Consumer Proposal - A great way to avoid bankruptcy and settle your debts

Chris Welker explains how a consumer proposal is a great way to avoid bankruptcy and settle your debts.

What are the advantages of making a consumer proposal?

  • Avoid bankruptcy and protect assets
  • Prevent creditors from taking further legal or collection action against you
  • Stop wage garnishments, interest and penalties
  • Bankruptcy and Insolvency Act forces creditors to participate
  • Ability to compromise debts
  • Flexible payment terms
  • Allows you to protect assets that would be affected by filing personal bankruptcy

Why are creditors willing to accept a consumer proposal?

The choice to accept your consumer proposal is a business decision. Creditors want to maximize the amount they are able to recover. By accepting your consumer proposal, creditors will recover more of what they are owed than they would if you were filing personal bankruptcy.

What creditors can be included in a consumer proposal?

  • All unsecured creditors (ie: creditors that don’t hold any collateral)
  • Your secured creditors (ie: creditors that hold collateral) are not affected by the proposal

What happens to secured creditors when I file a consumer proposal?

  • The rights of secured creditors are not affected
  • You must maintain payments to your secured creditors if you want to keep the encumbered/collateralized property
  • If you want to stop paying your secured creditors, you can surrender the asset to them and any shortfall that results will be included in your consumer proposal as an unsecured debt

What happens to my assets when I file a consumer proposal?

You retain possession and control of your assets. Your creditors and/or the trustee have no interest in any of your property.

Who is eligible to file a consumer proposal?

  • Anyone whose total debts, excluding the mortgage on the principal residence, are less than $250,000. For larger debts a Division I Proposal is filed.
  • Two people can file a joint consumer proposal provided that they have a financial relationship and the majority of their debts are joint
  • Individuals that owe over $250,000 can file a Division I Proposal

What is the process for filing a consumer proposal?

Meet with a licensed insolvency trustee who will:

  • Review your finances and determine what you can afford to pay creditors
  • Recommend what you need to offer your creditors based on your situation
  • Help you prepare the proposal documents

Consumer proposal voting and approval include:

  • Creditors have up to 45 days from the date of filing to vote on your proposal
  • If the majority (51%) of creditors by dollar value ($1 = 1 vote) vote in favour of the proposal it becomes binding upon all creditors
  • Deemed Court approval occurs 60 days after filing provided there are no creditor objections

Upon approval of your consumer proposal you must:

  • Make agreed-upon payments to the trustee
  • Attend two credit counseling sessions
  • File your income taxes on time
  • Pay any income taxes owed in the post-proposal period

What if my creditors don’t vote?

If creditors don’t vote within 45 days of filing, the consumer proposal is deemed accepted.

What happens if my creditors don’t accept my consumer proposal?

If your creditors don’t accept your consumer proposal as filed, the trustee will help you to negotiate further with your creditors. It may be possible to convince creditors to reconsider their position and accept the original proposal or you may have to amend the terms (increase payments) of the proposal to gain creditors acceptance. When creditors vote against a consumer proposal they usually make a counter-offer. If after negotiating you are unable to reach an agreement, then the proposal would fail and you would have the option of filing personal bankruptcy.

It is extremely rare that consumer proposals fail because creditors don’t want people filing personal bankruptcy which they know will produce less recovery than a consumer proposal.

What happens if I miss payments on my consumer proposal?

If you fall into arrears a total of three months payments, your consumer proposal is deemed annulled. This means you will no longer be protected from your creditors and cannot file another consumer proposal. The next step is to consider filing personal bankruptcy.

How does a consumer proposal affect my credit rating?

You receive a R7 credit rating because you have compromised the amount of your debts. This stays on your credit report for three years after your consumer proposal has been paid in full.

What are my options for dealing with income tax debt?

Owing money to the government regarding income tax debt is no different than owing money to any other creditor and it can be released by the filing of personal bankruptcy or the making of a consumer proposal.

What special rights does the Canada Revenue Agency have with respect to collection of unpaid taxes?

