What is a Consumer Proposal in Canada? An Introduction
A proposal is an ideal alternative to personal bankruptcy. It is a legal settlement with your creditors under the Bankruptcy and Insolvency Act filed with the Office of the Superintendent of Bankruptcy with the assistance of a Licensed Insolvency Trustee.
A proposal is a great alternative for those who are in financial difficulty, but who don’t wish to file for personal bankruptcy. Unlike a bankruptcy, filing a proposal won’t affect your assets and you get the benefit of bankruptcy protection from your creditors once a proposal is filed.
In fact, most individuals in financial difficulty today are resorting to filing a proposal rather than filing for personal bankruptcy because a proposal provides a debtor with far more flexibility in dealing with his debts than a bankruptcy.
You can also rebuild your credit faster – in fact, you can start rebuilding your credit right after your proposal has been approved by your creditors by getting a secured credit card.
When should I file a Consumer Proposal?
A proposal may be a viable solution for you if:
- You’re unable to repay all your debts in full.
- You’re unable to obtain a debt consolidation loan – this is usually the case if your credit score is too low or your debts are too high relative to your income
- Your debts don’t exceed $250,000 (not including your home mortgage).
- You have steady employment and can afford to make payments towards your proposal on a regular basis (usually monthly).
- You don’t want to go bankrupt, either because you have assets that you wish to protect or you simply have a negative connotation with the concept of personal bankruptcy.
How long does a Consumer Proposal last for?
Generally speaking, once your proposal has been approved by your creditors, you have 60 months to pay it off. The proposal is flexible enough so that payments can be made monthly, quarterly, semi-annually or by way of a lump sum payment within that 60 month period.
What type of debts can I include in a Consumer Proposal?
In addition to debt such as credit cards, loans and the like, a proposal can also deal with tax debt, including income tax debt and business-related tax debts such as director liability for unremitted sales tax and payroll taxes. Essentially, all debts can be dealt with through a proposal except for secured debts such as car loans and mortgages and undischargeable debts.
Finding a reputable Licensed Insolvency Trustee
You should be wary of working with a Trustee that engages in questionable business practices. The most common business practice that is bringing disrepute to the profession are Trustees who work in conjunction with fee-charging third parties who usually refer to themselves as “Debt Consultants”.
The Office of the Superintendent of Bankruptcy (“OSB”) is a government body that oversees the insolvency process in Canada and licenses Trustees. In April 2016, it initiated a review of the business practices of certain Trustees throughout Canada and completed its review in April 2017.
The purpose of the OSB’s review was to identify potential problems associated with the integrity of the consumer insolvency process, particularly in cases where Trustees have entered into business relationships with Debt Consultants.
In conducting this review, the OSB conducted across Canada interviews with clients of certain Trustees. The OSB also reviewed the business practises of various Trustees throughout Canada who demonstrated frequent and sustained relationships with Debt Consultants.
The OSB’s observations after completing its review are as follows:
- Debtors served by Trustees who received referrals from Debt Consultants ended up paying thousands of dollars more for the administration of their proposals than debtors who found a Trustee directly.
- Typically, Debt Consultants required a debtor to sign a fee agreement for consulting services before being introduced to a “selected Licensed Insolvency Trustee.” Debtors typically understood the role of the Trustee as being limited to meeting with the debtor to “file” the proposal developed by the Debt Consultant.
- The amount of the consulting fee portion of the agreement between the debtor and the Debt Consultant averaged approximately $2,400 and reached as high as $4,200.
- Furthermore, the OSB’s review found that debtors were often also sold supplemental services through the Debt Consultant and charged additional ongoing fees during the life of their proposal, which further increased their costs. For example, Debt Consultants marketed loans to pay out proposals at high interest rates, new credit instruments at high interest rates, proposal insurance, “credit rebuilding” loans and financial literacy services. Such expenses amounted to thousands of dollars in additional costs during the life of the proposals reviewed.
- Thirteen Trustee firms, including one national-level firm, were found to have operated in a frequent and sustained relationship with the two large-volume Debt Consultant firms. More than 40 % of their proposal filings were sourced from these Debt Consultants.
- A debtor would typically meet with the Trustee only once, at a time arranged by the Debt Consultant, to sign proposal documents. Before that meeting, the Trustee relied on the Debt Consultant to carry out the legal obligations of the Trustee with respect to actually conducting the assessment and collecting the debtor’s financial information. In cases where the Trustee had a frequent relationship with the Debt consultant, all aspects of the insolvency process prior to filing the proposal were usually performed at the Debt Consultant’s office.
- Information by the Trustee to prepare the proposal documents was normally transmitted directly from the Debt Consultant to the Trustee shortly before the meeting at which the proposal documents were to be signed. Signing of proposal documents also took place in various informal locations in towns and cities where the Trustee did not have a registered office.
- Subsequent communications with the Debtor after the proposal was filed were almost exclusively performed by the Debt Consultant and not by the Trustee
Bankruptcy in Canada has created a directory of reputable Licensed Insolvency Trustee firms across Canada that do not engage in such practices. So if you want to work with a Trustee who will give you confidence and peace of mind that your proposal is being dealt with in a professional manner, contact one of those Trustees for an assessment of your financial situation.
Consumer Proposal in Canada – Frequently Asked Questions (FAQs)
Below is a list of the most commonly asked questions about the proposal process. We’ve attempted to answer these questions in the most thorough but straightforward manner possible.
- What is consumer proposal in Canada?
- How do I start the consumer proposal process in Canada?
- Will filing a consumer proposal stop wage garnishments and collection agencies?
- What happens during the consumer proposal process?
- How are fees paid in a consumer proposal?
- How long does my consumer proposal last?
- What happens to my assets if I file a consumer proposal?
- What happens to my income tax refund?
- After a consumer proposal
- Consumer proposal credit rating
- Consumer proposal pros and cons
- Case Study: Submitting a Consumer Proposal to Your Creditors