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  • Writer's pictureScott Nazareth

Consumer Proposals and Second Mortgages

Consumer proposals in Canada represent a significant aspect of the country's insolvency and debt resolution framework. This article will explore the concept of consumer proposals, their benefits, the process involved, and how they compare to other debt relief options available in Canada.



In Canada, a consumer proposal is a legal process under the Bankruptcy and Insolvency Act (BIA) aimed at helping individuals struggling with debt to reach a settlement with their creditors. This process is administered by a Licensed Insolvency Trustee (LIT), a professional authorized to oversee insolvency proceedings in Canada.


Understanding Consumer Proposals

A consumer proposal is designed for individuals who owe less than $250,000 in debt (excluding the mortgage on their primary residence) and are unable to repay their debts in full but have the means to pay a portion. The proposal is essentially an offer to pay creditors a percentage of what is owed to them, extend the time to pay off the debts, or a combination of both.


The Process of Filing a Consumer Proposal

1. Assessment: The first step is to meet with an LIT to assess your financial situation. The LIT will review your debts, income, assets, and expenses to determine if a consumer proposal is the best option.

2. Filing the Proposal: If a consumer proposal is deemed appropriate, the LIT will help you develop a proposal plan. This plan outlines how much you can afford to pay, how long the payments will last (not exceeding five years), and how much the creditors can expect to receive.

3. Stay of Proceedings: Once filed, a “stay of proceedings” is enacted. This means that unsecured creditors cannot take legal action against you, and collection calls must stop.

4. Creditor Voting: Creditors have 45 days to vote on the proposal. Acceptance requires a majority of the dollar value of your debts to be in favor.

5. Approval and Payments: If the proposal is accepted, you must adhere to the terms and make regular payments to the LIT, who then distributes these funds to your creditors. If the proposal is rejected, you may need to consider other options, such as bankruptcy.

6. Completion: After fulfilling all terms of your proposal, you will be legally released from the debts included in the proposal.



Benefits of a Consumer Proposal

1. Debt Reduction: You may pay back only a portion of your total debts.

2. Fixed Payments: Payments are based on your income, assets, and family size, and do not increase if your income does.

3. Asset Retention: Unlike bankruptcy, you can retain your assets in a consumer proposal.

4. Credit Rating Impact: A consumer proposal is recorded on your credit report but is considered more favorable than bankruptcy.


Consumer Proposal vs. Bankruptcy

While both are legal processes managed by an LIT, there are key differences:

- Debt Relief: Bankruptcy often involves surrendering certain assets to discharge debts. In contrast, a consumer proposal allows for retaining assets.

- Credit Impact: A consumer proposal is recorded as an R7 rating (making regular payments through a special arrangement) on credit reports, while bankruptcy is an R9 (worst rating).

- Payments: In bankruptcy, payments can change based on income, whereas in a consumer proposal, payments are fixed.

### Consumer Proposal vs. Debt Consolidation

Debt consolidation involves taking out a new loan to pay off multiple debts. Unlike a consumer proposal, debt consolidation requires you to pay back 100% of your debts, often with interest.


Limitations and Considerations

- Not for Secured Debts: Consumer proposals only cover unsecured debts like credit cards and personal loans, not secured debts like mortgages.

- Eligibility: Only individuals with debts below $250,000 (excluding mortgage) qualify.

- Credit Impact: A consumer proposal impacts credit ratings for the duration of the proposal plus three years, up to a maximum of six years.



The Role of Licensed Insolvency Trustees

LITs are crucial in the consumer proposal process. They provide advice, help draft the proposal, administer the proposal, and ensure fairness to both debtor and creditor.


Conclusion

A consumer proposal can be a viable option for Canadians struggling with debt. It offers a way to deal with debt without resorting to bankruptcy, allows individuals to keep their assets, and stops collection calls and legal action. However, it’s important to carefully consider the implications, including the impact on credit ratings and the long-term commitment involved. Consulting with a Licensed Insolvency Trustee is the first step in determining whether a consumer proposal is the right debt solution.


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