What is a Consumer Proposal?

What is a Consumer Proposal?

Understanding what is a consumer proposal might be your ticket out of your financial dilemma. This debt agreement is a favourite for many Canadians as it requires minimal qualifications and still does its job.

A consumer proposal is an agreement that debtors make with the aid of a bankruptcy trustee to make it easier to repay creditors. This agreement extends the debt repayment period and allows debtors to avoid filing for bankruptcy.

The maximum period for this proposal is five years, and the debts paid back during this period are interest-free.

Read this article and understand what a consumer proposal is and what happens when you file one. Learn the benefits and drawbacks of filing this proposal and how to file one. You’ll also discover other alternatives to repaying your debts if you decide not to file this debt agreement.

What is a consumer proposal?

This is an agreement that Canadian debtors make to reduce the amount they’ll repay their creditors. This proposal also helps increase the loan repayment period governed by Canada’s Bankruptcy and Insolvency Act.

Many Canadians file this proposal as an alternative to declaring bankruptcy. Although it frees people from paying back their debt, bankruptcy can damage a credit score.

Any future business that such an individual opens will have a permanent stigma attached. Banks and other credit institutions will also find it challenging to release any loans somehow with such a record.

When debtors request this proposal, creditors get the short end of the stick. Hence, you might wonder, ‘Why should a creditor agree to this offer?’ Many creditors agree because it’s far better than the debtor declaring bankruptcy, which absolves them of all repayments.

What happens when you file this proposal?

After learning ‘What is a consumer proposal?’ it’s essential to understand what happens when you file this proposal. Filing this proposal can only occur through an insolvency trustee or a bankruptcy trustee—a government-licensed entity.

The bankruptcy trustee will file this debt agreement with the office of the Superintendent of Bankruptcy. When this successfully happens, you’re freed from making further payments to your creditor.

The insolvency trustee will then submit a similar proposal to your creditors. They’ll be given 45 days to accept or reject this proposal. During this period, the creditors can call for a ‘meeting of creditors’ or simply deny or accept the proposal.

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Suppose there is no meeting of creditors or acceptance or rejection of the proposal within this period. In that case, it’s assumed that creditors accepted it.

When this happens, you (the debtor) will have to start making the periodic payments or that lump payment to the insolvency trustee. During the period of this loan agreement, you’ll have to attend at least two obligatory financial counselling sessions.

Remember that a rejected proposal still has a chance to be renewed. It may mean that your creditors are not satisfied with your outlined terms. So, you can take back the proposal and modify it once more.

If you’re successful in paying back your debt under this agreement, you’ll receive a ‘Certificate of full performance.’

This certificate can be sent to a credit reporting agency when you’re done with your debts so they can update your credit score. A certificate of full performance also increases the chances of qualifying for another loan after paying back this one.

What Is A Consumer Proposal - comparewise

What types of debts are involved in this proposal?

One important thing in understanding a consumer proposal is the debts that can be cleared with it. This proposal covers unsecured debts, which are loans without an asset as security.

  • Income tax debt: This is the cash that Canadians owe on their income tax.
  • Credit card debt: This is the debt people owe on their credit cards, like Visa, Mastercard, Amex, etc.
  • Payday loans: These are loans you receive from a payday lender, with the condition of paying back when you receive your pay.
  • Student loans: If you’re filing this proposal seven or more years after graduating from university, your student debts will be extinguished. Otherwise, only a portion of your student debts will be discharged by this proposal.
  • Personal loans include renovation loans, lines of credit, and consolidation loans.

Pros of filing this proposal

Apart from escaping the need to file for bankruptcy, opting out of this agreement comes with many other advantages, such as:

Debt Reduction

With this debt agreement, Canadians can reduce the amount they’ll eventually repay. If the insolvency trustees are good enough, debtors only pay back a small percentage of the original debt.

Immediate Protection from Unsecured Debts

With this proposal, Canadians gain immediate protection from all their unsecured debts. This means that other creditors will stay away from the debtor until after the period of this agreement.

Debt Consolidation

This debt agreement can help your debt consolidation plans if you don’t have a stable income to back it up.

Temporarily Stops Student Loan Repayments

Canadians get a reprieve from paying back student loans when they create this debt agreement. This will allow them to pay their current debts before paying back student loans.

Substitute for Debt Management Programs

People not qualifying for Canadian debt management programs can consider this debt agreement, as it offers similar benefits.

Clear Rules with No Surprises

Since this debt agreement is a formal legal procedure, no one can violate it as they wish. This means that debtors won’t be receiving any unwanted surprises with this debt agreement in place.

Retained Ownership of Assets

When you choose this proposal, there’s no certainty that you’ll be surrendering ownership of your assets. This happens only when the creditor is adamant about getting collateral.

Cons of filing this proposal

There are many reasons to choose this proposal, and there are equally many reasons why you might be discouraged, and they include:

Court Approval Matters

This proposal only comes into effect if a court approves it. So, if you don’t get court approval for it, your qualifications won’t matter.

