What Is A Consumer Proposal?
A Consumer Proposal is a formal agreement between you and your creditors that is submitted on your behalf by a Licensed Insolvency Trustee (LIT). It includes an offer to your creditors to settle your debt for an amount that is normally less than the total amount owing. This can result in as much as a 80% debt saving. Most important, it allows you to retain assets, such as your car and your home. A Consumer Proposal allows you to get out of debt faster and easier, as compared to other debt relief solutions, and can be paid down quicker if you can do so.
Consumer Proposal & Loans
A very common question is whether a Consumer Proposal or Bankruptcy can help with Provincial or Federal student loan debts. This depends on how old the student loan debt is. According to the Bankruptcy and Insolvency Act, you can eliminate student loan debt through bankruptcy or Consumer Proposal if your loans are more than seven years old from the date you finished at the post-secondary institution you attended.
Therefore, if you’ve been out of school for more than seven years and are struggling to pay down your debt, you could find relief by speaking with a Licensed Insolvency Trustee and reviewing your options.
If it has not been seven years since you graduated, your student loan cannot be included in a Consumer Proposal or Bankruptcy. If you are in this situation, you will need to consider other options to help you handle your student loan debt pressures. There are some hardship provisions in the Act which could allow you to receive repayment assistance. This assistance could see your student loan payments reduced or you may not have to make any payments, depending on your financial situation.
Also, keep in mind that while a Consumer Proposal or Bankruptcy will not specifically help with your student loan debt if this debt is less than seven years old, these processes can help reduce or eliminate all of your other sizable debts (like credit cards with high interest rates), freeing up money in your monthly budget to cover the student loan repayment without further financial stress.
The good news? A Consumer Proposal does not ruin your credit rating forever. In fact, it puts you in a position where repairing your credit is very achievable.
After you have successfully completed your Consumer Proposal, there will be a note on your credit report at the credit bureau (TransUnion or Equifax) for three years. That three-year period will not prevent you from improving your credit score over time. One of the most important factors that is used to calculate a credit score is your payment history. Showing the credit bureaus that you can borrow money and successfully pay it back will improve your credit.
It makes sense to start small when it comes to credit rebuilding. After your Consumer Proposal has been completed, take out a small loan or apply for a credit card. You may wish to choose a secured credit card (where you put down a small deposit and the card issuer grants you a slightly larger credit limit) since this will likely be easier for you to obtain. Then it’s up to you to make responsible and regular payments on this card. Try to avoid a Prepaid Card as those cards do not report to the credit bureaus like a Secured Card would, and won’t help you in your rebuilding efforts.
It’s very important to be aware that rebuilding credit after a Consumer Proposal takes time. It is not an instantaneous process. Avoid companies that promise to be able to “fix” your credit rating quickly or automatically. No one can change the information that is listed in your credit report. The only way to repair bad credit is by having responsible and consistent credit behavior over time.
After a Consumer Proposal, you will need to show that you can borrow money responsibly. Showing this will allow you to rebuild your credit score.
You may have seen some of the Payday Loan companies scattered around your neighborhood. There are usually a few in every community and they are designed to make it easier for cash-strapped employees to borrow against their future pay cheques (another name for a Payday Loan is a cash advance). These are small, short-term unsecured loans that are tied to your pay cheque. The Pay Day Loan store advances you some funds against your next pay cheque. Once you get paid you go in and pay back the loan, as well as a chunk of interest.
The big problem with most Pay Day loans is they usually turn out to be anything but low-interest OR short-term. They are the loan of last resort (where we go when all other loan sources, such as banks, friends and family, have turned us down).
Once caught in the web of Pay Day loan repayments, a borrower will often find themselves heading to a second or a third Pay Day loan store to borrow funds to cover the growing debt on the first Pay Day loan – with often disastrous financial results.
Payday Loans are the worst form of revolving credit and are hopelessly unaffordable for most people. The best way to deal with a Pay Day loan is not to use one at all.
Luckily, there is hope thanks to the Bankruptcy and Insolvency Act. If you’re already caught up in a frustrating Pay Day loan cycle, a Licensed Insolvency Trustee can help you put a stop to the nightmare once and for all.
