If you’ve ever done some research on debt-relief options within Canada, it’s likely you’ve come across the term “consumer proposal” at some point. This article will help you start thinking about the considerations to make before further exploring this option.
What is a consumer proposal?
A consumer proposal is a legally binding debt settlement offer to your unsecured creditors. To file a consumer proposal, you will work with a Licensed Insolvency Trustee (LIT) to determine how much you can afford to pay back based on your income and non-exempt assets. The Trustee will also gather information about your financial affairs so your creditors can get an overview of your circumstances before they vote on your proposal.
Where to seek advice?
If you’re looking to invest, there are banks and financial advisors. But what about debt concerns? We would encourage you to seek out a Licensed Insolvency Trustee for a free consultation. LITs are the only professionals in Canada who can administrate bankruptcies and proposals. However, that’s not all they do; one of their primary roles – as debt and insolvency professionals – is to help those with debt problems by guiding them through their options for debt relief and helping them choose a path that is right for them.
When to seek advice?
It might sound surprising, but a lot of people don’t recognize the need for financial help until they’re waist-deep in debt. Keep these warning signs in mind when evaluating your financial situation:
- Using credit to pay off other credit
- Making frequent late payments
- Needing to make minimum payments on bills
- Your debts are going into collections
- Having to decide between paying bills and deferring others
- Using more than 17% of your gross monthly income for debt repayment
- Your debt payments are paying the interest only on your debts and not the principal
What should I consider before filing a proposal?
If you’re experiencing some of the warning signs above, you may wish to consider seeking out a LIT for a consultation. The trustee will work with you to get a preliminary look at your income and expenses and help you determine if you’re “insolvent” — under the Bankruptcy and Insolvency Act, an insolvent person is defined as someone who owe more than $1,000.00 and is unable to pay their obligations (e.g. debts) as they come due. It’s at this point where you may consider a consumer proposal as a potential option, and the Trustee will walk you through this process in-depth.
Of course, it’s best not to jump straight into a proposal without consideration of your other options. For example, is your debt the result of insufficient income? If you’re not making enough money to cover your basic needs, then a consumer proposal will not help you in the long term and you’ll want to find ways to increase your income. Will increasing your income make it possible to pay off your debts in a reasonable time frame? What about your selling your assets to pay your debts? Have you explored consolidation loans or an Orderly Payment of Debt? These are all questions that will be explored during a consultation with a Trustee, with the aim of helping you make an informed decision.
How can a proposal help?
- Once you file a proposal, you‘ll receive a stay of proceedings. This stay will protect you from legal proceedings, wage garnishment, interest accruement, frozen bank accounts, etc.
- A proposal is based on how much you can afford to pay (by reviewing your income and non-exempt assets). Non-exempt assets are those available to your creditors pursuant to the Civil Enforcement Act of Alberta
- The payments will be spread over a maximum of five years to help ease your cashflow
- You will pay back a percentage of what you owe
- The process is legally binding to your creditors
What are the disadvantages of filing a proposal?
Although there are significant advantages to a proposal, there are notable drawbacks as well:
- Your credit rating and credit score will be negatively impacted, meaning that getting further credit or qualifying for secured loans (e.g. mortgage and vehicle financing) will be more difficult
- Long term commitment: most often, a consumer proposal will be negotiated to your creditors on a 5 year term of consecutive monthly payments. Missing 3 payments will cause the consumer proposal agreement to be annulled, and your stay of proceedings will be lifted, which means your creditors will be able to seek collection again, unless you reinstate the proposal by catching up on all missed payments within 30 days
Looking to the future and your savings plan moving forward
When you’re drowning in debt, it’s hard to focus on other aspects of your financial health. Establishing an emergency fund, planning for retirement, saving for your future goals, whatever that may be, can be worked on together with your Trustee.
At Frederick and Company, our mission extends beyond getting you through a proposal; we’re here to help you start planning for a healthy financial future. Contact us today for a free consultation!