One of the main factors that is holding us back into being able to save up and invest in our future is our debt, especially our credit card debts. Reaching a point where you can’t even afford to pay the minimum required payment can be very stressful. A lot of us have heard of bankruptcy, but most of us are unaware of a program called Consumer Proposal.
The discussion here will include: What is a Consumer Proposal? What is the consumer proposal process? Does consumer proposal work? What are the advantages of a consumer proposal?
What is a Consumer Proposal?
Consumer proposal – in a simplified definition, is your proposal to your creditors regarding the repayment of your debts. You will need a Licensed Insolvency Trustee to go between you and the creditors. The trustee will help you develop a “proposal” to pay your creditors a certain percentage of amount owing at a fixed monthly payment for a specific period.
In order to qualify for a consumer proposal, you must be:
- at least 18 years of age
- not owe more than $250,000 (not including mortgage on the main residence)
- unable to pay your unsecured debt in a reasonable length of time
The Consumer Proposal Process
Your first step will be to meet with a licensed insolvency trustee for financial advice and discuss your financial circumstance. The trustee will evaluate your financial situation in order to give you options regarding debt management. If your financial circumstance is qualified to take the route of a consumer proposal, your trustee will give you all the information you need in order to start.
Part of this process is for you, the applicant, to attend a couple of credit counseling sessions. This will help you better understand the process, the effect, and the options available to you while in the consumer proposal program.
Here is a simplified version of the entire process:
- meet with a licensed insolvency trustee
- the trustee will look into your financial circumstance and if a consumer proposal is beneficial, then you can go ahead with the process
- you sign the contract and pay the trustee their fees to facilitate the entire process
- collect all the documents for your application:
- all of your loan statements (credit card, lines of credit, etc.),
- employment certificate
- bank statements
- and any other documents your trustee will deem necessary for your successful application
- the trustee will file your proposal to the Office of the Superintendent of Bankruptcy and submit your proposal to your creditors
- once the proposal is filed, you stop making payments to your creditors
- creditors have 45 days to either accept or reject your proposal
- you make your fixed monthly payment
- once you have fulfilled the terms of your proposal, you will be given a certificate of full performance
Does Consumer Proposal Work?
A consumer proposal will help you get your finances to straighten out. Once the proposal is accepted, you will start your fixed monthly payment for up to five years. Here is an example of an approved consumer proposal:
Mr. A has a total debt of $50,000 in all his credit cards and is paying an average interest rate of 19.99%. He is being charged over $800 a month on interest alone and he could no longer afford to pay the interest and make the minimum payment. He met with a licensed trustee to discuss consumer proposals.
A proposal to pay 50% of his total debt in five years is submitted by the trustee and all the creditors accepted the offer. The client now pays $420 monthly for five years. After five years, all his debts are paid off.
Mr. A can also choose to make a higher monthly payment to fulfill his obligations in a shorter time. The faster his debts are paid, the sooner his credit score can recover.
Advantages and disadvantages of a consumer proposal
As with all extreme debt management programs, there are advantages and disadvantages to a consumer proposal. Would the advantages outweigh the disadvantages to help you get out of debt sooner?
Having a fixed monthly payment with no interest can give you peace of mind. You need only to focus on the reduced monthly payment and use the extra money for your day to day living.
A consumer proposal is a little similar to bankruptcy in a way that it will adversely affect your credit score, thus affecting your ability to obtain a credit card. You need to make sure that your payment is on time. If you miss 3 months of payment, your contract becomes void and your debt goes back to its original balance plus interest.
The information I have given you is based on my experience as a financial adviser. Each situation is unique and needs in-depth analysis. Talk to a licensed financial advisor or trustee to properly guide you if a consumer proposal is a right path for you.
Source: The Government of Canada website