Getting a car loan in Canada while currently in (or coming out of) a Consumer Proposal is possible if you apply through a private lender, show your proof of Consumer Proposal documents and can ensure that your debt-to-income ratio is low (the amount of debt you hold versus your net monthly income).
There are lots of terrific car dealers across the country whose business models are designed around assisting people who are in a Consumer Proposal. And since financing or leasing an automobile is a secured debt, it’s a safe debt to take on (both for the lender, who could repossess the vehicle if you fail to make the required monthly payments on time, and for yourself since you will be able to start rebuilding your credit once the lender reports your on-time monthly payments to the credit bureaus), while in a Proposal or even in a Bankruptcy.
Consumer Proposal & Mortgage
One of the most frequent questions a Trustee hears is “will I be able to buy a home one day?” or the alternative “will my bank renew my mortgage if I am in a Consumer Proposal?” Both excellent questions that deserve some explanation. Luckily, the news is positive on both.
For you to get the best deal on a mortgage either during a Consumer Proposal or afterwards you need to ensure a few things are done properly, including:
- Ensure you pay all your monthly bills (including utility bills) on time – mortgage lenders have been known to reject a new mortgage due to defaults on utility bills. So, it’s not just a big monthly expense like the mortgage payment and the car financing payment you need to worry about, it’s also those cable, phone, gas and hydro bills. Always keep them current.
- Pay down your Consumer Proposal quickly – it will be much easier for you to qualify for a brand-new mortgage and get that home you are eager to buy if you don’t still have Consumer Proposal payments on your monthly expense list. Pay it down faster than required (you can pay a proposal off early by speaking with your Administrator) and then go apply for that mortgage. Plus, without the Consumer Proposal payments you’ll probably qualify for a better mortgage rate, thereby saving yourself a lot of cash over the years in unnecessary interest payments.
- Save towards a larger down payment – a lot of folks put down 5% and then qualify for a mortgage. By offering a much larger down payment (some lenders will be looking for at least 15% down, more likely 20% down) you can negotiate a better interest rate on the mortgage you are getting. And that means less money spent on interest and a faster pay-off time for the mortgage over the years.
- Don’t just focus on the banks – consider alternative lenders as well — many alternative lenders will consider approving your application for a mortgage soon after your discharge, if your past debts are fully cleared, and you are starting to re-establish credit. If you’re looking to re-finance your existing mortgage, it’s even possible that you could use part of the funds to pay off the proposal
- Try to make your credit rating as perfect as you possibly can. Your goal is to get your credit rating above 700. But the rating isn’t the only thing that’s important. Mortgage lenders want to see at least two significant “clean” credit facilities on your credit bureau. This includes major credit cards such as a Visa or MasterCard, as well as a car lease or loan, or sometimes even an RRSP loan (if it reports to the credit bureau). With your current “clean” credit cards, your balance should never exceed more than 30% of the limit.
- Obtain some solid advice from a mortgage broker. Not only does a mortgage broker have a much better overview of all the options available to you, you will also get someone who will help you with looking at your credit and making specific recommendations for improving it, give you feedback on any other aspects of your financial picture that you need to give attention to, and provide you with a game plan for getting a great mortgage, both short- and long-term.
The good news: Your home is safe. These assets remain your property. The lender usually takes some form of security such as a mortgage, to secure the amount you owe in the event you do not repay the loan. So, your home should be safe if your mortgage payments are up to date and you are current on your property taxes.
In most cases, you do not lose your assets when you file a Consumer Proposal if your offer is enough to satisfy your creditors. This means that, if you continue to make your payments, you will most likely be able to keep your home. Speaking with a Licensed Insolvency Trustee can clarify this for your situation. However, a Consumer Proposal does not usually involve the loss of assets.
A mortgage lender cannot change the terms of your mortgage because you have filed a Consumer Proposal. The only way that a lender can foreclose on your home is if you have missed payments. As mentioned, if you continue to make your payments on time, you should have no problems.
In a Consumer Proposal situation, you typically make a payment to your trustee each month. The trustee then distributes this payment to your creditors. Having a standard monthly payment makes it easier to budget so you should be able to fit your mortgage payments and your proposal payments into your household budget.
It is important to note that a Consumer Proposal is filed to all unsecured creditors. Unsecured debts include credit card debt, personal loans, unsecured lines of credit, bank overdraft fees and other such debts. Secured loans such as automobile loans and mortgages are not included in a Consumer Proposal. If you are having trouble paying these debts, you should speak to these lenders directly.
