If you have been doing research on consumer proposals, you’ll likely have encountered “consumer proposal calculators” that appear to have the ability to provide an estimate of the monthly cost of a consumer proposal payment. You’ll likely be asked to enter your total unsecured debt and these calculators will estimate a monthly proposal payment. Unfortunately, these calculations are inaccurate and misleading and do not reflect the truth regarding how a consumer proposal is calculated. 

Due to the complicated legal considerations relevant to the consumer proposal process it isn’t possible to use such a simplistic calculator to determine the cost of a consumer proposal. As you will see in this blog, there are numerous considerations that should go into the financial analysis that would then determine the cost of a consumer proposal – NOTE: your debt load is not amongst them.

The amount of your debt is absolutely relevant when you do a cost-benefit analysis of whether a consumer proposal is a good option for you but it does not factor into the calculation for determining the cost of a consumer proposal.

If there are people out there using their own consumer proposal calculator when crafting a consumer proposal for you then you most definitely are not getting a thorough analysis done of your financial affairs and I would suggest finding someone else to help you through this process. I would suggest finding a Licensed Insolvency Trustee who will do a thorough analysis of your financial situation to provide you with the best payment possible and your creditors with the reasons why accepting your consumer proposal is in their best interests.

How is the Cost of a Consumer Proposal Calculated?

A consumer proposal must offer a better advantage than bankruptcy so the first step in determining the cost of a consumer proposal is reviewing your financial situation to determine what a bankruptcy looks like. The cost of a bankruptcy is determined by your unique financial situation:

  • how many people are in your household, your income,
  • what expenses do you have,
  • whether you have been bankrupt before, and
  • what assets do you have and are they protected from your creditors.

See this article for more on how a bankruptcy is calculated.

Once we have determined the return to creditors – the dividend – in a bankruptcy we can then look at how much a consumer proposal might cost. A proposal must offer a better advantage to creditors than a bankruptcy. There’s a lot of ways an advantage to creditors could be defined however and the cost of the bankruptcy alone is insufficient for determining the cost of a proposal.

Some factors that we consider at Frederick & Company Ltd when we are determining the cost of a consumer proposal include the following:

1. The Expenses of Each Process

How fees and disbursements are calculated varies for bankruptcies and proposals and there can be situations where the expenses out of a bank or to state are significantly higher than the expenses of a proposal. In these infrequent situations, you can actually pay less into a proposal and still offer more to creditors than what a bankruptcy could provide.

2. How Long Each Process Will Take and When They Receive Money

The monthly payment requirement in a bankruptcy can be adjusted based on the funds available in your cash flow each month. If your ability to pay is hampered by your living expenses you may opt to extend the bankruptcy term so you can pay less monthly. This means that funds to your creditors will be further delayed because creditors typically get paid at the very end of the process. A consumer proposal can be offered over time but also as a lump sum. If a consumer proposal is offered as a lump sum there is a significant “time” advantage – because the amount of time in the process is typically 60 – 90 days long instead of a years long process – which means you can offer less money to creditors than you would with a consumer proposal that is spread out over 60 months. If a consumer proposal is offered over 60 months that proposal will provide for regular installments to creditors thereby providing money sooner to creditors than a bankruptcy because funds in a bankruptcy are generally provided at the end of the process.

3. Potential Complications of a Bankruptcy

Life can be messy and as a result bankruptcy can be messy too. If there are situations that might complicate a bankruptcy which could drive up costs of the administration and therefore reduce the amount available to creditors. These complications need to be disclosed to creditors so they can properly understand the potential outcomes. Some matters may require time and effort to pursue, and it may or may not result in additional recoveries for the bankrupt estate. Instead of all that hullabaloo a proposal offers a payment arrangement to creditors that offers greater return to creditors, the simplicity of which may be more attractive than the potential cost or additional benefit of the bankruptcy.

4. Additional Terms in the Proposal

There are creditors such as Canada Revenue Agency that do request specific terms in the proposal – such as staying on top of income tax payments and filings – that your license insolvency trustee will also need to consider when crafting a proposal. We will typically also include a clause that states if you pass away before the proposal is completed all your debts will be discharged. Without this clause your proposal would fail and those debts included in the proposal would need to be dealt with by the executor of your deceased estate thereby reducing the amount available from your estate to the beneficiaries listed in your will. These additional terms don’t usually factor in when determining the cost of a consumer proposal but are very important to know about so we have included them here.

5. How Much You Can Spend

Your cash flow is a major consideration when determining your payment. Reviewing expenditures that are necessary and those that you may want to cut out is a key part of the analysis to help you make the most of your consumer proposal. Your consumer proposal will resolve unsecured debt but this is also a great opportunity to consider whether keeping secured assets – and their associated debt – Will help or hinder your journey to financial success. Once you’ve done this analysis and have determined your monthly expenses the funds remaining Will inform how much you can spend on a consumer proposal. It’s important to consider regular expenses and make room for unexpected expenses that life might bring you. A monthly consumer proposal payment, once set, is not flexible so a proper analysis of your cash flow and making sure the payment is realistic and sustainable is important when considering what is proposed to creditors.

The proposal payment will be determined once the Licensed Insolvency Trustee has analyzed your personal circumstances, your cash flow, and the above considerations. As you can see, the amount of your debts has absolutely nothing to do with how much a bankruptcy or a consumer proposal would cost. So that begs the question: why do people pretend to be able to determine your consumer proposal payment with these inaccurate consumer proposal calculators? Worst case scenario these individuals do not know what they are doing or more likely they are using these calculators as a marketing gimmick to attract clients.

Consumer Proposal Calculations Done Right

At Frederick and Company Ltd we do things differently. We will always work to provide the most accurate information whether it be in our blogs, social media posts, or in a conversation with you. The law is complicated and how it applies to you is based on your unique circumstances and it can change when your circumstances change. Sometimes the law isn’t clearly defined, subject to interpretation with various potential outcomes that can make your journey uncertain. You need to know and understand all these aspects of the journey ahead before you can truly make an educated choice about what your best financial option is. 

Looking on the internet for general information is great but when you are looking for solutions tailored to your situation you cannot get the information you need without seeking our information from a licensed insolvency trustee. Like the consumer proposal calculator, general information can be misleading because your personal circumstances have not been added into the equation. Whether it be us or another licensed insolvency trustee in Alberta, it’s important to meet with someone to review your financial circumstances when you are wondering: Am I going to be alright? Can I pay down my debt?  

If you would like to seek our a conversation with our team please do not hesitate to reach out to us at 587-269-3009 or hello@frederickandcompany.ca.