Area of Law: Credit, Debt and Bankruptcy
Answer # 0274
Consumer proposalsRegion: Ontario Answer # 0274
An alternative to filing for personal bankruptcy, with less serious consequences that you may want to consider is a consumer proposal.
What is a consumer proposal?
A consumer proposal is available under the Bankruptcy and Insolvency Act (BIA) to individuals whose total debts do not exceed $250,000, not including debts secured by their principal residence. This is a legal process that allows you to make an offer to your creditors to change your payment schedule, or propose a compromise regarding the payment of your debts. For example, you may offer to pay less each month over a longer period. Or, you may offer to pay only a percentage of what you actually owe. In some cases, the failure to attempt a proposal instead of choosing bankruptcy, can be held against you when you apply to be discharged from bankruptcy.
For total debts which exceed $250,000 (excluding the mortgage on their main residence), debtors will need to make a Division 1 Proposal.
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What are the terms of a consumer proposal?
- must include an estimate of what the creditors would receive if you filed for bankruptcy,
- must offer creditors at least the same amount or better, and
- must not extend beyond a five-year period.
If your creditors accept your proposal, you will be able to manage your financial situation without filing for bankruptcy.
How to make a consumer proposal
There are a number of steps that take place when filing a consumer proposal with your creditors.
1. Meet with an LIT: You must first find and meet with a Licensed Insolvency Trustee (LIT) who will discuss your situation and work with you to develop a consumer proposal. You must provide your LIT with a complete list of all your assets (property) as well as your debts.
2. File the proposal: Your LIT will file the proposal with the Office of the Superintendent of Bankruptcy (OSB). Once your proposal is filed, you no longer make any payments to your creditors. As well, the creditors must stop any actions they have taken against you to collect the debt, such as garnishing your wages or any lawsuits.
3. Submit proposal to creditors: Your LIT will also submit your proposal to your creditors who have 45 days to either accept or reject it. They may also request a meeting.
4. Meeting of creditors – if applicable: If one or more of your creditors is owed at least 25% of the total value of the debt owed, they may request that a meeting take place. The terms of the meeting are as follows:
- it must be requested within 45 days of the filing of the proposal (the OSB can also request a meeting of creditors at any time within these 45 days),
- it must be held within 21 days after being called,
- the creditors must vote to either accept or refuse the proposal at the meeting, and
- the proposal will be considered to have been accepted by the creditors if no meeting is requested during the 45 days from the date the proposal was filed.
If your proposal is accepted
If your creditors accept your consumer proposal you then have a number of conditions you must meet, including:
- make either a lump-sum or monthly payment to the LIT who will distribute the money to your creditors,
- attend two financial counselling sessions with the LIT to discuss financial management and budgeting, and
- follow any other conditions set out in the proposal.
If all conditions are met, you will be legally released from your debts. If you do not meet the terms of your proposal, it can be deemed (considered) invalid and your creditors can take action against you to collect the money they are owed.
If your proposal is rejected
If your proposal is rejected, you are not automatically forced into bankruptcy. However, your creditors can continue or begin legal action against you.
If your proposal is rejected you will have to consider other options, such as:
- making changes to your proposal and resubmitting it, or
- filing for bankruptcy.
What does filing a consumer proposal cost?
There are no “up front” or “hidden” fees in a consumer proposal. Your LIT receives a fee of approximately 20% of the money that is paid to the creditors, but that fee comes out of your monthly payment to the creditor, so it’s the creditors that are paying for the cost of the consumer proposal.
How does filing a consumer proposal affect your credit score?
Generally, a person who submits a consumer proposal will be assigned either an R7 or an R9, which are the two lowest possible credit ratings. This will have a very negative effect on your credit score. With both Equifax and Transunion, your consumer proposal stays on your credit report for an additional three years after you complete the terms of your proposal. For example, if it takes you three years to pay your debts under the proposal, it stays on your report for a total of 6 years.
When you complete the terms of your proposal and you have finished making your payments, you will receive a certificate of full performance. Send a copy of it to the major credit-reporting agencies immediately to ensure that your credit record is updated.
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