Benefits of a Consumer Proposal

According to the Government of Canada, the national rate of insolvency in 2022 was 3.3 per 1,000 individuals. If you are insolvent, you may be wondering if you should pursue bankruptcy or a consumer proposal. While bankruptcy may be the best course of action in some cases, a consumer proposal could be more beneficial depending on your circumstances. 

If you are thinking of making a consumer proposal, reach out to Matthew R. Harris Law P.C. in Toronto, Ontario. Matthew Harris and his team can help you explore your options and decide which option is right for you.  

What Is A Consumer Proposal?    

A consumer proposal is a legally binding agreement with your creditors that puts an automatic stay on your unsecured debts and allows you to pay off the debts according to the terms of your proposal. For example, you and your creditors may agree that you should have extra time to pay off your debts, or you may agree to pay off a certain percentage of what you owe.  

You may enter into a consumer proposal if your debts do not amount to $250,000 or more, not including secured debt, such as a mortgage. During the proposal process, you will meet with a Licensed Insolvency Trustee (LIT), a professional employed by the government who will help you create a proposal and submit that proposal to creditors. You will then pay off your creditors according to the terms of your proposal through the LIT. 

Overview of Canadian Insolvency Laws  

The rules surrounding bankruptcy and consumer insolvency are set by the Bankruptcy and Insolvency Act (BIA), overseen by the Office of the Superintendent of Bankruptcy (OSB). Regulated by the OSB, the BIA determines all proceedings involving bankruptcy and consumer proposals and determines debtors’ and creditors’ rights and responsibilities. If you are declaring consumer insolvency and filing a consumer proposal, you must make a full disclosure of your insolvency, complete two Financial Counselling sessions, and maintain contact with an LIT. Under the BIA, you are legally required to meet all payments to creditors according to the terms of your proposal.  

According to the BIA, certain debts cannot be discharged by consumer proposal, including child support, alimony, court fines, debts and liabilities relating to criminal activity such as fraud or embezzlement, damages incurred in a lawsuit involving assault or wrongful death, and student loans taken out less than 7 years before insolvency is declared.

Benefits of a Consumer Proposal 

Debt Repayment Plan  

The debt repayment plan can be tailored to your specific needs. With the guidance of the LIT and the agreement of your creditors—and with the help of a skilled lawyer, of course—you will likely be able to pay off your debts within a reasonable period of time. Additionally, you and your creditors are legally bound to follow the proposal’s terms as-is; even if your income increases, your payments will not increase, which can sometimes happen in bankruptcy. Additionally, you will be able to avoid total bankruptcy and will be able to legally state that you have never been declared bankrupt.

Legal Protection 

As in bankruptcy, there will be an automatic stay placed on all of your debts once you file your proposal. Creditors cannot pursue you once the proposal is filed, and they cannot approach you for any other payment after you have paid off the debts laid out in the proposal. You will be legally protected from wage garnishment and collection calls throughout the process.  

Asset Preservation   

Unlike in some bankruptcy proceedings, you will retain possession of assets such as your home and vehicle(s). Your assets will also be protected from liquidation.

Credit Rating 

Compared to a bankruptcy, a consumer proposal has less of an effect on your credit rating. While bankruptcies stay on your credit report for six years after discharge, consumer proposals stay on your record for six years after the date of filing. You are able to pay off your consumer proposal early, unlike in bankruptcy. It is possible for a record of your consumer proposal to remain on your credit report for only three years from the date you complete the proposal, which is another incentive to complete your proposal early. The opportunity for early completion allows you to begin rebuilding your credit rating sooner than if you had filed for bankruptcy.  

Reduced Stress  

The avoidance of total bankruptcy as well as the flexible timeline for completing the proposal and the resulting positive effects on your credit rating can help reduce stress and improve your mental health and well-being. All of this can further compound your financial recovery. 

Consulting With an Insolvency Lawyer 

An insolvency lawyer can assist you as you work toward your financial fresh start. Having experienced legal counsel on your side can improve your peace of mind, as you will know that you are meeting all legal requirements, avoiding delays and other issues that may arise as a result of mistakes during the process. An insolvency lawyer can also ensure that your proposal meets your unique needs, and can be instrumental in successful negotiations with creditors.