If you need to renew your mortgage after filing a Consumer Proposal, you should generally not have an issue with doing so, dependent on whether you have made all your mortgage payments in the past and you can show the mortgage lender that you will be able to continue to make your payments in the future. However, a Consumer Proposal can make it more difficult to switch mortgage lenders. It can also make it more difficult to get a favorable interest rate when you do renew.
It’s important to remember that a Consumer Proposal remains on your credit record for three years after it is completed – some lenders will see this as a negative and either reject your renewal or ask for a higher interest rate during the time that Consumer Proposal remains on your credit report. It’s also important to remember that, since you were more than likely in a difficult financial situation before filing your Consumer Proposal, getting a favorable interest rate would likely be difficult anyway. You may have to endure the short-term pain of a 1, 2 or 5-year higher interest renewal and then negotiate a much lower renewal interest rate the next time you apply to renew the mortgage. Short term pain = long term gain.
It can be more complicated to get a brand-new mortgage after filing a Consumer Proposal. This is because a Consumer Proposal negatively impacts your credit rating. However, depending on your circumstances, you may still be able to get a mortgage.
To increase the likelihood of getting a mortgage after a Consumer Proposal, here are a few guidelines to follow:
- Take steps to rebuild your credit. Rebuilding your credit rating after a Consumer Proposal is not only possible but pretty much mandatory if you hope to have usable credit again. The first step? Consider applying for a secured credit card and then using the card for small purchases. Paying the card off in full and on time each month can then help restore your credit (You will be required to take two financial counselling sessions as a part of the Consumer Proposal process. These sessions will provide you with guidance on how to restore your credit).
- Look for a shorter-term mortgage. Since the interest rate on the mortgage will likely be higher than you’d like, consider getting a one- or two-year mortgage term and then re-negotiating the interest charged when you renew the mortgage with your lender (and your credit is better than it was the first time around). This strategy will help you avoid paying higher rates for longer than necessary.
- Offer a much larger down payment. Saving money so you can slap down a larger down payment can help you get a better mortgage rate. Most mortgage lenders like to see a 20% down payment (or more).
- Be realistic about what you can afford – try and choose a property that is affordable, both in terms of physical upkeep and monthly payments (including mortgage, property taxes, utilities or maintenance fees, etc.). That may mean buying a small condominium unit to start, then moving up to a small home later, once your credit and ability to earn income improve.
By following these guidelines, you increase your chances of getting a mortgage, even if you have filed a Consumer Proposal.
Consumer Proposal & Your Credit Rating
Your credit rating isn’t damaged forever once you file a Consumer Proposal. This is a common misconception that is often reinforced by creditors and collection agencies, who are trying to scare you into paying them before you file the proposal.
There is most-certainly an impact on your credit rating, however. But if you are in a position where filing a Consumer Proposal makes financial sense for you, your credit has likely already been damaged by prior missed payments or late payments (though many people who file Consumer Proposal have been successfully making small minimum payments for years before they file, and their credit scores appear quite robust). Ultimately, filing a Consumer Proposal and dealing with your rising debt load will help you in the long run. But it won’t happen overnight.
One of the best things about a Consumer Proposal is that, once filed, it puts you onto the right path and in position to start rebuilding your financial life. Rather than continuing the same minimum-payment dance that you’ve already been doing month after month, you will put that nasty debt behind you once and for all and be financially free to acquire new credit in a responsible manner.
One of the best ways to ensure you get on-track is to attend the two mandatory financial counselling sessions that are part of your Consumer Proposal process. These sessions teach you about money management as well as monthly budgeting and provide you with information that will help you manage your financial life going forward – one of the major components of the two sessions is a discussion of how you can rebuild your credit rating following the successful completion of the proposal.
When it comes to rebuilding your credit rating, it’s important to consider what actions are considered important by the credit bureaus (normally TransUnion and Equifax). One of the most important factors is your ability to repay your debts on time. This means that for you to dramatically improve your credit you will need to show your creditors (and ultimately the credit bureaus) that you are able to responsibly borrow money and pay it back as it becomes due.
