Debt can quickly become overwhelming, especially when high interest rates and multiple bills make repayment seem impossible. While bankruptcy is often viewed as the primary debt relief option, there is another powerful solution that many people may not know about: consumer proposals. Backed by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), which promotes a fair and transparent insolvency system in Canada, consumer proposals offer a structured way to manage debt without the severe impact on assets or credit that bankruptcy can entail.
In this blog, we’ll explore what a consumer proposal is, the advantages it provides over bankruptcy, who qualifies for this option, and how a Licensed Insolvency Trustee (LIT) can help you decide if it’s the right choice for you.
What is a Consumer Proposal?
A consumer proposal is a legally binding agreement that allows individuals to settle their debts by making manageable monthly payments to creditors. The proposal consolidates debt into a single, interest-free payment plan that is often less than the original debt amount. One of the most appealing features of a consumer proposal is that it allows individuals to retain ownership of assets, such as a home or car, that might otherwise be impacted in a bankruptcy.
Administered by a Licensed Insolvency Trustee, a consumer proposal is designed to provide relief to those who cannot keep up with their debt payments but want to avoid bankruptcy. Once filed, the proposal is presented to creditors, who can choose to accept or reject it. If the majority of creditors approve, all creditors are bound by its terms, and the individual begins making the agreed-upon payments.
To learn about consumer proposals as a bankruptcy alternative, watch this video with LIT Braden Burritt. Then, read on to discover how this option may benefit you.
Advantages of a Consumer Proposal
Consumer proposals offer a range of advantages that make them an appealing alternative to bankruptcy. Here are some of the key benefits:
1. Asset Protection
Unlike bankruptcy, a consumer proposal allows individuals to keep assets that might otherwise be at risk. This includes high-value items such as homes, vehicles, and other personal belongings. This aspect of a consumer proposal is particularly attractive to those who want to protect their property while reducing their debt.
2. Reduced Debt Load
A consumer proposal typically allows individuals to settle their debt for less than the full amount owed. Licensed Insolvency Trustees work with creditors to negotiate a fair and affordable repayment plan, allowing debtors to reduce their overall debt and make manageable monthly payments.
3. Interest-Free Payments
Once a consumer proposal is accepted, creditors are no longer allowed to charge interest on the remaining balance. This feature can significantly reduce the financial burden of repaying debt, as high interest rates are often a primary factor that contributes to unmanageable debt levels.
4. Less Impact on Credit Score
While a consumer proposal does affect credit, its impact is typically less severe than that of a bankruptcy. Filing for bankruptcy can remain on an individual’s credit report for up to seven years, whereas a consumer proposal generally has a shorter impact. Once the proposal is completed, individuals can begin rebuilding their credit sooner.
5. Legal Protection from Creditors
Filing a consumer proposal provides legal protection from creditors. This means that creditors are no longer permitted to contact the individual or take legal action to recover their debt. This protection can provide relief from harassing calls and the stress of impending legal action.
Who is Eligible for a Consumer Proposal?
A consumer proposal is available to individuals with unsecured debt up to $250,000, excluding the mortgage on their principal residence. This option is suited to those who are unable to manage their debt but have enough income to make monthly payments over a five-year period.
To qualify for a consumer proposal, individuals must be:
- Insolvent: Unable to pay their debts as they come due.
- Financially Capable of Repayment: Able to afford monthly payments under the terms of the proposal.
The proposal process is initiated by a Licensed Insolvency Trustee, who will assess the individual’s financial situation, determine eligibility, and file the proposal with the Office of the Superintendent of Bankruptcy (OSB).
The Consumer Proposal Process: Step-by-Step
Here is a look at the consumer proposal process and the steps involved:
1. Meeting with a Licensed Insolvency Trustee
The process begins with a consultation with a Licensed Insolvency Trustee, who will review the individual’s debt, assets, and income. The trustee will discuss various debt relief options, including consumer proposals and bankruptcy, to determine the most appropriate solution.
2. Developing the Proposal
If a consumer proposal is deemed the best option, the trustee will work with the individual to develop a proposal that includes the terms of repayment. This proposal outlines the monthly payment amount, repayment period (up to five years), and any other conditions.
3. Submitting the Proposal to Creditors
Once the proposal is prepared, the trustee will submit it to creditors for approval. Creditors have 45 days to vote on the proposal. If the majority of creditors (by dollar value of the debt) approve, the proposal is accepted, and all creditors are bound by its terms.
4. Making Monthly Payments
After the proposal is accepted, the individual begins making monthly payments to the Licensed Insolvency Trustee, who distributes the funds to creditors. The payments are interest-free, which makes it easier for individuals to keep up with their obligations.
5. Completing Financial Counseling Sessions
Part of the consumer proposal process includes attending two financial counseling sessions. These sessions are designed to provide individuals with the tools they need to manage finances effectively, avoid future debt problems, and rebuild credit.
6. Discharge from Debt
Once all payments are completed and counseling sessions are attended, the individual is discharged from the debts covered by the consumer proposal. This discharge marks the completion of the process, allowing the individual to move forward without the burden of past debt.
The Role of a Licensed Insolvency Trustee
Licensed Insolvency Trustees are the only professionals authorized to administer consumer proposals in Canada. Their role goes beyond simply filing the paperwork; they act as impartial advisors who ensure the proposal process is fair and compliant with federal regulations.
How an LIT Helps Individuals Through a Consumer Proposal:
- Evaluating Financial Situations: An LIT will conduct an in-depth review of the individual’s financial situation to determine if a consumer proposal is a viable option.
- Developing the Proposal: The LIT works with the individual to develop a proposal that is both affordable and likely to be accepted by creditors.
- Negotiating with Creditors: The LIT presents the proposal to creditors, negotiates terms, and ensures the proposal meets all legal requirements.
- Providing Legal Protection: Filing a consumer proposal through an LIT provides legal protection from creditors, preventing them from pursuing collection efforts or legal action.
- Offering Financial Counseling: Licensed Insolvency Trustees provide mandatory financial counseling to help individuals manage their finances more effectively and avoid future debt issues.
Licensed Insolvency Trustees are regulated by the federal government, ensuring that they maintain high standards of professionalism, transparency, and ethical conduct. Working with an LIT provides individuals with peace of mind, knowing that they are receiving unbiased advice from a qualified professional.
Is a Consumer Proposal Right for You?
A consumer proposal is a powerful alternative to bankruptcy for those struggling with unmanageable debt. It provides debt relief without the loss of assets, legal protection from creditors, and a structured payment plan that can make debt more manageable. However, it’s essential to consult with a Licensed Insolvency Trustee to determine if this option aligns with your financial situation and goals.
If you’re facing financial challenges and are unsure which debt relief option is best, consider scheduling a consultation with an LIT. They can guide you through the pros and cons of consumer proposals, bankruptcies, and other alternatives, helping you make an informed decision.
The Path to Financial Recovery
Debt can be overwhelming, but solutions like consumer proposals provide a structured, less impactful way to regain control of your finances. Licensed Insolvency Trustees are here to help Canadians navigate their debt options, offering compassionate support and professional guidance every step of the way.
If you think a consumer proposal might be the right choice for you, reach out to a Licensed Insolvency Trustee today. CAIRP’s “Find a CIRP LIT” tool can connect you with a trusted professional in your area who can help you take the first steps toward financial freedom.
Remember, you don’t have to face debt alone. Explore your options, seek professional guidance, and take control of your financial future with the support of a Licensed Insolvency Trustee.