No one starts its life intending to file a consumer proposal. People file a Consumer proposal for reasons beyond its control. A Consumer Proposal is not a bad thing. It used to be socially unacceptable, now it is the debtor legal right to file a consumer proposal as a way to get out of debts. A Consumer Proposal should be considered as one of the methods to become debt free, but if comes with a price. Filing a proposal is better than filing for bankruptcy.
The following content is the script of “How does Consumer Proposal work?” seminar. It is posted here for your convenience if you prepare to read instead of listing to the seminar.
Slide #1 – Introduction
Hello and welcome to the Consumer Proposal seminar.
No one starts its life intending to file a consumer proposal. People file a Consumer proposal for reasons beyond its control. A Consumer Proposal is not a bad thing. It used to be socially unacceptable, now it is the debtor legal right to file a consumer proposal.
A Consumer Proposal should be considered as one of the methods to become debt free, but if comes with a price.
Slide # 2 – Objectives
Let’s start by quickly reviewing what we’ll cover:
- We will Define what is a Consumer Proposal is and answer the who, what and why of filing a Consumer Proposal;
- Examine if a consumer proposal may be the debtors best option.;
- Discuss the characteristics of a Consumer Proposal , the advantages, the disadvantages, the costs;
- the ways to reestablish the debtor’s credit ;
- and answer a few of the most frequently asked questions.
Slide #3 – Complexity of Bankruptcy Laws
Before we delve into our seminar; I want to highlight that Bankruptcy laws and how it relates to consumer proposal. The Bankruptcy laws are so diverse and complex, it is impossible to deliver a comprehensive seminar that covers consumer proposal in all jurisdictions around the globe.
We will be covering consumer proposal as it is governed by the Canadian bankruptcy law.
Slide #4 - “Let’s make a deal!” to avoid Bankruptcy
Bankruptcy can be avoided. No one should jump into it, before exploring other options that could relieve him or her from its current debt crisis.
Let’s look at a situation. The debtor’s income is being split among all its creditors in the form of minimum payments. Not enough money to honor the debtor’s commitment. The debtor is struggling to make ends meet and wondering what to do.
If this is the situation you find yourself in month in month out. You need to explore if Consumer proposal is right for you.
Slide #5 - What is Consumer Proposal?
Consumer proposal Is an arrangement to pay a reasonable amount to the creditors. This allows a debtor to keep all of his property and stay out of bankruptcy. Consumer Proposal requires the debtor to come up with a plan that debtor to pay the debts within five years.
What is the difference between a Debt Management plan and a consumer proposal? A Debt management plan is not a legally binding agreement between the debtor and its creditors, a consumer proposal is.
There are two Consumer Proposal types under the Bankruptcy & Insolvency Act:
- Consumer proposal - This option is good for a maximum of $75,000;
- Division I proposal - This option is good for any amount in excess of $75,000.
In either case, the debtor must have the capacity to pay the amount agreed upon in the legally binding consumer proposal, for the entire duration of the consumer proposal.
Slide #9 - Who Files for Consumer Proposal?
Individuals or business owners who are under siege from creditors file for Consumer Proposal. A Consumer Proposal is viewed to be the last resort in dealing with creditors.
It could be a:
- business owner whose company has failed, leaving him or her personally responsible for the business debts;
- a person that has lost its job and was forced to live off credit before a new job was found;
- Making good money but unable to pay all its creditors as bills come due;
- or a person that was unable to work due to sickness or disability.
Generally, it will be someone who has something to gain by filing for a consumer proposal rather than a bankruptcy. For example a professional who can’t maintain its accreditation if they go bankrupt.
Slide #10 - How does a Consumer Proposal work?
We are going to discuss how the Consumer Proposal works.
The first stage in the consumer proposal consists of determining the details of the proposal.
A Certified Insolvency Counselor or Bankruptcy Trustee will:
- conduct a financial assessment of the Debtor;
- Help the debtor summarize its financial situation;
- Determine how much of a monthly payment the debtor can afford to make;
- Then, they’ll compare that payment to the total amount of the debtor unsecured debt to determine how many months the debtor will be required to pay.
If the numbers appear reasonable for both the debtor and its creditors, they will prepare the documents necessary to file a proposal to the creditors.
Slide #11 - How does a Consumer Proposal work?
The 2nd stage in the consumer proposal process is up to the creditors.
Under the Bankruptcy and Insolvency Act the creditors have 45 days to vote for or against the proposal. If 50% +1 creditors (in other words a simple majority) vote for the proposal then it is deemed to be accepted by ALL creditors.
Fifteen days after that, if there are no objections, the proposal will be approved by the Court. From that date forward, both the debtor and the creditors are locked into the terms of the consumer proposal.
The consumer proposal becomes a binding agreement for all the involved parties. The Debtor is expected to honor the new binding contract with its creditors.
Three missed payments will annul the proposal. All debts will revive and the creditors will have the legal right to go after the Debtor for what he or she owed plus interest. Should a default happens, the Debtor is automatically i forced to file for bankruptcy.
Slide #12 – The Proposal may have opposition
During the 2nd stage of the consumer proposal, any dissent to the consumer proposal received prior to 45 days of the filing is deemed to be a request for a creditors’ meeting.
During that meeting the Creditors vote with a simple majority of the dollars voted deciding on acceptance or refusal of the proposal.