However, you may find it difficult to acquire new credit if you have a low or poor credit rating. One solution to this problem is to apply for a secured credit card. This is a card that allows you to put down a small one-time payment that is then secured against the credit issued to you for the card by the lender. For example, if you put down $79, your credit card could have up to a $500 limit. You can then use this card for purchases in-person and online, such as groceries, gas or a hotel room or plane ticket. Paying the bill on this card as it becomes due will show credit bureaus and lenders that you are able to responsibly use credit, and this will help improve your credit report. They may even boost your credit level over time, as well as convert the secured card into a more traditional non-secured card once you’ve proven yourself a responsible borrower.
The best thing about a Consumer Proposal (aside from the financial freedom it grants you) is that it does not mean your credit rating is ruined forever. By taking the right steps, you can improve your credit and propel yourself back into a strong financial position.
As you can may already be aware, when you file a Consumer Proposal, the two credit bureaus list your existing debts as “R9.” You will likely remain at this rating until you have completed the proposal. When you complete your Consumer Proposal and receive your Certificate of Full Performance from the Trustee, a note is placed on your credit report. This note remains there for three years. This rating indicates someone has made a special arrangement to pay their debts, such as a consolidation plan, debt management plan or Consumer Proposal and has successfully completed the process.
After the three-year waiting period, any mention of your past debts disappears completely from your credit report, as does any related information about the Consumer Proposal you had filed and completed. To any new creditor reviewing your report it will appear as if you never filed a Consumer Proposal at all. Best of all, any new debt acquired since the date the proposal was first filed (such as a secured credit card or a car loan) is the only debt displayed on your credit report at that point.
Consumer Proposal Payments
Consumer proposals come in all shapes and sizes, including the not uncommon “lump sum payment” variety. Many Consumer Proposal in Ontario are based on a simple monthly payment format but some consumer debtors can offer a lump-sum proposal to their creditors, usually with the help of a family member or friend, by remortgaging an existing home, selling off a specific asset or cashing out an investment (such as a TFSA or a stock portfolio).
The advantages of a lump-sum proposal over a traditional Consumer Proposal include:
- A lump sum proposal is only finalized once a simple majority of your creditors (by dollar value of debts owed) vote in agreement to accept the proposal. Once that acceptance is in place, the lump sum is paid by the consumer debtor and the proposal is successfully completed shortly afterwards.
- Creditors will accept a lower repayment at the start of the payments, rather than having to wait up to a maximum of five years for monthly payments to accumulate and be distributed to them.
If you feel you have access to a large lump sum, either from a family member, by refinancing your home or by cashing out an investment account, then consider a lump-sum proposal over a traditional Consumer Proposal to speed up the entire process and get back on track financially faster.
For you to successfully complete your Consumer Proposal, your main duty and responsibility is to ensure that you make your proposal payments each month as agreed. These payments will be made directly to your trustee through a pre-authorized withdrawal from your bank account. The Trustee will then distribute the funds to your creditors once the accrual has reached a specific level. It is very important that you make these payments. If you miss three payments over the life of your proposal, the proposal can be annulled – this means your creditors will be free to take legal action against you in order to collect the full amount of debt owing to them, plus accumulated interest from the date the proposal was first filed.
Missing a payment here and there is not a huge problem if you replace the payment as soon as possible by either dropping off a replacement cheque, a cash payment or a money order to the Trustee’s office as soon as you possibly can. Then it will be as if you never missed a payment.
The Consumer Proposals we see annulled are usually the result of job loss or a substantial drop in income (for example, a change of employment to a lower-paying job for a different employer or the need to go on long-term disability due to an injury at work). These types of scenarios can make it extremely difficult for a consumer debtor to keep the monthly payments current. And once three payments are missed, annulment is the next step.
Remember: If your Proposal does get annulled you can always opt to file for personal bankruptcy so there is another option available. Your Trustee can move quickly to prepare the bankruptcy paperwork, and have you come in to sign everything. Once filed with the government your court protection from your creditors would be back in place.
One of the major benefits of filing a Consumer Proposal, rather than a Bankruptcy, is the freedom you can achieve if you can pay if off earlier (a Proposal can be paid down at any time after acceptance by the Creditors and the Court). And unlike some of those expensive loans, a Consumer Proposal has another benefit – there are no penalty charges or interest. In fact, we encourage you to pay down a Consumer Proposal as quickly as possible, so you can receive your Certificate of Completion earlier and use it to improve your credit rating.
