VII – Consumer Proposal in Toronto

HOW TO CONSOLIDATE AND SETTLE YOUR DEBTS WITH A CONSUMER PROPOSAL

Let’s say you have a lot of debt and for one reason or another, you don’t want to file personal bankruptcy. There is a legal proceeding in the Canadian bankruptcy act called a Consumer Proposal, which allows you to consolidate and settle your debts. This may be a good option for you if you meet the following criteria:

  • Your debts (excluding your mortgage if you own a home) do not exceed $250,000
  • You are able to pay your monthly living expenses and still have money left over to finance a proposal.

To illustrate how this works, let’s use the following example:

Jan has $80,000 in credit card debt, and she has fallen behind on her minimum payments. She can no longer pay off her debts.

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

Jan’s Monthly Budget
Net Pay
$4,000
Rent
$1,200
Groceries
200
Phone
30
Internet
35
Hydro
50
Heating
50
Car payment
300
Gasoline
150
Car insurance
100
Entertainment
250
Clothing
100
2,465
Cash surplus
$1,535

With the assistance of a bankruptcy trustee, Jan puts together a consumer proposal in which she offers to pay to her creditors $60,000 over 60 months, or $1,000 per month x 60 months. As you can see from her budget, she can afford to make these monthly payments to the trustee, who holds the funds in trustee for Jan’s creditors. This proposal would provide Jill’s creditors with a return (before the trustee’s fees – see below) of 75% of what they’re owed ($60,000 / $80,000 = 75%), which both Jan 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.

Some things you should know:

  • Upon filing a proposal, your credit rating will be the same as that of a bankruptcy individual. This goes away once the proposal has been completed.
  • The maximum length of a consumer proposal is 60 months. It cannot exceed this length of time.
  • The trustee’s fees are paid out of the trust funds, and are calculated pursuant to a tariff in the bankruptcy act.
  • Filing a consumer proposal does not actually get rid of your debts; it only protects you from legal proceedings by your creditors (i.e., wage garnishments, liens, etc.). You debts are extinguished only upon the completion of the proposal. Should you default on your proposal payments, your creditors will be able to recommence their collection activities.
  • Upon filing a consumer proposal, interest stops accruing on your debts. Therefore, your settlement would be based on the debt as at the date of filing the proposal.

So as you can see, a consumer proposal is almost like an interest-free debt consolidation which doesn’t even require you to pay your debts in full. This is an excellent alternative to filing for personal bankruptcy if you have assets you wish to keep and you have sufficient income to finance the proposal payments.

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