Consumer Proposals - An Alternative to Bankruptcy

Simply put, a proposal to creditors is a formal settlement plan governed by the Canadian Bankruptcy and Insolvency Act. It is considered a settlement in that you are proposing to pay your debts over an extended period of time, often for less than 100 cents on the dollar.

This is an ideal alternative to filing personal bankruptcy if:

• You have significant assets you want to protect, such as a home or financial assets, that would otherwise be liquidated by a bankruptcy trustee if you filed personal bankruptcy; and
• You have sufficient cash left over after paying your monthly living expenses, to fund a proposal by making monthly payments to a bankruptcy trustee. The trustee holds the funds in trust for the benefit of your creditors and distributes the money to them. The trustee is paid a percentage of the funds held in trust as a fee for this service.

An ancient Chinese proverb states that “a picture is worth a thousand words”. Therefore, we’ll explain the consumer proposal process in a nutshell by presenting a visual overview of a typical proposal based on the following case:

Jill has $50,000 in credit card debt, and she has fallen behind on her minimum payments. She can no longer pay off her debts.

Jill makes a good income and her living expenses are reasonable. Here is Jill’s monthly budget:

With the assistance of a bankruptcy trustee, Jill puts together a consumer proposal in which she offers to pay to her creditors $36,000 over 36 months, or $1,000 per month x 36 months. As you can see from her budget, she can afford to make these monthly payments to the trustee. This proposal would provide Jill’s creditors with a return of 72% of what they’re owed ($36,000 / $50,000 = 72%), which both Jill and her trustee feel is a fair settlement.

You shall also note that Jill has no credit card payments in her budget. Upon filing her consumer proposal, she stops paying her creditors – they can only be paid through the proposal.

With her bankruptcy trustee’s assistance, Jill files her consumer proposal on 1 January 2008 with Industry Canada.