Definition
A consumer proposal is a legally binding agreement between a debtor and their creditors to pay back a portion of their debts over a specific period of time. It is often seen as an alternative to bankruptcy in many countries, including Canada. A licensed insolvency trustee supervises the process to ensure all terms are met.
Key Takeaways
- A Consumer Proposal is a legally binding agreement set up by a licensed insolvency trustee between you and your creditors to pay back a portion of your debts over a period of up to 5 years.
- It is considered a less severe alternative to bankruptcy and will not result in the loss of all your assets, however, it will affect your credit score and remain on your credit report for a set period of time.
- By filing a Consumer Proposal, you can potentially stop actions taken by creditors such as wage garnishments, lawsuits, or calls demanding payments.
Importance
A Consumer Proposal is an important financial term as it refers to a formal arrangement set up by a licensed insolvency trustee between a debtor and their creditors.
It permits debtors to pay back only a portion of their debts, extend the time they have to pay off the debts, or both.
This legal process ensures that debtors can avoid bankruptcy and relieve a part of their financial burdens.
Meanwhile, creditors recover more of their funds than they might in a bankruptcy scenario.
Moreover, the consumer proposal protects the debtor from debt collectors’ calls and wage garnishments, making the repayment process easier and less stressful.
Explanation
A Consumer Proposal is a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). The overarching purpose of a Consumer Proposal is to provide a method for individuals with unmanageable levels of debt to reach a modified payment agreement with their creditors. Through this process, the debtor can avoid filing for bankruptcy and make arrangements to repay part, or all, of their debts over a specified period of time up to a maximum of 5 years.
The utility of a Consumer Proposal comes into play when an individual is unable to make their monthly debt payments in full. In the Proposal, the debtor has the flexibility to propose paying a percentage of what is owed, or extending the time they have to repay their debts, or both.
While the debtor’s assets are not sold in this process, Consumer Proposal nevertheless offers a legal protection from debt collectors looking to seize assets or garnishee wages. Therefore, it is an essential tool used to navigate and manage high debt situations.
Examples of Consumer Proposal
Credit Card Debt Settlement: A person may find themselves in overwhelming credit card debt due to high-interest rates and unmanageable payments. They can’t afford to keep up with their payments and the debt keeps growing. In this case, the individual can submit a Consumer Proposal, outlining a plan to pay off a percentage of the debt over a stipulated period of time, typically 3-5 years. In this agreement, the interest would stop accruing, enabling the person to manage their debts efficiently.
Mortgage Arrears: Another example of a Consumer Proposal involves mortgage payments. Suppose a homeowner is unable to keep up with his mortgage payments because of job loss or other unforeseen circumstances. This can lead to accumulating arrears that eventually the homeowner can’t afford. By submitting a Consumer Proposal, he might negotiate to repay his arrears in lesser amounts over a longer period of time, avoiding foreclosure on his home.
Medical Debts: Imagine a person who underwent an expensive medical treatment and now sits with an enormous medical debt that she can’t afford to clear. A Consumer Proposal could be a lifeline. She might negotiate with the creditors to pay let’s say, 60% of the debt amount over a time period of five years in monthly installments. If the proposal is accepted, she could resolve her debt problem without resorting to bankruptcy.
FAQ on Consumer Proposal
What is a Consumer Proposal?
A Consumer Proposal is a formal agreement setup between you and your creditors that is administered by a Licensed Insolvency Trustee. It includes a plan for the repayment of all, or a portion, of your unsecured debt over a period of up to 5 years.
Who can make a Consumer Proposal?
Any individual who owes between $1,000 and $250,000 (not including mortgages on a personal residence) can make a consumer proposal. It’s also available to insolvent businesses that owe less than $5 million.
What are the advantages of a Consumer Proposal?
A Consumer Proposal allows for greater flexibility in terms of payment schedule compared to other debt solutions. It ceases interest rates, prevents wage garnishment, and provides a way out of debt without going bankrupt.
How does a Consumer Proposal affect my credit?
While a Consumer Proposal has less of an impact on your credit rating than bankruptcy, it still has significant effects. If you submit a Consumer Proposal, it will appear on your credit report under the public records section and can remain there for up to three years after the entire proposal is paid.
Can a Consumer Proposal be declined by the creditors?
Yes. For a Consumer Proposal to be accepted, creditors representing at least 51% of the claimed debt must vote in favor of it. If not, the creditors have the right to decline the proposal.
Related Entrepreneurship Terms
- Debt Settlement
- Personal Insolvency
- Credit Counselling
- Bankruptcy
- Insolvency Trustee
