One of the most difficult financial situations to overcome is bankruptcy. But what happens when you feel as though you don't have a choice in the matter? There are times when you become so overwhelmed by your obligations that you feel as though bankruptcy is the only option… even if you would rather not take that step.
If you have a job but are unable to make all your minimum payments, let alone actually pay down the principal on your debt, you don't have to resort to bankruptcy. A consumer proposal is a way to avoid bankruptcy and meet your obligations in a way that is manageable in the context of your current financial situation.
What is a Consumer Proposal?
A consumer proposal is an option for an individual with over $5,000 but less than $250,000 in unsecured debt. It's also possible create a consumer proposal as a couple, as long as, together, you have less than $500,000 in unsecured debt.
Unsecured debt includes obligations like credit cards, lines of credit, loans and even unpaid income tax. With a consumer proposal, you are asking your creditors 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 of your creditors accept your terms, it is binding for all of your creditors. Under the Bankruptcy and Insolvency Act, once your proposal is accepted your interest is frozen and you are protected from any legal action. This can be a great
This can be a great way to meet your obligations without running into the issues that come when creditors raise interest rates, or adopt other policies that might not be beneficial to you.
Here's an example of how it works:
Say you have $50,000 in consumer credit. After looking at your net income, minus all of your living expenses such as rent, utilities, and food, maybe you determine that you can comfortably afford to make a payment of $500 a month to your creditors. Your consumer proposal might then to be to pay back $25,000 by making payments of $500 over the course of 50 months.
You can miss two payments, and those missed payments would then be added on to the end of your term, lengthening it by another two months. If, however, you 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 accrued since the time you filed the proposal.
Since creditors may get less under bankruptcy, many creditors are willing accept an arrangement that returns half of that amount back to them. The other consideration is the fact that you have been making payments for years, including interest. There is a good chance that your creditors have already more than received back everything that they lent you. Accepting your consumer proposal means less in overall interest received, but it is usually better than the risk of bankruptcy.
Arranging your Consumer Proposal
You can't just submit a consumer proposal to your creditors, however. Like bankruptcy, a consumer proposal needs to be arranged by a licensed bankruptcy trustee. Your representative 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 paperwork detailing income and expenses, payment terms, as well as your assessment certificate and the actual consumer proposal.
This is the information creditors will consider when deciding whether or not to accept your proposal. For many consumers who have regular income, and who are on the verge of succumbing to their debts anyway, a proposal is a good option for everyone. Creditors get some of their money back, and consumers are able to keep their heads above water and avoid bankruptcy.
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.