Is a consumer proposal a good idea?
You’re probably reading this because you’ve typed in the phrase “consumer proposal Ontario” in Google’s search engine.
If you’re financially distressed, you may considered a number of options to deal with your debt including a debt consolidation loan or credit counselling. You may have even considered filing for personal bankruptcy.
A debt consolidation loan may seem like a good idea, however, you may not qualify for a loan if you have a low credit score.
If debt consolidation loan isn’t viable, you can consult with an accredited credit counsellor who will put you on a Debt Management Plan (DMP). A DMP will allow you to pay off your debts over a longer period of time – usually 60 months. The counselor may also be able to negotiate a reduction in the interest rate. Despite all these positives, a DMP will have a negative impact on your credit. Moreover, if you’re unable to pay off all your debts over a 60 month period, this won’t be a viable solution for you.
Filing for personal bankruptcy also has some major disadvantages:
- Upon filing bankruptcy, a record of your bankruptcy will stay on your credit report for 7 years.
- With certain exceptions, your assets become the property of the bankruptcy estate. This becomes a particularly important issue if you own a home with substantial equity.
- Although attitudes are changing, there is still a stigma attached to the concept of filing for personal bankruptcy.
Given the above points, it would be prudent to consider another alternative to deal with your debts. The best alternative is called a “consumer proposal” to creditors.
How does a consumer proposal work?
A consumer proposal is a formal repayment plan governed by the Bankruptcy and Insolvency Act. Assuming your debts do not exceed $250,000 (this threshold excludes debts secured by a residential property), the steps in filing a proposal in Ontario are as follows:
How to start the consumer proposal process
- You would seek the assistance of a Licensed Insolvency Trustee who will assess your eligibility to file a consumer proposal by reviewing the following factors:
- Your income and your contribution to the income of your household.
- The amount of debt you owe.
- Your assets.
- Whether you’ve previously been bankrupt.
Who qualifies for a consumer proposal?
- After reviewing your financial information during your consultation meeting, the Trustee will inform you if you qualify to file a proposal. You can file a proposal if you’re insolvent, which is a technical term meeting that total amount of your debts exceed the value of your assets and/or you’re unable to pay your debts as they become due.
- Once the Trustee has ascertained that you’re insolvent and qualify, he will work with you in drafting a consumer proposal to your creditors.
What does a consumer proposal look like?
- A consumer proposal is a brief document usually no more than two pages in length which offers a settlement to your unsecured creditors. The settlement is usually paid in monthly installment payments of up to 60 months. However, payments can also be made on a quarterly, semi-annual, or annual basis. You can even offer a proposal with one lump sum payment as a full and final settlement. The most appropriate payment method suggested by the Trustee will depend on the particulars of your situation.
- For example, self-employed professionals who work on a commission basis such as real estate agents have an unpredictable income stream. Some months can be very busy in which they earn significant commissions and other months can be quiet during which they earn nothing at all. The most appropriate proposal for a person in this situation would be a one in which payments are made on an annual basis. For example, for a real estate agent, a proposal can be drafted in which she undertakes to make 5 annual payments of $10,000 per year for a total settlement of $50,000.
- However, since most people are employed and receive a steady paycheque, the most common type of proposal is one in which a debtor undertakes to pay a fixed payment each month towards her proposal.
- Regardless of how a proposal is structured, all payments are made to the Trustee, who holds the money in trust for your creditors. It’s his responsibility to distribute the funds to your creditors on a semi-annual or annual basis.
How to file a consumer proposal
- After the proposal is drafted by the Trustee and then signed by you, an electronic copy of it is filed with the Office of the Superintendent of Bankruptcy (a division of the federal government that monitors insolvency proceedings in Canada). Upon filing the proposal with the OSB, your creditors are legally stopped from taking any action against you. This is called a “stay of proceedings”.
How a consumer proposal is approved by your creditors
- The proposal is sent to your creditors for their review. A document called a voting letter, which allows a creditor to indicate its vote, is also sent. Creditors are required to file with the Trustee a proof of claim and completed voting letter before their claim can be registered for voting on the proposal.
- At the end of the 45-day period after the proposal was filed with the OSB, the Trustee will compile and review the voting letters received. There are 3 possible scenarios:
Deemed Approval by Creditors
- If no voting letters were received, the creditors are “deemed” to have accepted the proposal.
- If those creditors voting “no” comprise less than 25% of the value of claims filed, the creditors are deemed to have accepted the consumer proposal.
Approval at Meeting of Creditors
If those creditors voting “no” comprise more than 25 percent of the value of claims filed, the Trustee is required to hold a meeting of creditors. Creditors will usually vote “no” because they want more money. Therefore, a meeting of creditors would be held to discuss what the debtor would have to offer in a consumer proposal before it would be accepted by the dissenting creditor(s).
Deemed Court Approval
Once your creditors have accepted your proposal, there is a 15-day waiting period that allows any interested parties (e.g., creditors, the Trustee, or the OSB) to request that the Bankruptcy Court review the . Once that 15-day period expires, the is deemed to be accepted by court.
Proposal Not Approved
If your proposal is not approved by the creditors and the court, you’d essentially in the same position he was prior to filing – at the mercy of your creditors. In that event, you may want to consider filing for bankruptcy.
Consumer Proposal Process In 5 Steps – Infographic
Here is a visual summary of the consumer proposal process. If you share it, please link back to our website at https://startingovertoronto.com/consumer-proposal/.
Our Promise To You
If you want to work with a Trustee who will give you confidence and peace of mind that your consumer proposal is being dealt with in a professional manner, look no further.
Contact Fong and Partners Inc., a member in good standing with the Better Business Bureau with an A+ Rating and one of the 3 Best Rated Trustees in the Greater Toronto Area.