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How Does a Debt Consumer Proposal Work?

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What is a Debt Consumer Proposal?

A consumer proposal is a legal process that is designed to help those who are unable to make their financial commitments. In Canada, a debt consumer proposal can only be administered by a Licensed Insolvency Trustee. However, unlike the bankruptcy process which many people are familiar the consumer proposal process is less well known. This means most people have a lot of questions.

If you are asking “what is a consumer proposal?” or “how does a consumer proposal work?” here are some details about the process and answers to some common questions that can help you.

A debt consumer proposal is a situation where an offer is made to a debtor’s unsecured creditors. In most cases, this offer is for less than the full amount of debt owed. In general, a consumer proposal usually allows you to repay a portion of what you owe and have the remaining debt eliminated once the proposal is complete.

Consumer Proposal Process

The first step of the consumer proposal process is meeting with a Licensed Insolvency Trustee. They will review your finances and give you details on all the debt relief options that are available to you. Most trustees offer this consultation at no charge. At this point, you can also ask whatever questions you may have, including how does a consumer proposal work, what the consumer proposal process could mean for you, and much more.

  • If you decide to proceed with a consumer proposal, the trustee will determine what a fair offer to your creditors will be. This offer is then prepared and sent to all your unsecured creditors.
    • Unsecured creditors are those who hold debt that is not tied to an asset. For example, credit card debts, lines of credit, tax debt, and personal loans are just a few examples of unsecured debt.
    • In general, most consumer proposals allow you to repay a portion of what you owe rather than the full amount.
    • In addition to allowing you to repay only a portion of what is owed, a consumer proposal also streamlines the debt repayment process since you will only need to make one payment each month rather than several different payments to different creditors on different days.

 

  • Once the proposal is prepared and sent, creditors will determine if they will accept it. If the creditors that are owed at least 50% of the debt vote to accept, the proposal becomes binding.
    • For example, if you owe $40,000 in debt, and any creditor or collection of creditors that is owed more than $20,000 vote to accept the proposal, the proposal is binding for all your creditors, even those that did not vote to accept it.
    • A consumer proposal means you do not need to individually negotiate with each creditor. This streamlines the process since you don’t need every creditor to agree.
    • It may seem confusing that creditors would be willing to take less than is owed to them. However, creditors understand that someone who is filing a consumer proposal is obviously having difficulty meeting their financial commitments. They also know that, if the proposal is rejected, the debtor will likely have no choice but to file for bankruptcy. Creditors typically do not get very much (if anything at all) in a bankruptcy. They may decide to accept a consumer proposal since getting a portion of the debt paid is better than receiving nothing in a bankruptcy.

 

  • You receive legal protection when you file a consumer proposal. This means your creditors cannot contact you about your debts at all. All communication will be handled by the trustee. It also means that your creditors cannot take any legal action against you to collect on the debts and any legal actions that are already in place (garnished wages, frozen bank accounts, etc.) must stop immediately.
  • If your proposal is not accepted, the trustee has the opportunity to revise it and resubmit it.
  • If your proposal is accepted, you are responsible for making monthly payments as outlined in the terms of the proposal.

 

  • Payments will be made to the Licensed Insolvency Trustee who will distribute them to your creditors.
  • If you miss three payments, your proposal can be annulled and you will once again be responsible for the full amount of your debt.
  • As a part of the consumer proposal process, you are required to complete two financial counselling sessions. These sessions are taught by the trustee and they are designed to help people understand credit, debt, and budgeting with the goal of preventing people from ending up in financial trouble in the future.
  • Once you have made all your required payments and fulfilled your duties, you will receive a Certificate of Full Performance. This signifies that your proposal is complete and you will be relieved of the remainder of any outstanding debts that were included in the proposal.

The length of a consumer proposal can vary, depending on your financial situation. The maximum length is 60 months (five years).

Once you have completed your consumer proposal, you are able to begin rebuilding your financial life.

How Much Does a Debt Consumer Proposal Cost?

One of the most common questions, usually asked right after “How does a consumer proposal work?” Is “How much does a consumer proposal cost?” This is an important question as you are dealing with finances and you want to make sure that you are making the right choice for your financial future.

In general, a consumer proposal costs around $1500 in filing and administration fees. Part of this is paid in an initial set up fee (which goes towards the cost of filing, paperwork, etc.) and the remainder is paid through a portion of the payments you make to your creditors through the trustee.

What are the Consumer Proposal fees?

It’s important to remember that all fees associated with a consumer proposal are standard and set by the federal government. Since a consumer proposal can only be filed by a Licensed Insolvency Trustee, and Licensed Insolvency Trustees have their fees regulated, you can trust that you are being given a fair deal. Some other financial providers and advisors are not regulated by the government, so each one is free to charge its own fee. Trustee fees are standard across the board for all trustees.