Unfortunately, Consumer Proposal payments to the Trustee are not tax-deductible, even though the process is overseen by a government agency, the Office of the Superintendent of Bankruptcy. It’s always important to remember that when you make those proposal payments you are paying off a portion of the unsecured consumer debt you owe to your creditors. This is money you have already spent on goods and services. The major benefit of filing a Consumer Proposal is to obtain relief from the stress of having a large debt load and an end to any further interest being charged on your debts.
Frequently Asked Questions About Consumer Proposal
Most Consumer Proposals last from three to a maximum of five years (with 5 years being the norm). You generally make one monthly payment to your Licensed Insolvency Trustee, who disburses the funds to your creditors on your behalf. You have more flexibility in managing your monthly expenses, because the total amount you have agreed to can be paid out over a full five-year period. There are no additional payments other than those being offered under your Proposal. Once accepted, the Consumer Proposal is legally binding on all your creditors. In other types of debt settlements, you would normally need to negotiate a settlement with each creditor individually, and some could choose to opt out. In a Consumer Proposal, once a simple majority of positive votes by dollar value is achieved then all the other creditors are part of the settlement – even if they voted against the proposal during the 45-day voting period (which begins right after protection goes into effect). You are formally discharged from the balance of your debts owing once you make your final payment to the Licensed Insolvency Trustee. The Trustee then issues you a Certificate of Completion and notifies the credit bureaus that you have successfully completed your proposal duties.
To be eligible to file a Consumer Proposal you must be insolvent (i.e. unable to pay your debts as they become due), have a total debt load of less than $250,000 (excluding the mortgage on your principal residence), have a stable source of income (or a friend or family member who is prepared to underwrite the proposal’s monthly payments on your behalf) and have no prior Proposal proceedings still active. If you are currently having difficulty meeting your debt repayments (for example, you miss monthly payments or are paying just the minimum payments on your credit cards), a Consumer Proposal may be a far better solution than some other options, such as a debt consolidation or credit counselling. You will normally end up paying your creditors less in a Consumer Proposal than under those other two options, and interest will stop the moment the proposal is filed with the Official Receiver (the Federal government).
If you choose to file a Consumer Proposal, the Licensed Insolvency Trustee (LIT) will determine what a fair offer to your creditors will be, based upon your financial situation. Often the amount to be offered in a settlement will be approximately 30% of what you currently owe all your creditors. You will then complete all required legal paper work; the Consumer Proposal will be filed with the Federal Regulator and your offer will be sent out to all your unsecured creditors by the Trustee’s staff.
More than $250,000 of debt? Consider a Division 1 Proposal
Like a Consumer Proposal, this is a formal procedure overseen by the Licensed Insolvency Trustee (LIT) under the Bankruptcy and Insolvency Act (the BIA). This type of Proposal is available to businesses and individuals — there is no limit with respect to how much money is owed (other than the requirement that the amount owing must be over $250,000). As with a Consumer Proposal, in a Division I proposal, you work with a Licensed Insolvency Trustee to construct a fair offer to pay your creditors a percentage of what you owe them, payable over a specific timeframe. And just like a Consumer Proposal, all payments are made through the Insolvency Trustee, and the Trustee holds those funds in trust as they accrue and then uses them to pay each of your creditors.
Because a Division One or Consumer Proposal in Canada can only be submitted to your creditors by a Licensed Insolvency Trustee (also known as a LIT), a debt consolidation firm or credit counselor cannot file a Consumer Proposal for you nor can you file a Consumer Proposal on your own. Because the Bankruptcy and Insolvency Act states that only a Licensed Insolvency Trustee can file the proposal, the integrity of the system stands firm. Trustees are licensed through the Federal Government and understand both Provincial and Federal laws. They are required to perform a face-to-face Assessment with you and ensure all unsecured debts, all assets and all other pertinent information (including a detailed household income and expense report) is prepared and signed. This ensures the proposal is being filed properly so it is legally-binding on you and all your unsecured creditors once accepted by a simple majority of your creditors.
