If you’re like most Canadians, you’re probably familiar with the term consumer proposal, but do you understand what it truly means? Many of us use consumer proposal and bankruptcy interchangeably. While both are similar with respect to how they help you get rid of debt and put you in a better position from a monthly cash flow perspective, the way that each of them achieves this is different.
Let’s take a look at what a consumer proposal is, how it works and the benefits of filing a consumer proposal over filing for bankruptcy.
What’s a Consumer Proposal and How Does it Work?
A consumer proposal is a formal arrangement that’s negotiated with creditors that you owe money to. This legally binding agreement is negotiated and administrated by a Licensed Insolvency Trustee (LIT). A consumer proposal is another way to handle debt besides filing for bankruptcy. It protects you from your creditors seeking immediate debt collection, sometimes via legal action.
When filing a consumer proposal, you’ll want to work with an experienced LIT that you can trust. The LIT and you will work closely together to come up with a proposal that your creditors are likely to accept. At its heart, the consumer proposal will pay creditors a percent owing to them, lengthen your payment schedule or a combination of both. (Please note that your consumer proposal can only be stretched out to five years at a maximum.)
When filing a consumer proposal, instead of paying creditors directly, you’ll make the payments through the LIT you’re working with. The LIT will then pay the creditors based on the agreed upon repayment schedule and amount in the consumer proposal.
What are the Benefits of Filing a Consumer Proposal?
Considering filing for bankruptcy and a consumer proposal and not sure which one to go with? Here are some benefits of filing a consumer proposal.
Not Filing for Bankruptcy. A major benefit of filing a consumer proposal is you’re not filing for bankruptcy. Creditors will usually accept the consumer proposal you develop with the LIT if they believe they’re likely to be paid more than they would receive under a bankruptcy.
But filing a consumer proposal isn’t just a benefit for creditors, it can be beneficial to you. Consumer proposals don’t tend to affect your credit score in as much of a negative way as bankruptcies do. Consumer proposals results in a R7 rating on your credit report, while bankruptcies result in the worst credit rating, an R9.
Better Cash Flow. Since the amount of time you have to repay your debts may be stretch out or the amount you’re required to repay lessened, your cash flow is almost always improved. Interest also stops accruing the moment you file the consumer proposal, helping you save on the total amount of interest you’ll pay.
Keep Your Assets. One of the biggest worries about filing for bankruptcy is losing the assets you’ve worked so hard for over your life. We’re talking about your home, car and other worldly possessions. Unlike a bankruptcy where you could have to turn over the keys to your home and car, in a consumer proposal those assets are typically protected from being seized by creditors.
This was a brief overview of what a consumer proposal is and how it’s different from filing for bankruptcy. Thinking about filing a consumer proposal? Speak with one of our experts to see if it makes sense for you.
About the Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.