It’s also important to note that the cost of your consumer proposal does not change once it is accepted regardless of your income. Once your proposal is voted on and approved by your creditors, you are responsible for making monthly payments as outlined in the terms of the proposal. That means you do not have to worry about providing the trustee with monthly income statements since your monthly proposal payments are not tied to your income. This is different from bankruptcy. With a bankruptcy, you are required to regularly update the trustee with your financial details each month. If you earn more, the cost of your monthly bankruptcy payments may increase. This does not happen with a consumer proposal.

Will the monthly payment change during the Consumer Proposal?

Once your proposal is accepted, the amount of your monthly payments does not change. However, if you earn more money or your financial situation improves in another way, you are able to pay off your proposal more quickly if you’d like. There is no penalty for doing so. Completing your proposal more quickly will allow you to receive your Certificate of Full Performance earlier, which means you’ll be able to start rebuilding your credit score and the rest of your financial life sooner.

Filing a consumer proposal allows you to repay only a portion of the debt that is owed. Even if you take the administrative costs into account, your proposal will likely still end up saving you a lot of money since you won’t be responsible for paying the full amount of debt owed. This can make the consumer proposal process the right option for people who can afford to repay some of what they owe, but who are unable to pay the full amount owing.

If you still have questions such as “How much does a consumer proposal cost?” or “How does a consumer proposal work?”, meeting with a Licensed Insolvency Trustee is a good idea. They will answer whatever questions you have about the consumer proposal process and provide you with details on the options that may work to help you resolve your debt issues.

Is a Consumer Proposal Right for Me?

Each person’s financial circumstances are unique. Therefore, there is no “one size fits all” option that is right for everyone. When you meet with a Licensed Insolvency Trustee, they will review your financial situation and give you details on the options that may be available to you.

Trustees are bound by a strict code of ethics. This means they are required to provide information on all debt-relief options, not just those with which they can assist. This ensures that you’ll receive all the information you need to make an informed choice about your financial future.

If you’re wondering “how does a consumer proposal work?” or curious about “how much does a consumer proposal cost?”, or have any other questions, speaking with a trustee can be an excellent idea. Most trustees offer free consultations so you can get the information you need to improve your financial situation.

Making a Debt Proposal to your Creditors

It can be very difficult to deal with a large amount of debt. Unfortunately, since many lenders charge significant penalties if you miss payments and large interest rates if you carry a balance, once you get into debt trouble, it’s very hard to get out.

One option for people who are dealing with a large amount of debt is a debt proposal, which is formally known as a Consumer Proposal.

The way a debt proposal works is that an offer is made to all of your unsecured creditors. In most cases, this offer will see you pay back a portion of what you owe, rather than the full amount.

The Consumer Debt Proposal Process

Only a Licensed Insolvency Trustee can administrate a consumer proposal in Canada. A Licensed Insolvency Trustee is a person who has received specific training and who is licensed by the Office of the Superintendent of Bankruptcy. Trustees are trusted to provide people with information on debt relief options and they are the only professionals in Canada who can file insolvency processes such as bankruptcies and consumer proposals.

When you meet with a trustee (most offer free consultations), they will review your financial situation, including your debts. The trustee will then give you information on the debt relief options that may help you. Trustees are required to give details on all possible options, not just the ones they can administrate.

What you do next is always your decision. If you decide to go ahead with a consumer debt proposal, the trustee will determine what a fair offer to your creditors will be. They will then send this proposal to all of your unsecured creditors.

Unsecured creditors are those who hold debts that are not backed by an asset. Examples of unsecured debts include credit card debt, lines of credit, tax debt, personal loans, student loans (if you have been out of school for at least seven years), and other such debts. Mortgages and automobile loans cannot be included in a proposal.

How long is the Consumer Proposal process?

The maximum length of a consumer proposal is 60 months (five years), but the specific length of your proposal will depend on your financial situation.

Once you file a debt proposal, you receive protection from your creditors. A consumer proposal prevents creditors from taking legal action against you to collect on debts that are owed. Creditors cannot even contact you about the debts. All communication will go through the trustee.

If the creditors that are owed the majority of the debt choose to accept it, then all of the creditors are bound by the terms of the debt proposal. If the proposal is rejected, the trustee may revise it and send it for another vote.

After the debt proposal is accepted, it is your responsibility to make the monthly payments as outlined in the proposal terms. If you miss more than two payments, the proposal can be annulled and you will again be responsible for the full debt. For this reason, it’s very important to make your payments as outlined in the proposal terms.

