"Lets Make a Deal!" to avoid
Bankruptcy in Ontario
It's the end of the month and the
bills are due. You've got a good job. You can afford
to pay, just not as much as everyone wants. What do
you do?
If you find yourself in this situation
month after month, then you might want to consider
filing a personal or consumer proposal (to your creditors).
What is a Consumer Proposal?
The concept behind a consumer proposal
to creditors is similar to a Debt Management Plan:
you can afford to repay a portion (or all) of your
debts; you simply need more time to pay.
Unlike a Debt Management Plan, a
consumer proposal to creditors is a legally binding
procedure that is administered for the courts by a
licensed trustee in bankruptcy.
Proposals to creditors are best suited
to persons with debts in excess of $5,000 (to a maximum
of $75,000), who have the ability to repay a portion
of their debt. The advantages of a consumer proposal
are:
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Maximum period is 5 years; |
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If accepted by a majority of your creditors
(50% +1) it is deemed to be accepted by ALL
of your creditors; |
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Interest is frozen at the date you file;
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You can negotiate to repay only a portion
of the debt you owe; |
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Wage garnishments (except for support
and alimony) are immediately stopped. |
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Your creditors are "stayed"
(restricted) from taking any legal action
against you; and |
Proposals to creditors were created
to provide people with an alternative to bankruptcy.
If you are in financial trouble and you have the ability
to repay a portion of your debt, perhaps a consumer
proposal to creditors is the right solution for you.
Once you file a proposal, none of
your unsecured creditors can garnish your wages or
take you to court until the proposal has been dealt
with. In fact, if your wages are being garnished and
you file a consumer proposal, the garnishment will
stop.
In addition, when you file a proposal
to creditors, all of your unsecured debts are frozen
and no more interest accumulates against them.
How does a consumer proposal work?
First, a trustee in bankruptcy will
help you summarize your financial situation and determine
how much of a monthly payment you can afford to make.
Then, they'll compare that payment to the total amount
of your unsecured debt to determine how many months
you will be required to pay. If the numbers appear
reasonable for both you and your creditors, the trustee
will prepare the documents necessary to file a proposal
to creditors.
Is that all it takes to present
a consumer proposal?
That's the end of the first stage.
The second stage is up to your creditors. Under the
Bankruptcy and Insolvency Act ("BIA") your
creditors have 45 days to vote for or against your
proposal. If a simple majority (50 % +1) vote for
your proposal then it is deemed to be accepted by
ALL of your creditors. Fifteen days after that, if
there are no objections, your proposal will be approved
by the Court. From that date forward, both you and
your creditors are locked into the terms of the proposal.
What if my creditors vote "no"
to my personal proposal?
If 25 % or more of your creditors
vote against accepting your proposal, your trustee
will call a meeting of creditors. At that meeting
(which you must attend) the trustee will help you
negotiate with your creditors in an attempt to find
an agreement that both you and the creditors find
acceptable.
Here's an example:
"You have debts totaling $25,000.
After you pay all of your living expenses (rent, utilities,
groceries, etc.) you have $500 left to pay bills.
You want to leave yourself a bit of a "buffer"
for unexpected expenses (like car repairs) so you
think you can afford to make a payment of $350/month
towards a proposal."
Generally, the threshold that creditors
consider reasonable is an offer to repay at least
50% of the amount that you owe. In the example above,
that would be $12,500. With a payment of $350 per
month it would take you 36 months to pay that amount,
so that's probably the proposal to creditors that
you would offer (36 monthly payments of $350/month).
If you could only pay $250 a month,
then it would take you 50 months to pay $12,500. If
you could pay $400 per month, then if would take you
32 months to pay $12,500.
Keep in mind that this is only an
example. Your creditors might accept less than 50%
or they may ask for more. Each consumer proposal is
different and has to be considered on its own merits.
Which debts can I include in my
proposal to creditors?
Consumer proposals to creditors were
created to deal with unsecured debt. An unsecured
debt is money owed without collateral. Some examples
of unsecured debt include:
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Credit cards |
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Lines of credit |
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Personal loans |
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Income taxes |
The other type of credit that people
usually have is called secured debt. Secured debt
is money that was borrowed with a condition that if
you fail to make your payments one (or more) of your
possessions may be seized and sold by the secured
creditor. Some example of secured debt include:
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Mortgage |
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Car loan/lease |
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Financing contract |
In most cases, secured creditors
are excluded from your proposal. The exception: if
you owe a secured creditor more than the value of
the item they hold security over. For example:
"One of your creditors is Acme
Finance. You owe Acme $2,500 and they hold security
over your stereo system, with a current value $1,500."
Acme is both a secured ($1,500 for
the stereo) and an unsecured creditor ($2,500 - $1,500
= $1,000). Under the terms of the proposal, you will
have to make an arrangement to pay Acme the $1,500
that they are entitled to (the value of their security)
or give them the security (your stereo). The other
$1,000 that Acme is owed will get lumped together
with all of your other unsecured debts.
Can't I just leave a creditor out
of the personal proposal?
No. If you file a proposal to creditors,
you are required to include all of your unsecured
creditors. That goes for family and friends too. All
of your unsecured creditors must be treated the same
- it's one of the basic conditions of filing a consumer
proposal.
What happens if I miss a payment
on my consumer proposal?
Over the life of a consumer proposal
you may miss up to 2 payments and the trustee will
simply add two more payments to the end of the proposal.
However, if you miss 3 payments the
proposal to creditors collapses and is annulled by
the Court. If your proposal is annulled, your unsecured
creditors may immediately apply to the court to garnish
your wages and interest charges are applied to your
debts back to the day that you filed your consumer
or personal proposal.
Once you file a proposal to creditors,
if you start to run into payment problems, contact
your trustee immediately.
How does a consumer proposal affect
my credit rating?
As soon as you file a proposal to
creditors your credit rating will be revised to either
an R7 (paid through a consolidation order, consumer
proposal or credit counseling debt management program)
or an R9 (bad debt or placed for collection or bankruptcy)and
it will probably remain at this rating until the proposal
is completed. In addition, after you complete the
proposal, a note will appear in your credit record
for up to 7 years from the date that you filed the
proposal to collectors.
Consumer proposals sound too easy...
Don't kid yourself. A consumer proposal
will only work if you have the ability to make your
payments. Remember, your alternative is to file bankruptcy.
Your personal proposal must offer your unsecured creditors
more money than they would receive in a bankruptcy
and they have to believe that you are capable of making
the payments that you are proposing.
What does a proposal to creditors
cost?
The trustee's fees are set by the
Superintendent of Bankruptcy and are described in
the BIA. In most cases, your trustee will be paid
out of the proceeds of the proposal. Using our earlier
example, if you offered your creditors 36 payments
of $350 to retire $25,000 worth of debt, your total
payments would be $12,600. The fees for the proposal
would come out of that amount.
I think I might be a candidate for
a consumer proposal, what do I do now?
If you are experiencing financial
difficulty, we recommend you make
an appointment to see a member of our team to
discuss whether a consumer proposal is an Chatham bankruptcy
alternative in your situation.
Our bankruptcy trustees will assess
your situation and help you determine the strategy
that makes the most sense for you. Our initial consultation
is always free of charge, and may help you to resolve
your problems before they get out of hand.
If you think you're in trouble -
contact
us today.
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