When you get so far into debt that it seems you will never be able to pay it off, you might believe that your only option for relief is bankruptcy. After all, to have all of your debt erased in bankruptcy gives you the opportunity to start over and move forward in life unencumbered by what you once owed to your creditors. However, as there are many drawbacks to bankruptcy, it is important to exhaust all of your debt relief options before you begin the bankruptcy process. The consumer proposal is one of the most frequently used options for getting out of debt in Canada.
Consumer Proposal Basics
Consumer proposals in Canada are governed by the Bankruptcy and Insolvency Act of 1985. Essentially, a consumer proposal allows you to settle with your creditors for less than what you actually owe. You end up paying something to your creditors, but much of your debt will be forgiven. To file a consumer proposal, the amount of unsecured debt that you are carrying must total at least $1,000 but no more than $250,000. Married couples are allowed a maximum debt of $500,000.You file a consumer proposal in the same way that you file for bankruptcy. All you need to do is contact a licensed bankruptcy trustee in order to get the paperwork started. Once you file your consumer proposal, your debt will cease accumulating interest – at least until such time as the proposal is rejected. As long as you and your trustee put together a suitable proposal, however, the chances of a final rejection are quite low.
The Consumer Proposal and Your Creditors
A consumer proposal is a legally binding document that obligates all of your creditors to its terms if the creditors who hold a simple majority of your total debt agree to it. Will creditors accept your consumer proposal? That all depends on which creditors you are talking about. It does not matter how many individual creditors refuse your proposal; rather, the important figure to look at is your total debt. You could have ten obstinate creditors who refuse to accept your proposal, but if they hold 49 percent or less of your total debt, they will still be forced to abide by the proposal’s terms if the creditors who hold 51 percent or more of your debt agree to its provisions. Thus, the key is to write a proposal that will be agreeable to the creditors holding most of your debt. If you make them happy, everything else will fall into place.
Consumer Proposal Advantages and Disadvantages
The consumer proposal offers several advantages when measured against bankruptcy in Canada.
First, your minimum monthly payment is usually lowered and interest charges are frozen. Many creditors will also forgive part of the debt you owe them, further helping you to become debt free.
Second, your assets (home, car, wages) are protected, so creditors won’t be able to go after them or garnish your wages.
Third, once the proposal is in place, collection agencies will no longer be allowed to contact you. Those of you who have been harassed by these calls know what a strain they can be.
The first is that they only affect unsecured debt, so if your mortgage or car payments are part of the problem, a consumer proposal won’t be able to help.
Consumer proposals are also matters of public record (similar to bankruptcy), and are actually handled by the same court.
Trustees who handle your case are obligated to pay your creditors as much as you can afford, and since their first priority is your creditors, you may end up disagreeing on what ‘can afford’ means.
And of course, a consumer proposal negatively affects your credit score, although not always as severely as bankruptcy. You’ll get an R7 rating on your credit report, and your ability to borrow or finance anything will most likely be affected for at LEAST 3 years.
As always you should speak to a qualified debt counsellor to identify the best option for your specific situation.
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