In order to be eligible to file a Consumer Proposal you must an insolvent person, be unable to pay your debts as they become due and have total debts of less than $250,000 (excluding the mortgage on your principal residence). You must also have a stable source of income, to ensure that you will be able to make the monthly proposal payments, and have no prior proposal proceedings still open.
You can withdraw a Consumer Proposal within the first 60 days of filing the proposal. However, the danger in doing so is that all the unsecured creditors would then be able to descend on you again, demanding full repayment with interest charges added for the period since the Consumer Proposal was first filed. If you are seriously considering withdrawing your proposal, we strongly recommend you first speak to the Trustee that is handling your Consumer Proposal about the alternatives available to you (for example, the filing of a personal bankruptcy as an alternative way of dealing with your debt pressures).
Generally, most employers will not ask if you have filed either a bankruptcy or proposal. However, some industries, specifically the financial or insurance sectors, may require that you disclose this information. By choosing to file a Consumer Proposal, rather than a personal bankruptcy, you can then retain your professional credentials or license (as in the case of an insurance broker, a director of a corporation, a licensed real estate broker, lawyer etc.)
Consumer Proposals must be voted on by all unsecured creditors. Once registered with the Official Receiver, a Consumer Proposal is sent out to all your creditors and they have 45 days from the date of filing to vote. Most Consumer Proposals are accepted “as is” but a small percentage require an additional stipulation included (at the request of the creditor, for example CRA) or a slightly-larger settlement amount agreed to by the debtor. The rule of thumb is: The Consumer Proposal must be a better offer, dollar wise, than what the creditor would receive in a Bankruptcy. Once accepted by a simple majority of your unsecured creditors, all of them are bound by the terms of the Proposal agreement. This is the major difference (and sizeable advantage) of a Consumer Proposal as compared to an informal debt settlement, whereas a debt settlement is negotiated with each creditor individually (often a very tenuous process). In Ontario, Consumer Proposals are usually accepted if they are fair and reasonable. This is because creditors know that they will get significantly less money from you in a Bankruptcy scenario.
Are you borrowing from one credit card to pay the minimum monthly amount on another card? Constantly relying on your overdraft to cover monthly bills and debt repayment? Frustrated by the amount of interest being racked up on your line of credit or department store cards each month? Then it’s probably time for you to to speak with a Licensed Insolvency Trustee. We completely understand how difficult and stressful it can be to speak to a licensed professional about your debt woes. The good news? There are countless debt relief options for you to choose from, each tailored towards a different type of debt or situation. For many Canadians a Consumer Proposal is the ideal solution to their debt worries.
Your creditors will have 45 days to either accept or reject your proposal. Any creditor with a proven claim may accept or object to your proposal. This can be done either prior to or at the meeting of creditors, (if one is held). It can also be done within 45 days following the filing of your Consumer Proposal. A meeting of creditors will be called if one is requested by one or more creditors having at least 25% of the value of the proven claims filed with the Trustee. This request must be made within 45 days of the filing of your proposal. The OSB can also direct your Trustee to call a meeting of creditors at any time within this 45-day period. A meeting of creditors will be held within 21 days after being called by the Trustee. It’s rare for creditors to outright reject a reasonable Consumer Proposal. Some may wish an additional stipulation be added to the Proposal’s wording (as in the case of CRA) or request the debtor increase his settlement offer amount slightly to satisfy a specific creditor. There is almost always a way to obtain acceptance of the Consumer Proposal. And every Consumer Proposal drafted is unique in that it contains a specific list of assets and debts that no other Proposal will contain in just that same way.
Each month you will pay the Trustee an agreed-upon fee that is “locked in” once the Proposal is accepted by your creditors. No surprises. Missing a payment is discouraged but Trustees are aware that the intrusion of the real world tends to result in a missed payment now and again. If you replace the payment within a short period of time, your Proposal will continue unabated. The important thing to remember is the “three strikes rule”, which is known officially as a “deemed annulment”. This occurs when you miss a total of three payments over the course of the Proposal and don’t make up the payments in a timely manner.
