Consumer Proposals

A consumer proposal is a legally binding settlement between a debtor and their creditors; in most cases the debtor pays less than the full amount owing to discharge their debts.

In a typical consumer proposal, the debtor may owe $50,000 on various credit cards, bank loans, lines of credit, government taxes, and pay day loans. If the debtor is unable to repay the full $50,000 plus interest, they could file a consumer proposal, where they offer to pay, for example, $350 per month for 48 months, or $16,800 in total. If the creditors accept, the debtor has only one monthly payment to make; at the end of the four year period, all debts included in the proposal are discharged.

Why would creditors accept a consumer proposal for less than the full amount owing?

If the creditors do not accept the proposal, the debtor may have no other option but to file personal bankruptcy. In a bankruptcy it is likely that the creditors will receive even less than they would have received in the proposal, so in most cases creditors will accept a proposal.

At my firm, Hoyes, Michalos & Associates Inc., we have a success rate of over 95% with having creditors accept proposals; if the proposal is structured properly, it is affordable for the debtor, and provides greater realizations for the creditors, so it is a classic “win-win” situation.

Who Can File a Consumer Proposal?

Any person who owes more than their assets are worth, and who is unable to pay their debts, may file a consumer proposal. Even someone who is bankrupt may file a consumer proposal. Under existing rules (August 2008) to file a consumer proposal your total debts, not including the mortgage on your principal residence, must be less than $75,000. If you have joint debts with your spouse, it is possible to file a joint proposal for non-mortgage debts of up to $150,000.

Under new bankruptcy and proposal rules passed by Parliament, and expected to be enacted in the fall or winter of 2008, a consumer proposal may be filed if your non-mortgage debts are up to $250,000.

If your debts exceed the $75,000 limit, it is possible to file a proposal under Division 1 of the Bankruptcy & Insolvency Act. However, the procedure is more cumbersome and complicated, so expert advice is required.
 

What is the Process for Filing a Consumer Proposal?

If you believe you are a candidate for filing a consumer proposal, the first step is to contact a licensed proposal administrator, which in most cases will be a licensed bankruptcy trustee (since proposals are governed by the Bankruptcy & Insolvency Act). The trustee will give you a proposal application form and assist you in assembling the required information, including your name and address, a list of your debts, and summary of your assets, and a monthly family budget.

The trustee will then work with you to determine the terms of the proposal. The trustee will determine the likely realizations in a bankruptcy, and then the proposal will be structured to give the creditors a higher rate of return.

For example, if due to your income and assets you would be expected to pay $500 per month for 21 months in a bankruptcy, or $10,500 in total, the trustee may recommend that you file a proposal where you offer $250 per month for five years, or $15,000 in total. The proposal is affordable for the debtor ($250 per month is easier than $500 per month), but the creditors are satisfied because, even though it will take them five years to receive all payments, they will share in $15,000, as compared to only $10,500 in a bankruptcy.

Obviously this is only an example; each case will be different, so a trustee should be consulted to determine what proposal terms are likely to be accepted by the creditors.

Once the proposal paperwork is prepared, it is electronically filed with the Office of the Superintendent of Bankruptcy, and then sent to all known creditors. The creditors then have 45 days to vote yes or no to the proposal. Each creditors must prove the exact amount that is owed, and they are then granted one vote for every dollar they are owed. If a majority of the dollar value of the creditors votes to accept the proposal, all creditors are bound by the proposal.

This is a critically important feature of a proposal; only a majority in dollar value are required to accept it, and the proposal becomes binding on all creditors.

What if the creditors reject the proposal?

If the proposal is rejected by the creditors, a creditors’ meeting is convened, at which point the debtor may propose higher payments in an effort to convince the creditors to accept the revised proposal. If that is not successful, the proposal is rejected.

In a consumer proposal the debtor is NOT automatically bankrupt. They can attempt to resume paying their creditors, but in most cases that is not a practical solution, and often the debtor will then file bankruptcy.

What debts are included in a consumer proposal?

A consumer proposal includes all unsecured debts, such as credit cards, bank loans, lines of credit, income taxes, pay day loans, and finance company loans. Certain debts are specifically excluded, including child and spousal support, student loans less than seven years old, debts that arose as a result of fraud, and court fines and penalties (including traffic tickets).

Secured creditors, such as car loans and mortgages, are not included in the proposal, unless the debtor agrees to surrender the security (the car or house).

Length of Consumer Proposal

The maximum length of a consumer proposal is five years. The minimum length is only 60 days, if a debtor makes a “lump sum” proposal where a lump sum of money is offered at the start of the proposal period.

Cost of Filing a Consumer Proposal

The proposal administrator is paid an amount that is legislated by the federal government, and this payment is taken from your monthly payments. For example, if you are paying $350 per month for 48 months, that is all you are paying. There are no additional fees or costs. In a typical consumer proposal the administrator receives a base fee of $1,500, and receives 20% of all funds distributed to the creditors (after the proposal is accepted). The government receives a 5% tax or levy on all proposal payments, so the creditors receive somewhat less than 75% of the payments in a proposal.

Impact of Proposal on Credit Report

Equifax, the largest credit bureau in Canada, reports a proposal as an R7 (R1 is perfect credit, and an R9 is a bankruptcy), so a proposal is slightly better than a bankruptcy on your credit report. A bankruptcy remains on your credit report for six years from the date of discharge; a consumer proposal remains on your credit report for three years after the proposal is completed.

Is a Consumer Proposal Better Than Bankruptcy?

The answer depends on your individual circumstances. If you cannot afford payments, bankruptcy may be your best choice. If you have the ability to make partial payments to your creditors, and you want to avoid bankruptcy, a consumer proposal may be the correct solution.

Resources

List of licensed trustee and proposal administrators in Canada that provide no-charge initial consultations.

Consumer proposals in Canada information site

Consumer proposals in Canada Blog (readers can post anonymous questions, and receive answers from experts).

Equifax Canada description of information on credit reports and proposals

Consumer proposal video on You Tube

Hoyes Michalos & Associates Inc. Consumer Proposal Information Site