assessment certificate and the actual consumer proposal.
All of the creditors on your credit report will report an R7 until the payments are completed, then the note of having completed a consumer proposal will remain for another three years. Since this is only for unsecured debts, this will not cover your mortgage or car loan. You also can’t get out of your obligations for support, alimony or student loans. While this arrangement may not work for everyone’s financial situation, a consumer proposal may be the best way for many to recover from their debts without losing their assets to bankruptcy.