Filing a consumer proposal can be the best course of action to protect important assets that would otherwise be liquidated in a bankruptcy. The process of filing a consumer proposal, however, requires careful planning and consultation with a Licensed Insolvency Trustee (LIT). LITs are licensed by the federal government to administer consumer proposals.
A consumer proposal is a legal settlement negotiated between yourself and your creditors to avoid bankruptcy. The process of filing a consumer proposal can be broken down into several steps beginning with an initial assessment of your debt and qualifications and ending with submitting the proposal to your creditors. If the proposal is accepted, then you'll repay the amount of debt you agreed through fixed monthly payments for up to 60 months.
1. Qualification & Debt Assessment
The first step is to contact a LIT like Remolino & Associates to assess whether you qualify for a consumer proposal and whether it's your best option given your income and total debt. If your total debt is too high for a debt consolidation loan or a debt management plan, but you have the income to pay a portion of your debt, then a consumer proposal is a good option to consider.
The legal requirements to quality for a consumer proposal are that you:
Be a person (a Canadian citizen or a property owner in Canada)
Be in a state of insolvency
Have less than $250,000 in total unsecured debt
Have sufficient income to make long-term monthly payments
Not have any other consumer proposal in progress or a previous proposal for the same debts that has been annulled
If you meet these requirements, then your administrator will total the amount of unsecured debts that you have and compare it to the amount of your disposable income. The LIT then can draw up a partial repayment plan based on these figures to offer your creditors.
For example, suppose your unsecured loans total to $30,000, and you're able to make payments of $200 each month with reasonable certainty. In this
scenario, you could repay 40% of your outstanding debts, or $12,000, in a 60-month period. If you were able to pay $250 a month, you could propose to repay 50% of your loans.
The offer that's most likely to be accepted by your creditors will depend on your situation, but these debt reductions are typical for most consumer proposals.
2. Draft a Proposal & Payment Terms
To create a proposal that will get accepted, the payment terms must follow a couple of basic rules:
The amount you propose to repay must be greater than the amount that your creditors can expect to receive in a bankruptcy scenario. If it's not, then they won't have an incentive to accept your proposal.
The monthly payment must be realistic over the course of the repayment period that you propose. If you offer an amount that stretches your budget too far, the proposal is likely to fail if you encounter a loss of income or unexpected expenses in the future.
Your creditors aren't obligated to accept a consumer proposal based on your qualifications or adherence to these rules, as they have their own standards that they follow. The LIT administering your case will use their knowledge of creditor needs and your situation to craft the proposal that's most likely to be accepted.
3. Proposal Documents
A formal consumer proposal requires four documents that the administrator will file on your behalf:
A Statement of Affairs
A Statement of Income and Expense
An Assessment Certificate
A Consumer Proposal
The Statement of Affairs is a balance of your total assets and liabilities. It lists your assets, their estimated value, and documents all creditors by account and address. This document is used by creditors to determine what they could hope to receive in the case of a bankruptcy.
The Statement of Income and Expense documents the amount of disposable income you currently have after deducting your necessary expenses. It supports the case for the reasonable amount you are proposing to pay each month.
The Assessment Certificate documents that your administrator gathered all the necessary information and counseled you regarding your rights and alternative options.
Finally, the Consumer Proposal is the formal document proposing to repay a portion of your unsecured debts to your creditors.
4. Filing Your Consumer Proposal
With the above documents in hand and the decision made to proceed, the LIT will file your consumer proposal with the Official Receiver and send a notice to each creditor for their consideration. Once the proposal is filed, you are protected from collection efforts, including garnishments, lawsuits, and debt collector calls until the proposal is either accepted or rejected.
5. Creditors are Contacted
When your creditors receive their copies of the notice from your administrator, they have 45 days to respond. If they do not respond, the Official Receiver will deem that the proposal is accepted. If your creditors object before the 45 days is up, however, a meeting with your creditors may take place.
6. Creditor Can Request Meetings
When more than 25% of your creditors object to your consumer proposal, they can request a meeting with you and the other creditors to vote on accepting or rejecting it. Your administrator will schedule a First Meeting of Creditors, the purpose of which is to attempt to reach an agreement with the majority of your creditors.
7. Creditors Vote on Your Proposal
The voting process is weighted such that each creditor receives one vote per $1 of debt you owe them.
For example, if you have three loans of $5,000, $6,000, and $3,000, then these three creditors will have approximately 35%, 44%, and 21% of the votes. Thus, if a single creditor holds more than 50% of your unsecured debts, they'll effectively decide to accept or reject it for all your creditors.