Cancelling your Consumer Proposal is known as an annulment. The consequences of an annulled Consumer Proposal are severe. First, unlike other debt relief options that get cancelled, you will lose all the money that has been given to your creditors. All funds that have been paid will not be returned to you. After receiving notice of the annulled proposal, some, or all, of your creditors will eventually start contacting you again for repayment. If able to do so, you could try making your own informal offers with your creditors to settle each of your debts on your own (a difficult process at the best of times). Opportunities such as selling your assets to raise funds for debt repayment could be another way to eliminate or reduce a debt amount. Many consumer debtors who withdraw from a Proposal ultimately end up filing for Personal Bankruptcy protection from those same creditors to ease their debt pressures.
The good news is that your assets can be protected under a Consumer Proposal. Unlike a bankruptcy, where you could lose some of your assets depending on their value and the province that you live in, a Consumer Proposal allows you to keep what you own if the creditors agree to the amount you have committed to repay. This is particularly important if you own a vehicle, have RESPs for your children (except in Alberta) or have net equity in your home after selling costs and mortgage repayment. Money invested in an RRSP is generally protected from creditors with some exceptions (any funds contributed within the past 12-month period must be calculated into the value of your realizable assets in some provinces). Provincial government exemptions (which differ from province to province) allow you to protect various assets from seizure by your creditors.
A Consumer Proposal also puts a stop to any wage garnishment and unfreezes your frozen bank accounts. The process also ends any civil legal action against you to collect on the debt. However, there are exceptions to this, specifically wage garnishments and legal action that are a result of unpaid child support or spousal support. These debts cannot be eliminated by a Consumer Proposal and filing a proposal does not stop legal action or wage garnishment in these cases. Aside from those specific debts, when you file a Consumer Proposal all wage garnishments and collection calls cease. This is called a Stay of Proceedings — it means you are protected from any creditors starting or continuing any legal proceedings to collect any debt owed to them.
The Canada Revenue Agency (CRA) can order your bank account frozen if you owe the agency money. If you owe your bank money (through a bank loan or a credit card supplied by the bank, for example) the bank can also freeze your bank account or seize funds from the account without warning if you are behind on your minimum monthly payments on your lines of credit, overdraft, bank loan or credit cards. When your bank account is frozen, you will be unable to withdraw any funds from the account. Instead, the CRA or your bank seizes the funds directly from your account in order to repay a portion, or all, of the debt that is owed. A Consumer Proposal unfreezes frozen bank accounts but cannot get back the funds already seized.
The only way to rebuild bad credit is to replace it with good credit over time. This can often be done by obtaining a secured credit card and using it regularly as well as paying it down each month. A secured credit card is a special type of credit card where you place a small deposit up front and this amount is used to secure the credit limit on the card. For example, some secured credit cards require an initial security deposit of $75 and then an annual fee to use the card. In exchange you are given anywhere from $200 to $2,000 of credit on the card to use as a way of helping you re-establish your credit worthiness. Using this card and repaying the outstanding balance in full each month helps rebuild your credit rating and your Beacon Score and demonstrates to other prospective creditors that you can use credit in a reliable, responsible manner and are a good credit risk.
Many people wonder about the impact of a Consumer Proposal on RRSP investments. A lot worry that they’ll lose the money they’ve worked so hard to contribute to their RRSPs when they file a Consumer Proposal. This is a valid concern. After all, your RRSP contributions are funds that you may have saved for many years to sustain you in your future retirement.
This money is vital to your future because you’ll need to live on it one day. When you file a Consumer Proposal, you generally do not have to give up any assets (or your monthly payment to creditors compensates them for the value of those assets, where applicable). This includes funds invested in an RRSP. Therefore, in most cases, the money in your RRSP will remain untouched when you file a Consumer Proposal.
When you file a Consumer Proposal, you enter a legal process. The terms of your Proposal will detail the payments you are required to make as well as the term of the proposal. Once you have completed these payments and fulfilled all duties associated with your Consumer Proposal, you will receive a Certificate of Full Performance signed by your Licensed Insolvency Trustee. You will then forward a copy of this certificate to the two major credit bureaus (TransUnion and Equifax) in order to let them know that your proposal has been successfully completed. However, the credit bureaus will likely also be notified by the Licensed Insolvency Trustee of your completion. It is recommended that you request a free copy of your credit report once per year to check its status and to ensure all your debts are designated as being resolved through the Proposal process. Sometimes errors can creep into a credit report – by monitoring the report yearly you can request a correction from the credit bureau and keep your credit score from dropping due to errors.