It Impacts Your Credit Score

Bankruptcy impacts your credit score heavily when you file for it, and this proposal is the same. So, while it’s not bankruptcy, it’ll still lower your credit score.

It’s a Public Matter

When Canadians file for this proposal, it’s included in a public searchable database and made a permanent public record. This can be bad when you want to hide the fact that you’ve requested this debt agreement in the past.

Costs for Filing are High

Filing for this debt agreement is a costly undertaking, as you’ll pay both your creditor and the bankruptcy trustee.

Creditors Might Not Accept This Proposal

One of the criteria for this proposal to come into effect is when your creditor accepts it. Some creditors can take advantage of this criteria to demand higher pay from the debtor if they agree to this proposal.

Filing Takes Time

Like all legal processes, filing this proposal can be a time-consuming process. So, a little patience is necessary.

Future Employment Opportunities are at Risk

The stigma of filing for bankruptcy equates to closed doors in many professions and for many loans. This proposal is also similar in that regard, as some employers won’t accept employees who have requested this debt agreement in the past.

The Risk of Bankruptcy Still Exists

You need to complete this proposal to clear you of the risk of bankruptcy. If you miss two payments under this new debt agreement, you’ll still be required to file for bankruptcy.

High-Interest Rates on Loans

During the period of this proposal, it’ll be challenging to qualify for loans. Even when you do, the interest rates on those loans will be higher than usual.

How to qualify for a consumer proposal

Now that you’ve understood what is a consumer proposal, it’s time to understand the qualifications to get one. The section below will show you all the requirements to qualify for this proposal.

  • Own a debt that’s greater than the value of all your assets.
  • You need to be a Canadian resident or citizen with a home in the country.
  • Your unsecured debts shouldn’t be more than $250,000 but must be bigger than $1,000.
  • You should only be capable of paying back a portion of your debts and not the whole thing.

Alternatives to filing this proposal

Even though the question of what is a consumer proposal has been answered, you still have other options. While this proposal offers a manageable way of paying back debts, other options could work better for your situation. Some of the alternatives to this proposal include:

Consolidation Loan

This is a loan that Canadians can use to compress many monthly payments into one monthly payment. You’ll get a consolidation loan from a bank, finance company, or credit union.

For this offer to work, the lender of the loan has to agree to it. They’ll also need to review the debtor’s credit profile before agreeing. This loan usually requires collateral from the debtor and comes with high-interest rates.

Orderly Payment of Debts

Only Canadians from Nova Scotia, Alberta, and Saskatchewan can use this offer. It involves a debtor requesting a court to compress unsecured debt payments into one monthly payment.

Canadians who decide on this monthly payment have a three-year period (at maximum) to repay their loan and a 5% interest rate.

Bankruptcy

You can fall back on this option when the loan repayments get overwhelming.

When you declare bankruptcy, you get immediate relief from most unsecured debts at the cost of your credit score and future borrowing capability.

This means you no longer have to pay your debts, as creditors would be forced to forgive you. However, you won’t find getting more loans or anything similar easy, as your credit score would have hit rock bottom.

Debt Management Plan

Suppose you want to clear things up between yourself and your creditor without involving any legal proceedings. In that case, this is your best option.

The debt management plan is usually overseen by a non-profit credit counselling organization. This organization will work with both parties to offer a more affordable debt repayment plan.

This debt repayment option consolidates all the unsecured debts into one package. This singular payment is then made to the credit counselling organization, which then releases the payment to the creditor.

Is it possible to get other loans while under this debt proposal?

Yes, getting other loans while paying back your debts is possible under this proposal. However, the reality is that most lenders won’t offer loans to anyone who’s still paying back their debts under this proposal.

Nonetheless, many lenders consider Canadians who can repay their debts under this proposal. Of course, the interest for the loans such debtors will receive will be higher than usual.

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Final thoughts

Reading through this article would have given you a suitable answer to the question, ‘What is a consumer proposal?’ In this article, you also saw that it’s the best option for Canadians who owe less than $250,000.

It allows debtors to keep their assets and repay loans without worrying about interest. While filing this proposal is considered a better option than declaring bankruptcy, that doesn’t mean it’s free.

It’s just that the amount that a debtor pays using this proposal is less than what they would have with other alternatives.

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FAQs about what is a consumer proposal

What is a consumer proposal calculator?

A consumer proposal calculator is a tool Canadians use to determine their monthly payments if they choose this proposal. This tool can also determine the payments for debt consolidation plans, bankruptcy, and other debt repayment options. This tool lets Canadians compare their debt relief options before choosing one.

What happens when you miss your monthly payments after choosing this proposal?

Canadians who miss three monthly payments will have their proposal annulled. At this point, their creditors can choose to take them to court or decide to seize their assets to repay the loan. Nonetheless, this annulled proposal can still be revived. The debtor only needs to satisfy certain conditions for it to happen.

Can joint debts be handled under this debt agreement?

Yes, this proposal can take care of joint debts as long as all debtors file the proposal. Anyone who refuses to file this agreement is left responsible for handling the debt. Of course, those individuals won't have their credit scores lowered more quickly by this debt agreement.

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November 29, 2023
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