Creditors can vote to accept, accept with an alternative proposal, or reject your proposal. They might also not respond at all, which is considered a vote to accept.
8. Fulfilling Your Consumer Proposal
Once your proposal is accepted, you begin making the monthly payments you agreed to pay. It's possible to pay off the settlement amount early if your financial situation improves, or you can simply make the payments as planned. There's no interest or fees that make a longer payment period more expensive.
When you make the final payment, your administrator will send a Certificate of Full Performance, which you keep as proof that you've completed the conditions of the proposal. The balance of your original debts is forgiven, and you will receive other documents, including a Statement of Receipts and Disbursements and a Notice of Taxation of the Administrator’s Accounts and the Discharge of the Administrator.
These documents are also sent to your creditors and the Official Receiver. The government then will notify the credit bureaus about the debts that were forgiven.
9. Rebuild Your Credit
One reason a consumer proposal can be a better option than a bankruptcy is that it's not as difficult to rebuild your credit. You can begin the process even while you're making monthly payments by obtaining a secured loan or credit line. The overall benefit of a consumer proposal is to relieve you from high-interest debts and insolvency without the damaging process of a bankruptcy.
For a free consultation about whether a consumer proposal is the best option for you, contact a Licensed Insolvency Trustee like Remolino & Associates in Ontario.
Frequently Asked Questions Regarding the Consumer Proposal Process
Q: What are the chances that my proposal will be accepted?
When a consumer proposal meets a few minimum criteria, the acceptance rate is very high. A proposal must give your creditors more return on your debts than they would receive if you filed bankruptcy. Otherwise, it won't make economic sense to them. The payments proposed must also be realistic for your financial situation to be acceptable. At Remolino & Associates, we pride ourselves with an approval rate of original Proposals of 98%, The additional 2% have been approved, after the proposals have been altered.
Q: Can I exclude a creditor from my proposal?
No, as an alternative to filing bankruptcy, a consumer proposal requires that you address all your debts. It's a way of eliminating unsecured debts by negotiating a settlement with your creditors in the context of all other types of debt. Secured loans aren't addressed, and recent student loans, legal fines and fees, and alimony are exempt from a consumer proposal as well.
Q: What happens if my proposal is rejected?
It's possible to renegotiate a consumer proposal that's rejected by the majority of your creditors to address their concerns. However, the reason for the rejection may be that your finances appear too difficult to make a consumer proposal worthwhile to your creditors, in which case a bankruptcy filing may be more appropriate.
Q: What happens if I can’t keep up with my consumer proposal payments?
If your financial situation changes after a consumer proposal is accepted, you'll need to make the monthly payments as agreed or the proposal will be annulled. It is possible to amend your current proposal if it becomes clear that you will fall into arrears for more than two months.
When you realize that you won't be able to make your payments, contact your administrator to discuss your options. If the problem is temporary, you may be able to secure an amendment to your proposal if your creditors approve it. Otherwise, you may need to consider withdrawing from the proposal, allowing it to be annulled by missing three payments, or filing for bankruptcy.
Q: What happens if I miss a payment?
You can miss a maximum of two payments once a consumer proposal is in force. If you fall three payments behind at any time, the proposal will be annulled. At that point, the full debt balances will be reinstated, and your creditors can pursue collection efforts.
Q: How long will I have to make payments for?
The maximum length of a consumer proposal payment plan is 60 months, but the proposal can be for a shorter period or a single lump sum payment. In any case, the payments will be interest free, so a longer payment term doesn't increase the total cost to you.
Q: Can I pay extra towards my proposal to pay it off earlier?
Yes, you can. The payments required each month will be a fixed amount, but you can end the payment period sooner with extra payments or a lump sum payoff.
Q: What fees are associated with filing a consumer proposal?
There aren't any extra fees required to file a consumer proposal beyond the cost of your settlement amount that you agree to repay. The LIT is compensated by taking a portion of the settlement payments that you make.
Q: When should I consider bankruptcy over a consumer proposal?
There are situations in which you may technically qualify for a consumer proposal but lack the income needed to satisfy your creditors. You'll typically need to repay at least 30% of your unsecured debts within five years for a proposal to be accepted. If this isn't possible, a bankruptcy may be a better option. You'll also need to consider bankruptcy if you've already attempted a consumer proposal for the debts you have, but it was annulled.