Filing Consumer Proposal for Debt Consolidation

If you are too deep in debt and cannot qualify for a debt consolidation loan or the debt management program, filing a consumer proposal is the legal process that can help you. The Consumer Proposal is only administered by Bankruptcy Trustees. When filing the Consumer Proposal, the Bankruptcy Trustee will be submitting a ‘proposal’ to creditors asking that they accept less payment than what is owed. For this option to proceed, at least half of the creditors to whom the debt is owned must accept the proposal. If they don’t, you need an alternative debt settlement option such as filing for bankruptcy.

Filing for the Consumer Proposal is a last option before considering bankruptcy. The program has to be taken seriously for the following reasons:

  • You will still be required to pay off the debt in bankruptcy depending on your income. You also have to pay administrative charges.
  • Bankruptcy filing will give you an R9 record on credit rating. The record remains with you for 6 years after the first-time bankruptcy discharge.
  • You lose non-exempt assets like RESPs as well as contributions made to the RRSP in the last one year. You also lose your home equity for up to $10,000. You will also lose tax refunds for the year that you filed bankruptcy and the previous year’s refunds that are outstanding. You will lose your HST cheque too.
  • You have duties to perform such as making monthly payments, attending credit counseling and reporting your income. Failing to perform these duties will keep you from being discharged.

Once your creditors accept the proposal, you will be given 5 years to repay the agreed amount. The proposal will collapse if you are unable to meet your monthly repayments after which you need to apply for another proposal.

Advantages

  • No interest is paid
  • The majority of wage garnishments will end immediately
  • You will not be harassed by collection agencies and creditors since you are not dealing with them directly.
  • You pay significantly less than what you owe
  • The negative impact on your credit rating will not be as significant as that of filing for bankruptcy. Consumer Proposals lead to the R9 rating whereas bankruptcy leads to R9 rating. R9 rating is the lowest credit rating possible.
  • You get to avoid filing bankruptcy
  • Payments will not increase with an increase in your income.

Disadvantages

  • You are at the mercy of your creditors. If at least half of them don’t accept the proposal, you will have to file for bankruptcy.
  • Consumer Proposal is a legal process under the Bankruptcy & Insolvency Act. Once it is initiated you cannot go back.
  • The action will be reported on your credit report. Your credit rating will be impacted negatively for the duration of the program. Considering the program takes 4 to 5 years, you will have a bad credit rating for 7 to 8 years.
  • You pay the initial and ongoing fees over and above the monthly payments
  • The recidivism rate is more than 20%. This means 1 in every 5 people have to repeat the program in the future.

To qualify for the Consumer Proposal, your total debt including your home mortgage must be more than $5,000 but less than $250,000. You also need to have a good job, your current situation must be that you cannot be able to repay creditors in full plus interest and you must not be able to afford a debt consolidation loan.