Is A Consumer Proposal Worth It?

Alternatives to Consumer Proposals

Is a consumer proposal worth it? To be more specific, how will it impact –

• • Your credit
  • Your income
  • Your assets

in contrast with other alternatives such as –

• • Filing for personal bankruptcy
  • Filing a debt management plan with an accredited credit counselling agency?

Consumer Proposal Versus Bankruptcy

Effect On Assets

Unlike filing for bankruptcy, a consumer proposal won’t affect your assets. So if you have assets you wish to protect such as a motor vehicle, real estate or financial assets, a consumer proposal may be an ideal way for you to manage your debts.

Moreover, if choose to file for bankruptcy and you receive a windfall such as an inheritance or lottery winnings, you will be obliged to notify your Trustee of this development. Windfalls such as these are called “after-acquired property”. As such, your Trustee shall be required to intercept this windfall for the benefit of your creditors in your bankruptcy proceedings.

In contrast, you wouldn’t lose this windfall if you choose to file a proposal – since assets aren’t affected, you keep all proceeds from any such windfall.

Effect On Income

Once a proposal is approved by your creditors, they are bound by its terms and so are you. For example, if the terms of your proposal called for 60 payments of $250 per month, that’s all you’re obliged to pay, irrespective of any changes in your income.

Continuing our example, if you earn more income during your proposal or receive an employment bonus, your payment obligation doesn’t change – you’re only obliged to pay $250 per month for 60 months.

In contrast, if choose to file a bankruptcy, any changes in your income will impact the amount you have to pay to your Trustee in your bankruptcy proceedings. The amount you have to pay based on changes in your income is called surplus income, which we discuss in more detail here. In short, the more you earn during your bankruptcy, the more you’ll have to pay.

Effect On Credit

If you file for bankruptcy, a record of it will stay on your credit file for 7 years. If you are filing a subsequent bankruptcy (i.e., you’re filing for a second, third or fourth time), a record of bankruptcy will stay on your credit file for 14 years from the date of your latest bankruptcy filing.

In contrast, a consumer proposal will stay on your credit file for the length of time it takes you to pay it off plus 3 years after the date of full payment. In other words, the faster you pay off your proposal, the faster your proposal filing gets deleted from your credit file.

For example, suppose you file a proposal with terms of $250 per month for 60 months (i.e., $15,000 paid monthly over 5 years) and it’s accepted by your creditors. One year later, you get a higher paying job with a huge signing bonus.

With your good fortune, you tell your Trustee that you’ll be able to pay off the balance of your $15,000 proposal immediately. So in this example, you’ll have paid off your proposal in 12 months rather than 60 months. Therefore, your proposal filing will fall off your credit file 4 years after you filed it – i.e., the 12 months it took you to pay off your proposal in full plus 3 years after the payout date.

But that’s not all – once your proposal is accepted by your creditors, you can obtain new credit and and start rebuilding it as soon as your proposal has been accepted by your creditors, which is usually 45 days after the filing date. In contrast, you won’t be able to obtain credit in a bankruptcy until you’ve been discharged, which can take anywhere between 9 months to 36 months. And the time it will take you to obtain your discharge depends on whether: (i) you’re filing bankruptcy for the first or subsequent time; and (ii) whether you have an obligation to pay surplus income (as discussed in the preceding section).

As you can see, a consumer proposal offers much more flexibility than a bankruptcy in getting your credit back into good standing.

Consumer Proposal Versus Credit Counselling

An accredited credit counselling agency offers a service called a Debt Management Plan (“DMP”). A DMP will allow you to pay off all your debts in their entirety over an extended period of time – usually up to 60 months. Moreover, a credit counselor may be able to help you negotiate a reduction in the interest rate on your debts. Under a DMP, you make the monthly payments to the agency which it then distributes to your creditors.

Credit counselling agencies are essentially collection agencies in everything but name, and hence are paid by your creditors. They are generally paid about 10 percent of the payments they collect from you.

Effect On Assets

Like a consumer proposal, a DMP won’t affect your assets.

Effect On Income

Like a consumer proposal, once your creditors agree to a DMP, they will be bound by its terms. However, unlike a proposal:

• • If any one of your creditors does not agree to the DMP, they don’t have to participate and will initiate or continue legal proceedings to recover their debt – including a wage garnishment.
  • In contrast, if your proposal is approved by a majority of your creditors, then the minority of creditors which didn’t approve it will still be bound by its terms. We provide an example of this scenario using the Royal Bank of Canada, as it frequently votes against proposals when it’s a creditor.
  • In addition, a DMP will require you to pay your debts in full (i.e., 100 cents on the dollar). In contrast, a proposal will allow you to settle your debts – usually for much less than what you owe your creditors (e.g., 30 – 50 cents on the dollar). Therefore, DMP payments will take up a larger portion of your income than consumer proposal payments.

Effect On Credit

A DMP will stay on your credit file for the time it takes you to pay it in full plus 2 years after full payment. And as we discussed above, a proposal will stay on your credit file for the time it takes you to pay it in full, plus 3 years after full payment.

Although a DMP will affect your credit for 1 year less than a consumer proposal, you must weigh this against:

1. 1. The savings you incur by settling through a proposal versus paying your creditors back in full through a DMP; and
   2. The risk that not all your creditors will agree to the DMP versus the certainty that your creditors will be bound by your proposal so long as the majority of creditors vote in favour of it.

Conclusion – Is A Consumer Proposal Worth It?

So, is a consumer proposal worth it? If you want:

1. 1. Certainty that your creditors will be bound by your proposal so long as the majority of creditors vote in favour of it.
   2. Certainty that your monthly payments will be fixed irrespective of any changes in your income.
   3. The ability to keep your assets, including any financial windfall you may receive after your proposal has been approved by your creditors.
   4. The ability to rebuild your credit faster, starting as soon as your proposal is approved by your creditors.

Then a consumer proposal is definitely worth it!

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