When in debt so far that you believe there’s no end in sight, you may believe that the only option is filing for bankruptcy. It gives you a clean slate, erasing all debts owed and provides a second chance to get back on track and start again, right? If it come down to it, that is an option, but there are many downsides to bankruptcy that outweigh the clean slate, and that is why you want to ensure there is absolutely no other option for debt relief before filing bankruptcy. When bankruptcy seems to be the only option left, many people find consumer proposal is an alternative for debt relief in Canada
Basics of Consumer Proposal
In Canada, the consumer proposal program is governed by the Bankruptcy and Insolvency Act of 1985. Basically, the consumer proposal enables individuals to settle debts owed to creditors similar to debt settlement to pay less than owed. Unlike bankruptcy, you will have to pay creditors something, but the majority of debts are forgiven. For an individual in Canada to file for a consumer proposal they must have over $1,000 in unsecured debt, but less than $250,000 for individuals, and a maximum of $500,000 in debt for married couples.
Consumer proposals are filed like filing bankruptcy. You just contact the licensed bankruptcy trustee of your choosing to start on the paperwork. After filing the consumer proposal, all interest will stop accumulating on debts until the proposal is approved or rejected. Although, rejection rates are low when you and the trustee have created a suitable proposal.
Consumer Proposal and Creditors
Consumer proposals are legally binding document obligating all creditors to the terms if the creditor holding the majority of total debt agrees to the terms. The question is, will creditors accept the consumer proposal?
The answer depends on the creditor, because the number of individual creditors rejecting a proposal is not important. You should look at your total debt, and target a proposal towards the creditors who have the 51% or more of your debt. The reason is, even if 11 creditors that hold 49% or less of debt reject a proposal, they are required to agree to the terms if the creditors holding 51% or more agree to your terms. You want to write a proposal making the majority debt holders happy, the rest will follow.
Advantages and Disadvantages of Consumer Proposal
There are many advantages to a consumer proposal, compared to bankruptcy in Canada.
- Interest is frozen on all debts, and the minimum monthly payment is typically lower. Furthermore, most creditors will forgive a portion of total debt owed, which reduces the monthly payment or shortens the repayment period.
- It protects your major assets, such as a car, home or wages. This means creditors cannot garnish checks or go after assets.
- When approved, collection companies are not allowed to continue contacting you. A major benefit for those being harassed by collection agencies.
However, consumer proposal’s have some major disadvantages when compared to other options, such as debt consolidation or debt settlement.
- It only helps with unsecured debt. If you’re having issues with a car payment or mortgage, the consumer proposal will not help.
- Consumer proposals are public record, like with bankruptcy. Being handled by the same court.
- The trustee has the creditors best interest in mind, being obligated to ensure they are paid the most you can afford. This can lead to disagreements on what is “affordable”.
- Although not as negative as bankruptcy, it has a negative impact on your credit score. It will show R7 rating on the credit report, and lowers your chances of being approved for anything based on your credit for at least 3 years, and possibly longer.
It is always recommended that you discuss your situation with a qualified debt counsellor, they will be able to help determine the best option for your unique situation.
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