Secured vs Unsecured Debt

Before discussing the impact of a consumer proposal on secured debt, it’s essential to distinguish between secured and unsecured debts. Unsecured debts include lines of credit, personal loans, credit cards and income taxes. Secured debts are those tied to specific assets, like a mortgage for a house or a car loan.

When you opt for a consumer proposal, you offer to settle your unsecured debts. This process allows you to manage your unsecured financial obligations, such as credit cards and personal loans, lines of credit, and income taxes, by proposing a repayment plan that fits your budget.

Filing a consumer proposal will help you pay back your unsecured debt with a payment that fits your budget and can free up room to make payments to your secured creditors.

Are Secured Creditors Included in a Consumer Proposal?

As in a bankruptcy, all your assets and liabilities must be listed on the documents you sign. Secured debts are acknowledged in the consumer proposal documents but are not inherently part of the proposal unless you decide to surrender the secured asset. If you wish to keep your secured asset, like a car or a house, you must continue to make payments to the secured creditor. The payments to the secured creditor are not part of your consumer proposal.

If you cannot afford your payments to the secured creditor or do not want to keep your secured asset, you can return the asset to the secured creditor, and the shortfall will be covered in the consumer proposal.

Your proposal administrator will notify your secured creditors you have filed a consumer proposal. However, if you keep your asset, the secured creditors do not participate in your proposal. Your agreement with them continues unless you stop paying the secured creditor.

In a consumer proposal, the secured creditors’ rights are not affected. They have the same rights after you file as they did before you filed. This means that the secured creditor has the right to realize the asset if you do not continue with your agreed-upon payments to them.

Consumer Proposal and Mortgages

Homeowners struggling with their unsecured debt often will file a consumer proposal as they can keep their home in the consumer proposal process. The equity available in the property will be considered when making an offer to your creditors. What about joint assets? If one spouse files and you own your home jointly, only the filing spouse’s share of the equity is considered as part of the consumer proposal value available to creditors.  

During the term of the proposal your mortgage may come up for renewal. If it is auto renewed, there will likely be no changes. If you are asking to refinance the mortgage, your mortgage company may request that you pay off the proposal before processing the refinancing request.

Consumer Proposal and Car Loan/Lease

Many individuals rely on their vehicles daily, and a consumer proposal accommodates this need. If you have a car loan and file a consumer proposal, you can keep your secured vehicle by ensuring your payments are current before filing the proposal. Even after the consumer proposal is filed, you must continue making payments on the car loan.

For those with high car payments or an over-encumbered vehicle (owing more than its worth), surrendering the car to the secured creditor might be an option. The shortfall on the car loan becomes part of the consumer proposal.

If you decide to return the car, you’ll likely need an alternative means of transportation. This could involve purchasing a more affordable vehicle or securing a different vehicle loan. The advantage here is that the new loan won’t have negative equity, allowing for a more budget-friendly arrangement.

Final Thoughts

In conclusion, a consumer proposal can provide relief for unsecured debts, allowing individuals to manage their financial obligations while navigating the complexities of secured debts by either continuing payments or surrendering the asset with the shortfall covered in the proposal.

Speak to a Licensed Insolvency Trustee to help you decide if filing a consumer proposal is the right decision for you.

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Consumer proposal eligibility: Do you qualify?

I. Who can apply for a consumer proposal?

To be eligible to file a consumer proposal:

1. You must be an individual. An incorporated business cannot file a consumer proposal but can file a Division 1 proposal as an alternative.

2. You must be insolvent, meaning you cannot pay your unsecured debts as they come due.

3. Your total debts, excluding your mortgage, cannot exceed $250,000. If you exceed this debt threshold, you can file a Division 1 proposal.

4. You must have a stable income to afford the monthly payments.

5. You cannot be in an active consumer proposal already.

II. Types of debts covered

A consumer proposal deals with unsecured debts. This includes credit card debt, student loans, lines of credit, payday loans, personal loans, and even tax debt.

Secured debt, like a car loan or your mortgage, is not affected by a consumer proposal. As long as you continue making loan payments to your secured lender, you can keep these assets. You can, if you choose, voluntarily surrender a secured asset and deal with any residual or shortfall through your consumer proposal.

III. Common financial situations eligible for a consumer proposal

A consumer proposal is a debt solution for Canadians facing financial difficulties looking to avoid personal bankruptcy.

Typical financial scenarios might include:

1. overwhelming debt

2. debts with very high interest rates

3. missed and overdue debt payments

4. a wage garnishment

5. collection calls and legal action by creditors

6. a CRA requirement to pay

7. asset protection while you negotiate a debt settlement and payment plan with your creditors

The process of filing a consumer proposal

Here is a brief overview of the consumer proposal process:

I. Consultation with a Licensed Insolvency Trustee (LIT)

A consumer proposal is a serious financial decision to be considered carefully. The process begins with a consultation with a Licensed Insolvency Trustee.

The role of the LIT is to review your specific circumstances, including income, expenses, and debts. This assessment helps determine if a consumer proposal is a suitable option to deal with your debts. In a consumer proposal, the LIT is sometimes called the consumer proposal administrator.

II. Developing the proposal

The Licensed Insolvency Trustee will work with the debtor to develop a realistic repayment plan. Your offer will depend on any assets you own, how much debt you owe and to whom (some creditors expect higher settlements), and any surplus income you might have.

The objective is to negotiate a settlement offer that results in monthly payments that are significantly less than the debt payments you are making today.

The formal proposal to creditors outlines how much you can afford to pay and the terms of the proposal. Proposal payments can be monthly, tied to your pay period or lump sum.

One final note: The cost of a consumer proposal is covered by your agreed upon proposal payments.  There is no upfront fee and no separate charge.  The trustee is paid out of the funds distributed to the creditors.

