The Other Option: The Rise of Consumer Proposals in the World of Insolvency
12 Mar 2018
According to the Office of the Superintendent of Bankruptcy (OSB), 122,198 Canadians filed an insolvency proceeding in 2017 – however 53% were able to avoid bankruptcy. These individuals chose to file a Consumer Proposal instead of bankruptcy to resolve their financial difficulties. Monthly OSB statistics also reflect a growing trend of Consumer Proposal filings in many regions across Canada.
WHY IS THIS HAPPENING?
- The emotional and social stigma heavily tied to “Bankruptcy” is disconcerting to people, so they seek an alternative remedy to their debt problems.
- People have less money to give to their creditors if they’ve experienced short or long term job loss.
- For a variety of reasons (ie. poor credit score or lack of assets to pledge as collateral), people aren’t qualifying for consolidation loans to pay off 100% of their debt.
- Those currently impacted by or who are recovering from a recessionary period are earning substantially less than what they were earning pre-recession, thereby impacting the ability to service debt.
WHAT IS A CONSUMER PROPOSAL?
Simply put, a Consumer Proposal is an offer to pay your creditors a percentage of what you owe them. A Consumer Proposal allows for the consolidation of debt—often at a reduction of the total amount owing—under a single manageable payment up to 60 months. The payments must be affordable, fitting within your monthly budget, and realistic to personal circumstances. For example, if you plan on retiring in less than 2 years, offering a proposal over 60 months would not make sense.
YOUR CREDITORS HAVE A SAY
A Consumer Proposal is a creditor driven process in that your creditors will vote on whether to “accept” or “reject” your offer. This is determined 45 days after filing the proposal. Acceptance of your offer will be legally binding and, upon completing the terms of your proposal, creditors agree to write off the remaining balance that you owe. For example, if creditors accept your offer to pay back 40% of your debt over 5 years, they will write-off the remaining 60% once you complete the terms of your proposal and requirements in the process.
The motivation for creditors to accept your offer is that they are receiving a higher return over what they would get if you go bankrupt.
WHY ARE CONSUMER PROPOSALS THE MORE ATTRACTIVE OPTION?
- You are in control of your assets. You can continue to make mortgage and vehicle payments during the Consumer Proposal.
- It provides a solution for tax debt and multiple payday/cash store loans.
- You know where you stand with your creditors. Collection action and interest charges from creditors will immediately stop upon filing a Consumer Proposal.
- Your monthly payments are fixed and paid at no interest.
- It’s viewed more favourably. You avoid the stigma of filing a bankruptcy and there is less of an impact on your credit rating which will sit at an R7 instead of an R9 (bankruptcy). You can also continue to act as a Director of an incorporated business.
Bottom line – the offer to repay a percentage of your debt over five years or less must be realistic, monetarily and circumstantially, based on your financial situation. A consumer proposal might not be the right option for everyone, but it is important to explore before deciding on bankruptcy. Talk to a Licensed Insolvency Trustee to see if a Consumer Proposals is the right option for you and your debt.