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If you can’t pay off your debts, a consumer proposal may be a solution. Here’s how it works, who can file one and what happens after it’s submitted.
In Canada, a consumer proposal is a legally binding agreement that offers an alternative to bankruptcy when you’re unable to pay your debts. It’s an option if you owe less than $250,000 excluding the mortgage on your principal residence. If the proposal is accepted by your creditors, you can pay a smaller amount to settle your debts, have more time to repay what you owe, or both. Consumer proposals can last up to five years.
Consumer proposals are created and administered by licensed insolvency trustees (LITs).
After you meet with an LIT to discuss your financial situation, the trustee drafts a proposal and files it with the Office of the Superintendent of Bankruptcy (OSB), which is part of Innovation, Science and Economic Development Canada. You must provide a list of your assets and liabilities and agree to attend financial counselling sessions. You must also attend a meeting of the creditors, if they request one or the OSB directs the LIT to call one.
Once the proposal is filed, you stop making payments to your creditors directly. You will stop receiving collection calls. Also, any legal action your creditors are taking against you stops, and if they’re garnisheeing your wages (taking money from your paycheque), that ends too.
Your creditors have 45 days to accept or reject your proposal. Each creditor gets a vote, which is weighted according to their proportion of the total dollar amount they are owed. For instance, a creditor owed $100,000 would have four times the influence of a creditor owed only $25,000. Whether your proposal is accepted or rejected is decided by the simple majority, or 50% plus one, based on the dollars owed.
If your creditors accept the proposal, you make the payments required under the agreement to the trustee, who then makes payments to your creditors. You’ll also have to comply with any other conditions agreed to in the proposal.
If your creditors reject your proposal, you can modify and resubmit it, consider other ways of paying off your debts or declare bankruptcy.
Submitting a consumer proposal will negatively impact your credit score in Canada. However, the proposal will be removed from your credit report after a certain period. Canada has two credit bureaus that monitor credit history: Equifax and TransUnion. At both, a consumer proposal will be removed from your report three years after you pay off your debts or six years after the proposal was filed, whichever comes first.
Example: “Nadeem owed $60,000 on his car and $40,000 on his credit card. Because the car loan represented more than half of his debt, the auto financing company’s vote would determine whether his creditor proposal was accepted or rejected.”
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