The Income Tax Act (ITA) gives the Canada Revenue Agency (CRA) special collection rights referred to as “enhanced garnishment provisions”. The enhanced garnishment provisions provide CRA with the ability to garnishee wages and seize assets without a court order. The CRA can also register an involuntary lien (mortgage) on the title of your property.  

The filing of personal bankruptcy or the making of a consumer proposal stops all collection action and the CRA cannot continue to enforce any enhanced garnishment provisions.

However, if the CRA registers a lien upon the title of your property prior to your filing personal bankruptcy or your making a consumer proposal, the lien will survive.

How do I compromise my income tax debt?

File a formal consumer proposal with a licensed insolvency trustee. CRA will not accept informal proposals from credit counsellors, financial advisors or any other non-trustees.

Does the amount I owe to Canada Revenue Agency affect my options?

Only if you are considered a ‘High tax debtor’. A high tax debtor is anyone that files personal bankruptcy and owes the CRA in excess of $250,000. These individuals are not eligible to receive an automatic discharge from bankruptcy and must obtain their discharge from the court. A CRA representative will attend the court hearing and their discharge may be made conditional upon additional payments being made. 

This is not an issue if you decide to make a consumer proposal.

What debts are not released?

Most debts are released by filing of personal bankruptcy or the making of a consumer proposal but there are some debts that are not released by the bankrupt's discharge or by the completion of a proposal.

These debts are listed in Section 178 of the Bankruptcy and Insolvency Act and include:

  • Fines (E.g.: traffic fines)
  • Child support arrears
  • Spousal support arrears
  • Debts incurred through fraud
  • Student loans (less than 7 years out of school)

Can I be released of my student loans?

As per section 178(1) of the Bankruptcy and Insolvency Act, student loans received under the Canada Student Loans Act or similar provincial legislation are not released by the filing of personal bankruptcy or the making of a consumer proposal unless the debtor has ceased being a full or part time student for a minimum of 7 years prior to filing.

Is a Consumer Proposal possible with student loan debt?

Provided that the debtor has ceased being a full or part-time student for more than 7 years as at the time of filing the consumer proposal, the student loan debts will be discharged upon completion.

If the debtor has not ceased being a full or part-time student for more than 7 years, the student loan debts will not be released of by filing a consumer proposal. However, collection action is subject to the stay of proceedings and creditors are able to receive dividend payments. It is possible to continue your regular student loan payments during the term of the consumer proposal to avoid additional interest charges.

Is filing personal bankruptcy possible with student loan debt?

The Office of the Superintendent of Bankruptcy Canada indicates that student loan debts can be released by the filing of personal bankruptcy, provided that the bankrupt has ceased being a full or part-time student for more than 7 years as at the date of filing. 

If the bankrupt has not ceased being a full or part time student for more than 7 years as at the date of filing personal bankruptcy, the student loan debts are not automatically released. 

Then the debtor may make an application to the court requesting that their student loans be included in their bankruptcy and be released. This is referred to as a “Section 178(1.1) application”.

The Section 178(1.1) application is not part of the service provided by the trustee. We can recommend knowledgeable and experienced individuals to provide this service.

How is the 7 year period calculated?

The 7 year period is calculated from your "last day of study" to the date of your filing. The last day of study is not necessarily the last day that you attended classes. If you are unsure of this date, you should contact your former school/institution for confirmation prior to your filing.

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Filing personal bankruptcy allows you to be released from most of your debts. It is a formal process under the Bankruptcy and Insolvency Act and is filed by a licensed insolvency trustee.

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Credit Counsellors can help you with budgeting and money management, filing a Debt Management Plan or by helping you communicate with your creditors. It typically makes sense to use a credit counsellor if you have a relatively small amount of debt.

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Collection Agencies may take legal action against you if you owe money to your creditors and do not make payments. Collection Agencies must follow rules outlined in the Collection Agencies Act, which is regulated by the government.

Rebuilding Credit

Credit rating is a fluid concept and is always changing. No matter what you do, including filing personal bankruptcy or a consumer proposal, you can always rebuild your credit rating.

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