A consumer proposal is a process that is administered by a bankruptcy trustee for individuals that have consumer debt between $5,000 and $250,000. When a consumer has more debt than they can afford to pay back, they work with a bankruptcy trustee to create a proposal. This is a last-ditch effort to avoid declaring bankruptcy.
When someone uses a consumer proposal they still get to keep all their assets, any actions used by unsecured creditors (ie. garnishing wages) are legally stopped and the consumer gets to avoid declaring bankruptcy.
The proposal itself is an offer to pay creditors a percentage of the original amount owing, extend the time given to pay off the debt (or both). The proposal is a legally-binding process and can’t exceed 5 years.
The United States has something similar called a Chapter 13 Wager Earner Plan, which involves the consumer making set payment amounts (usually for a few years) that are then distributed among the creditors.
Frequency of Consumer Proposals
Most of us don’t have to deal with consumer proposals but some do and it’s important to have a basic understanding of how the process works.
In Alberta the number of consumer bankruptcies dropped between 2013 and 2014, but the number of consumer proposals went up by 58%.
Steps in a Consumer Proposal
The following steps are taken:
- The proposal is filed with a bankruptcy trustee and all payments are stopped (and all actions taken by unsecured creditors (ie. wage garnishments) are also stopped)
- The proposal is given to creditors and details the financial situation and circumstances of the consumer
- Creditors have 45 days to accept or reject the proposal
In some cases a meeting of the creditors is held to discuss the proposal. A meeting can be requested by one or more of the creditors if they are owed 25% or more of the outstanding debt. The voting at the meeting is determined by a majority based on the amounts owed. If there is $100,000 in total debt and Creditor A & B are both owed $60,000, they can vote to accept it since they form the majority (based on the total dollar value of the debt).
A creditor would want to accept a consumer proposal if they know they would get less of their money back if the person declares bankruptcy (usually the case). The proposal involves paying back a percentage of the amount owing but the amount under a consumer proposal is likely to be higher than under a formal bankruptcy.
The creditors will report the consumer proposal on the credit report and a note on the file is kept for 3 years after the consumer proposal is completed. A consumer proposal only covers unsecured debts (ie. credit card debt) and doesn’t apply to mortgages or vehicle loans (secured debt).
Avoiding a Consumer Proposal
The steps to avoid a consumer proposal (and bankruptcy) are all common knowledge – living with your means, paying bills on time and saving for the future.
It’s also important to have an emergency fund in case something comes up in the future. A budget is a great way to keep spending in check, but an unexpected cost like a medical bill, home repairs or vehicle repairs can come out of nowhere and can derail any budget.
Conclusion: a consumer proposal isn’t the best case for anyone’s finances but it is likely a good way to avoid declaring bankruptcy for those who have too much debt. The consumer still gets to keep their assets and wage garnishments are stopped.