What You Need to Know about Filing a Consumer Proposal
Filing a consumer proposal can feel a bit intimidating. As you start to research, you’ll find meetings of creditors, public records, and official filings with the Office of the Superintendent of Bankruptcy (OSB) Canada. All of that may sound scary but, at its heart, a consumer proposal is simply a plan that allows you to get relief from your debt and avoid bankruptcy.
You file a consumer proposal with the help of a Licensed Insolvency Trustee like Melanie Leigh. The trustee helps you develop a reasonable repayment plan that you can afford and that your creditors will be likely to accept. Melanie will also be there to assist you through the process.
With that in mind, we’ve put together this beginner’s guide to filing a consumer proposal. You’ll learn how the process works, how costs are determined, and the pros and cons. If you have any questions or would like more information, you can contact Melanie at (780) 784-8638.
What is a consumer proposal?
A consumer proposal is an offer to creditors to settle your debt for less than you owe. Once your creditors approve, the proposal becomes legally binding. Again, those words “legally binding” may sound scary, but what they mean is that once you file a consumer proposal you’re legally protected. You receive an automatic stay of proceedings that means unsecured creditors cannot pursue any collections or legal action against you.
With the help of a Licensed Insolvency Trustee (LIT), you set a plan that pays back a portion of the total debt you owe. That portion is determined by what you can reasonably afford to repay.
The trustee’s job is to help you develop a proposal that is likely to get accepted by your creditors. That way, your creditors get paid back at least some of what they’re owed and you avoid bankruptcy.
Keep in mind that for a proposal to be accepted, it must offer creditors a better deal than what they would get if you filed for bankruptcy.
Requirements for a consumer proposal
To file a consumer proposal, you need a minimum of $1,000 in debt. Your maximum debt (not including your mortgage) must be $250,000 if you file individually. If you are married, the maximum amount is $500,000.
You must file the proposal through an Insolvency Trustee that is licensed to work in your province or territory.
Debts that can be discharged through a consumer proposal
Most unsecured debts are eligible for discharge through a consumer proposal:
- Credit cards
- Unsecured personal loans
- Unsecured Lines of Credit (LOCs)
- Debt collections
- Student loans that are more than seven-years-old
- CRA income tax debt
For any of the above types of debt, the remaining balances will be discharged once you complete the repayment plan outlined in your proposal.
If you have other debts, such as student loans that are less than seven-years-old, child support or alimony arrears, they can participate in the proposal. Your proposal will help reduce the balances you owe and catch up on payments. However, once your proposal ends, you will still be responsible for paying the remaining balances.
How a consumer proposal works
There are three basic steps to filing a consumer proposal:
Step 1: Get a free debt assessment to understand your options
The first step in a consumer proposal allows you to decide if filing a proposal is right for you. You meet with a Licensed Insolvency Trustee like Melanie Leigh for a free, no-obligation debt assessment.
The assessment starts by evaluating what your situation would be if you filed for bankruptcy. Melanie will review your debts and assets. She’ll help you understand which assets would qualify for exemption if you filed.
You will also review your income and expenses. The goal is to see if you can develop a reasonable repayment plan that would be more beneficial to your creditors than a bankruptcy filing.
That’s key because, for a proposal to be approved by your creditors, it must offer them something better than what they’d get if you filed for bankruptcy. We’ll talk more about this soon.
During the assessment, Melanie will also review all the options you have for getting out of debt. You’ll get fully informed on the solutions available, so you can make an informed decision.
Once you decide to move forward, you will need to meet with Melanie—either in person or virtually—to sign you papers.
Step 2: Get the approval of your creditors
At the end of the assessment, if you decide to move forward, your trustee will draft the proposal. You will meet with the trustee either virtually or in person to sign your papers. Then the trustee will submit it to the Office of Superintendent of Bankruptcy (OSB) Canada. Once it’s filed, you will be granted an automatic stay of proceedings, protecting you from collection actions by unsecured creditors.
Then the proposal will be submitted to your creditors for approval. Creditors have 45 days to review the proposal and decide.
- Approve the proposal as is
- Make a counteroffer
- Request a meeting of creditors
- Reject the proposal outright, which is extremely rare because your trustee helps you ensure the proposal you make is reasonable
The approval is based on a majority vote by the dollar amount of debt. Each dollar of debt held by a creditor or lender equals a $1.00 vote. If a dollar-majority approves the proposal, then the proposal is approved. Even creditors that did not approve the proposal would be legally bound by the agreement.
If a creditor counteroffers, then it is Melanie’s job as your trustee to help you evaluate the counteroffer and reach an agreement with the creditor. She will contact you right away to explain the counteroffer and then help you decide how to respond.
The creditors may also request a meeting of creditors. Again, this is done by a dollar amount vote. If creditors holding 25 percent of your debt request a meeting, it will be held.
You, your trustee and your creditors will attend and review the proposal as a group. In rare cases, counteroffers may be proposed and negotiated here as well, although most counteroffers are dealt with earlier on in the process. Then a final vote will be held.
Once a dollar-majority of your creditors that’s greater than 50 percent approve the proposal, court approval will occur within 15 days. This doesn’t require any attendance before the court.
Step 3: Get out of debt by completing your repayment plan
The final step is to fulfill all the duties required of you under your consumer proposal. This includes:
- Making all the payments outlined in your proposal
- Completing two mandatory financial counselling sessions provided by your trustee.
Once these two duties are met, your trustee will provide a Certificate of Full Performance that affirms you have completed all the requirements. All eligible debt balances will be forgiven.
The creditors will report to the credit bureaus that the balance of your account has been paid. The record of a consumer proposal will stay on your credit report for three years from the date you complete the program.
Taxes in a consumer proposal
The Canada Revenue Agency (CRA) is treated like any creditor if you owe them a debt. Your tax debt will be included in your proposal and the CRA will vote on your proposal along with the rest of your creditors.
This means all tax returns must be filed before your consumer proposal can be filed. You will provide your trustee with your tax information. They will file any returns for years that have not been filed and any debt you owe to Revenue Canada will be included in your proposal.
Then your trustee will also file a provisional tax return on your behalf for the current tax year. If you owe a debt for the year, it will get added to your proposal. If you will get a refund, the provisional return determines the maximum amount of the refund the CRA can take.
For example, let’s say you file your proposal in November. Your provisional tax return shows you would get a refund of $900. When tax season rolls around, you have a refund of $1,500 by the end of the year. Revenue Canada is restricted to $900 and you receive the remainder.
The cost of a consumer proposal
It’s important to note that there are no upfront costs as you decide if a consumer proposal is right for you. The debt assessment is free.
If you decide to move forward with the proposal, you will remit the Government of Canada filing fee of $104.24.
All other fees, including the trustee’s fees, are taken from the payments that you make through your proposal.
How is the proposal’s payment structure determined?
The repayment plan for a consumer proposal can vary widely from one consumer to the next. The starting point is always the same—what will your creditors get if you declared bankruptcy and can you offer them something better?
In many cases, “better” simply means a higher percentage of money than what they’d get through bankruptcy. However, there are other options.
For example, you may have a family member that would be willing to help by making a lump-sum payment. Or, you may be willing to sell an asset to provide a lump-sum payment yourself. In both cases, creditors might be willing to accept a lower percentage than what they’d get in bankruptcy for that fast lump sum.
As your trustee, it’s Melanie’s job to walk you through all these options to set up a realistic and affordable repayment plan.
At most, you will be required to make monthly payments for a maximum of 60 months. But again, proposals have the flexibility to be tailored around your situation and what you can reasonably afford to pay.