Once you’ve made all the required payments, the debt proposal is considered complete and you will receive a Certificate of Full Performance. This means the debts will officially be eliminated.

A consumer debt proposal makes it possible for you to repay a portion of the debt you owe rather than the full amount. Since it is a legal process, the terms of this process are outlined in the federal Bankruptcy and Insolvency Act and administered by a Licensed Insolvency Trustee.

Why Would Creditors Accept a Debt Proposal?

One question that a lot of people have is why a creditor would accept less money than they are owed. There are several reasons why. A major reason is that a creditor knows that someone who is filing a consumer debt proposal is a person who is having trouble handling their debts. Since a Trustee must file a proposal, lenders know that a qualified professional has looked at the situation and determined that a proposal is an option.

Creditors usually get very little (if anything at all) when a person files for bankruptcy. If a creditor vote against accepting a proposal, and the proposal is not accepted, they know that bankruptcy may likely be coming next. Rather than risk getting nothing in a bankruptcy, they often choose to take partial payment through a debt proposal instead.

Creditors also trust the judgment of Licensed Insolvency Trustees. If the trustee states the offer is fair that it makes sense for the situation, lenders often agree. Licensed Insolvency Trustees are there to ensure that both creditors and debtors are treated fairly.

It’s also important to remember that not all creditors need to accept a proposal for it to be considered binding. Only those creditors (or group of creditors) that are owed at least 50% of the outstanding debt must accept. This means if you owe $20,000 in debt and a group of creditors that are owed more than $10,000 accepts the proposal, it becomes binding for all creditors.

Reasons for Choosing a Debt Proposal?

The main reason why someone would choose to submit a consumer debt proposal is that it is a way to pay only a portion of the debt you owe, rather than the full amount. This is significant since many other debt relief processes work by reducing the interest you owe or giving you more time to pay, rather than actually requiring you to pay less of the actual debt.

There are many people who would be able to pay some of what they owe, but not the full amount. A consumer debt proposal is very helpful in these situations.

Also, since a consumer proposal is a legal process administered by a trustee, you receive legal protection from your creditors when you file. They are not able to contact you (all communication is done through the trustee) and they cannot take legal action against you to collect on the debts that are owed. If any legal action is in place (such as wage garnishment), a consumer proposal immediately puts a stop to it.

Consumer proposal terms are set once the proposal is agreed upon. That means your payments will not change, regardless of your income. This is different from a bankruptcy, which will cost more if you earn more. This means that, with a debt proposal, you are not required to submit monthly income and expense statements to the trustee. You are, however, able to pay off your proposal more quickly without penalty if you can. If your income increases over the proposal period, paying it off more quickly will allow you to eliminate your debts more quickly and start rebuilding your financial life sooner.

Possible Downsides to Filing a Debt Proposal

A consumer proposal is a legal insolvency process. This means that it is noted on your credit report when you file. A debt proposal remains noted on your credit report for three years after it has been paid off. This can make it more difficult for you to get a loan.

However, if you are in a situation where you are struggling with debt and considering a consumer proposal, your credit report may already be negatively affected. If you’ve borrowed more than you can afford to repay, missed payments, or made payments late, these factors are all recorded on your credit report and they can all negatively affect your chances of getting a loan in the future.

When you file a proposal, you are able to eliminate your debt in full while only paying a portion of what is owed. While this will have a negative effect on your credit report, it may still be worth it to you if you’re otherwise unable to pay your debts.

Meeting with a Licensed Insolvency Trustee will help you determine if a debt proposal makes sense in your financial situation.

Alternatives to a Debt Proposal

When you meet with a trustee, they will review your finances and give you information on all possible debt relief options. A debt proposal will likely not be the only choice. Trustees are required to provide details on all possible options.

Debt consolidation is an option that may allow you to save money on interest. This process usually works by taking out a new loan and using this loan to pay off your existing debts. If you’re able to get a new loan with a lower interest rate than the overall interest being charged on your existing debts, you can save money. However, a debt consolidation loan will not reduce the overall amount of debt you will be expected to pay.

Bankruptcy is another legal process that can only be administered by a Licensed Insolvency Trustee. In bankruptcy, your debts are eliminated and you are able to start your financial life fresh. However, like a consumer proposal, bankruptcy will be noted on your credit report. This note will remain for six years after your bankruptcy has been completed.

A Licensed Insolvency Trustee can help you determine which debt relief option is right for you. Once a trustee gives you the information on your options, it is entirely up to you how you will proceed. A trustee will never try to pressure you into any option. If you determine that a bankruptcy or debt proposal makes the most sense for your situation, they will administrate the process. Most trustees offer a free consultation so you can learn what options are available.

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