If the creditors do not accept or the court does not approve the consumer proposal the debtor cannot make another consumer proposal. The debtor is not automatically bankrupt if the consumer proposal is not accepted; the debtor often has to file for bankruptcy at that time.
Slide #13 - Duties of the person who filed for Consumer Proposal
The bankruptcy and insolvency Act protects the debtor from its creditors, but it imposes certain conditions while the person is in the Consumer Proposal period.
While in Consumer proposal:
- the debtor must make monthly payments to the trustee;
- If the debtor misses 3 monthly payments, the proposal is deemed to have failed. The debtor’s unsecured creditors have the right to collect on their debt, may immediately apply to the court to garnishee the debtor’s wages and interest charges are applied to debtor’s debts back to the day that the debtor filed the consumer proposal to creditors;
- The debtor does not need to turn in all credit cards. However, the creditors most likely will cancel all the credit cards and freeze any line of credits;
- The debtor must attend two counseling sessions on money management.
Slide #14 - What if my creditors vote “no” to consumer proposal?
Should the proposal receive 25% or more of the creditors vote against accepting the proposal, the trustee will call a meeting of creditors.
The Debtor must attend the creditors meeting. At that meeting the trustee will help the debtor negotiate with the creditors in an attempt to find an agreement that both parties find acceptable.
If the proposal fails, then the insolvent person has to file bankruptcy.
Slide # 15 - Which Debts Are Included in Consumer Proposal?
Consumer proposals to creditors were created to deal with unsecured debt.
An unsecured debt is money owed without collateral. Examples include:
- Credit cards;
- Lines of credit;
- Personal loans;
- Income taxes;
- Student loans older than seven years.
Court and family court imposed fines and student loans cannot be included in a Consumer Proposal.
Slide #16 - How does a consumer proposal affect credit rating?
The debtor’s credit rating will definitely be affected by filing a consumer proposal.
All bad debts placed for collection will be revised to R7 from R9. R7 means the current debt is in in consumer proposal or credit counseling.
The Debtor’s credit rating will remain as R7 until the proposal is completed. The trustee will provide the debtor with a certificate of compliance. The compliance letter will formally relieve the debtor from its obligations.
In addition, a note will appear in the debtor’s credit record for up to 6 years in Ontario, and 6 to 7 years in other provinces and territories from the date that the debtor files the proposal to creditors.
Slide #17 - What are the assets the debtor is allowed to keep?
Remember that a consumer proposal is an alternative to bankruptcy. Under the Bankruptcy and insolvency Act a debtor in Consumer Proposal is entitled to keep all his assets and can earn as much money as possible.
However, remember, the more assets the debtor has, the more money the debtor has to offer its creditors.
Slide # 18 - What does a proposal to creditors cost?
The cost of the proposal varies from a debtor to debtor. The income and asset of the debtor dictated how much the debtor has to pay to settle on the debt owed.
The trustee’s fees are set by the Superintendent of Bankruptcy and are described in the Bankruptcy and insolvency Act.
In most cases, the trustee will be paid out of the proceeds of the proposal.
For example a debtor offers its creditors $12,600 in payments over 36 months to retire $25,000. Which translate that the debtor has to pay $350 per month? The trustee fees for administering the proposal would come out of that amount.
Slide #19 – The proposal is completed
The trust will issue a certificate of full performance to certify that the proposal has been fully performed. All the debts owed are cleared for ever.
The Credit bureau is notified of the full performance of the proposal and in three years the record of the proposal is removed from your credit report.
Slide #20 - Reestablishing the debtor Credit
A consumer proposal is a black mark on a debtor’s credit rating that stays on its credit bureau report for six to seven years depending on the province that the debtor lives in.
However, a diligent person can rebuild its credit rating in as little as two years and even buy a house one day after discharge with 15% down payment.
Slide # 21 - Frequently Asked Questions
Question: Can’t I just leave a creditor out of the consumer proposal?
Answer: No. If the debtor files a proposal to creditors, He or she is required to include all of its unsecured creditors. That includes family and friends too. All of the debtor’s unsecured creditors must be treated the same - it’s one of the basic conditions of filing a consumer proposal
Slide # 22 - Frequently Asked Questions
Question: What happens if I miss a payment on my consumer proposal?
Answer: Over the life of a consumer proposal the debtor may miss up to 2 payments and the trustee will simply add two more payments to the end of the proposal.
However, if the debtor misses 3 payments the proposal to creditors collapses and is annulled by the Court. If the debtor proposal is annulled, the unsecured creditors may immediately apply to the court to garnishee the debtor’s wages and interest charges are applied to the debts back to the day that the debtor filed the consumer proposal to the creditors.
Slide #23 - Why do we offer this Insight?
We at Debt free Living believe in educating you about money management principles and how to get more from your money.
Countless numbers of people are challenged financially. We want to empower you to:
- Get a budget in your life that helps you achieve your goals. Having a budget helps you reduce or stop relying on more debt;
- Eliminate your debt. Debt elimination is not debt consolidation.
We want to see you go from debt to wealth. We want you to lead a happy, secure and prosperous life.
We at Debt Free Living want to give you the gift of becoming debt free on $10 per day. We wrote the book on how to do it successfully. We would love to personalize a debt elimination plan for you so you can become secure about your financial future.
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