When filing a Consumer Proposal, you propose to pay a portion of the debt that you owe over a specific period of time. One common question that many have is what does a Consumer Proposal look like?
3 Consumer Proposal Examples
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 had recently purchased a home, and its value had increased since then. However, unexpected and costly house repairs arose, leaving them with $70,000 in debt. Their net equity in the home was $35,000. Unfortunately, they couldn’t secure a second mortgage and had minimal 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.
These examples illustrate various scenarios where consumer proposals provided individuals and couples with a manageable path to debt relief while preserving their financial stability and assets.
Consumer proposal costs – understand the terms
The terms of a Consumer Proposal can be as varied as the individuals that need them. It is worth mentioning that one or more terms can be combined when formulating a Consumer Proposal. The following is a sample of some different terms that could be included in a Consumer Proposal to creditors but is not intended to be an all-inclusive list.
1. Lump Sum Offer
A lump sum offer a is useful strategy when someone has a supportive third party willing to contribute towards resolving their debts.
- Example: A third party is prepared to contribute $8,000 towards the proposal, to be distributed among unsecured creditors upon their acceptance. The third party’s funds are only disbursed if the creditors’ acceptance leads to a legally binding agreement.
2. Fixed Monthly Payments
Fixed monthly payments represent the most prevalent form of Consumer Proposal, involving a commitment to pay a consistent sum each month for a predetermined duration.
- Example: A monthly payment of $300 for 48 months
3. Stepped Payments
Stepped payments are employed when an individual expects changes in their financial situation 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 flexible, varying based on specific criteria, often with a predetermined minimum that 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 require assistance in addressing 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
Percent payment involves committing to a regular monthly payment until a specific portion of the debt is paid through the proposal.
- 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
A Sale of Assets in a proposal is commonly used to liquidate an asset strategically, either to gain more time, preserve its value, or incentivize creditor acceptance.
- Example 1: The debtor plans to sell a summer cottage in the spring and directs the proceeds to be placed in the Consumer Proposal for creditors’ benefit. This choice allows the debtor to wait for a more favorable market season, rather than a forced sale in the off-season.
- Example 2: The individual agrees to sell or cash an asset typically beyond creditors’ reach. They might consider cashing their protected RRSPs, covering the taxes on the proceeds, and remitting the balance to creditors, contingent upon the creditors’ acceptance of the Consumer Proposal. The decision to cash RRSPs intended for retirement should be weighed carefully, with pros and cons discussed during the 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.