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If you’re exploring ways to manage your debt, you’ve likely come across the term ‘consumer proposal’. They can be a great way to take back financial control, but understanding their intricacies can be a bit daunting. That’s why we’re here – to simplify things for you.
In this blog, we’ll walk you through examples of consumer proposals, breaking down how they work in practice.
So, whether you’re considering a consumer proposal or just curious about your financial options, you will have the answers you need to make informed decisions.
3 Consumer Proposal Examples
A consumer proposal is an agreement you make with your creditors where you pay a portion of the debt you owe, over a specific amount of time. But what does this look like?
Example 1: Managing High Rent Costs
Meet Sarah, a single parent working as a nurse. She found herself in a situation where escalating rent costs in Toronto were consuming most of her income. Sarah had accumulated $45,000 in credit card debt and had a car loan of $20,000. With her monthly rent payments and minimum debt payments, she was left with barely enough for living expenses.
Sarah’s only significant assets were her car and $3,000 worth of nursing equipment, which were exempt in a bankruptcy. She didn’t expect a substantial tax refund. Based on her single income, Sarah would have to pay nearly $700 a month in surplus income payments over 21 months.
She decided to file a consumer proposal to reduce her monthly expenses. The proposal lowered her monthly debt repayment to $250, allowing her to afford rent and living costs.
- Proposal payments: $250 a month for 60 months.
- The result: Sarah repaid $15,000 of her $45,000 debt, saving $30,000 or 67%.
Example 2: Home Equity Utilization
John and Emily have recently purchased a home, the value of which has increased since they bought it. However, unexpected and expensive house repairs came up, leaving them $70,000 in debt. Their net equity in the home was $35,000. Unfortunately, they couldn’t secure a second mortgage and had limited savings. To manage the debt, they resorted to credit cards and a high-cost, unsecured line of credit at 28% interest.
When Emily faced a temporary job loss during the pandemic, it became challenging to keep up with payments. John decided to seek help, and he filed a consumer proposal offering to repay $40,000 over 60 months. While this was a significant amount, it was a more affordable option compared to their high-interest debt payments.
- Proposal payments: $667 per month for 60 months.
- The result: John paid $40,000 on their $70,000 debts, reducing it by 43%, and they retained ownership of their home.
Example 3: Navigating Debt After Divorce
Mark and Lisa, previously a dual-income household, faced financial turmoil following maternity leave, layoffs, and ultimately, divorce. They collectively owed $60,000 in debts, including a joint credit card with a balance of $25,000. As they contemplated debt relief, they realized that if one of them filed a proposal, the bank would seek repayment from the joint borrower. Therefore, both Mark and Lisa needed a solution.
Mark, as the higher income earner, would have had some surplus income and savings from the divorce settlement. His bankruptcy would have resulted in monthly payments of $400 for 21 months, totaling $8,400, which was challenging for his budget.
- Lisa’s Proposal payments: She agreed to pay $200 a month for 60 months.
- The result for Lisa: She paid $12,000, saving $13,000 on her debts, a 52% reduction.
Meanwhile, Mark, who was still out of work, decided to file for bankruptcy. As a first-time bankrupt, he had no surplus income and had utilized his cash savings from the divorce during his period of unemployment. His bankruptcy resulted in monthly payments of $180 for 9 months.
Consumer proposal costs – understand the terms
The terms used in a consumer proposal can be as varied as the people that need them. We know that the legal jargon can get confusing and overwhelming, so to help you understand what you’re looking at, we’ve pulled together some of the most common terms you’ll come across.
1. Lump Sum Offer
A lump sum offer is a strategic approach in a consumer proposal where a supportive third party, like a relative or friend, provides a one-time payment to help the debtor settle their debts.
- Example: Imagine a scenario where a third party agrees to pay $8,000 towards the debtor’s consumer proposal. This amount will be distributed among the unsecured creditors once they accept the proposal.
However, the funds will only be released if the creditors agree to the proposal, leading to a legally binding agreement between the debtor and the creditors.
2. Fixed Monthly Payments
Fixed monthly payments are the most common form of payment in a consumer proposal. It involves the debtor committing to pay a specific amount every month for an agreed amount of time.
- Example – An example of a fixed monthly payment could be $200 every month for a period of 48 months. The aim is to be debt-free at the end of this repayment period.
3. Stepped Payments
Stepped payments are an alternative to fixed monthly payments, and are used when the debtor expects their financial situation to change over time.
- Example 1 – Initially, $200 for the first 6 months, followed by $300 for the subsequent 12 months, and then $350 for an additional 18 months.
- Example 2 – Payments start at $800 monthly from November to February, then reduce to $120 per month from March to October, continuing for a duration of 4 years.
4. Floating Payments
Floating payments are a flexible option. They vary based on specific criteria and often have an agreed minimum amount, though this can be adjusted according to future circumstances.
- Example – The debtor commits to contributing either half of any monthly income exceeding $4,000 OR a minimum of $600 per month for 48 months, whichever amount is greater. Monthly earnings will be validated through pay stubs.
5. Full Payment
Full payment is an option for those who can meet their obligations to creditors but need help with their interest and penalties.
- Example: The debtor commits to a steady monthly payment until the principal debt is entirely settled. This arrangement halts all future interest, penalties, and collection actions as long as the agreed monthly payment is consistently made.
6. Percent Payment
A percent payment is where the debtor agrees to regular monthly payments, until a specific portion or percentage of the debt is paid off.
- Example: The debtor opts for a $350.00 monthly payment until 42% of the confirmed debts have been repaid. The precise amount will be determined after creditors submit their claims and relevant account details.
7. Sale of Assets
When you’re in a consumer proposal, sometimes you might decide to sell some of your things (like property or investments) to help pay off your debts. This is called a “Sale of Assets.” It’s a way to strategically use what you own to either get more time, keep the value of your assets, or make your creditors more likely to agree to your proposal.
- Example 1 – Let’s say you own a summer cottage. You plan to sell it in the spring when you can get a better price for it. The money you get from this sale goes into your Consumer Proposal to help pay your creditors. By waiting for the spring, you avoid selling it for less during the off-season.
- Example 2 – Another situation could be when you decide to sell or cash in something valuable that your creditors usually can’t touch. For instance, you might choose to use money from your RRSPs (a type of retirement savings plan). You would pay any taxes due on this money and then give the rest to your creditors, but only if they agree to your Consumer Proposal.
Remember, using your RRSPs, which are meant for your retirement, is a big decision. It’s important to think about the good and bad points of this choice, which can be discussed during a free consultation.
Consumer proposals – what’s a debt-free life worth?
To ensure the legal binding of your Consumer Proposal, a majority of your creditors must agree to the terms set by the trustee. This involves making payments to your trustee for distribution among your creditors, typically offering them more than they would receive in a bankruptcy scenario.
Calculating the cost of a Consumer Proposal varies for each individual. During a free consultation with a trustee like Harris & Partners, your unique financial situation will be thoroughly assessed. This consultation allows you to understand proposal terms, review payment examples, and weigh the pros and cons. It’s essential to consult a Licensed Insolvency Trustee (LIT) for a consumer proposal, as LITs are legally mandated for this purpose. Avoid unqualified debt counsellors offering similar services.
Managing debt can be intricate, and deciding on a consumer proposal’s suitability for your circumstances can be daunting. Therefore, seeking guidance from a licensed insolvency trustee is highly advisable.
Want to file a consumer proposal in Canada? Reach out to one of our licensed insolvency trustees at Harris & Partners Inc. by calling 1-800-268-8093 today.