III. Protection and legal implications

A consumer proposal is a legal, legislated debt solution available through the Bankruptcy and Insolvency Act. It can only be filed with a Licensed Insolvency Trustee.

One key advantage of a consumer proposal is the automatic stay of proceedings, providing legal protection against creditors’ legal actions. Again, a consumer proposal can stop unsecured creditors but not secured creditors (unless you return the secured asset).

While a consumer proposal will impact your credit score, the impact is shorter than for bankruptcy. Most people can obtain a new credit card while still in a consumer proposal. This new card can help you rebuild your credit rating after filing, by establishing a new and better payment history on your credit report.

IV. Creditor consideration and voting

Once the paperwork is signed, your Licensed Insolvency Trustee submits the consumer proposal to the Office of the Superintendent of Bankruptcy (OSB) and sends a copy to your creditors.

Individually, your creditors review your proposal and can decide to:

• Accept your terms as filed (vote yes)
• Reject your terms (vote no)
• Reject your terms and ask for a creditors’ meeting
• Do nothing

Your creditors have 45 days to vote on the proposal. If the majority of creditors vote (in dollar value) to accept your proposal, it is binding on all unsecured creditors.

Creditors can request a meeting of creditors, although this is rare. Before that first meeting, your trustee may work with you and any dissenting creditors to renegotiate acceptable terms.

V. Debt repayment and counselling

Your responsibilities in your consumer proposal are to make your required payments and attend two financial counselling sessions. During these sessions, your credit counsellor will discuss budgeting and rebuilding your credit after a consumer proposal.

Other things to know:

• You can pay off your proposal early.  Your total payments are fixed. But, once your creditors accept your proposal terms, you can make additional payments or pay the balance off at any time. The sooner you complete your proposal, the sooner the recovery process begins.

• You can defer up to two payments. If you fall three payments in arrears, your proposal will be deemed to be annulled.  If this happens, your debts are reinstated, and creditors can take legal action to pursue the outstanding debt.

• No income reporting is required.  Unlike bankruptcy, you do not need to report your income and expenses every month.

It is critical to complete your requirements in order to obtain your certificate of full performance, which will wipe out your debts.

A consumer proposal example

Mark owes $65,000 in credit card and other unsecured debts. He owns a home with $14,000 in equity (after paying all potential selling costs), and his household income is $5,000 a month. Mark is married and has one child.  With this information, the trustee determines that Mark’s potential bankruptcy costs would be $20,600.  This includes the equity value in his home and potential surplus income payments.

In this scenario, Mark could make an offer to pay his creditors $21,000 rather than file for bankruptcy. If he pays this amount over the maximum of 5 years, his payments would be $350 a month.

The end result of all this is that Mark pays back only $21,000 of his original $65,000 in debts, and he pays no interest.

If you’re wondering what your possible payment plan could be based on average settlements, try our consumer proposal calculator.

Conclusion

While this article explores the process, eligibility criteria, and potential outcomes of a consumer proposal, take the next step towards being debt free and contact us to book a free consultation with a Licensed Insolvency Trustee about your debt relief options. We’ll explain more about a consumer proposal and also review other options like debt consolidation and credit counselling.

The post How Does a Consumer Proposal Work appeared first on Hoyes, Michalos & Associates Inc..

You may be wondering about the fee to file a proposal. While filing a consumer proposal is not free, fees are included as part of your monthly consumer proposal payments, with no additional costs. Read on to learn about the costs of filing and how payments are calculated to fit your budget.

Who can file a consumer proposal?

The Bankruptcy and Insolvency Act in Canada outlines who can file a consumer proposal in Canada. The requirements are that you:

• Must be insolvent, meaning you are unable to pay your debts as they come due, or that your assets are worth less than your unsecured debt obligations.
• Must be an individual and reside, carry on business, or have property in Canada.
• Must owe more than $1,000 and less than $250,000 in unsecured debt, not including the mortgage debt you owe on your primary residence.

Debts that can be discharged in a consumer proposal include credit card debt, payday loans, lines of credit, income tax debts, personal loans, and student loans if you have been out of school for seven or more years. You can continue to pay secured debts like a car loan or mortgage if you want to keep your car or house.  Or, you can surrender your vehicle or walk away from your mortgage and include any shortfall in your consumer proposal.

While you might qualify to file a consumer proposal, a licensed insolvency trustee will do a complete review of your debts and financial situation before recommending any debt solution.

Do you have to pay to talk to a licensed insolvency trustee?

First and foremost, a consumer proposal can only be filed through a licensed insolvency trustee.

Licensed insolvency trustees (LIT) offer free consultations, with no-obligation to review your debt relief options. There is no fee to speak to a trustee about your financial situation.

Licensed insolvency trustees are federally licensed debt professionals and are regulated by the Office of the Superintendent of Bankruptcy (OSB). Trustees are  legally required to explain all debt relief options to you. Not everyone struggling with debt ends up going bankrupt. While some will file a consumer proposal, many more will be provided with suggestions and solutions that will let them manage their debt by themselves.

You are not obligated to work with the first trustee you speak to either. You should choose one you are comfortable working with, and since consultations are always free, you can visit multiple professionals without worrying. The OSB allows Licensed Insolvency Trustees to conduct a debt assessment online so it’s easy to have an initial discussion over the phone or via video to gain insight into your options to deal with your debt.

Always be sure to ask about a trustee’s credentials and verify that they are in fact licensed by the federal government. Beware of unlicensed debt consultants who act as middlemen and refer you to a licensed insolvency trustee, only after charging you hefty upfront fees. You do not need a referral or to pay anyone to recommend a trustee to you. You can speak to an LIT directly yourself.

How much does it cost to file a consumer proposal?

Licensed insolvency trustees are paid to administer consumer proposals. Trustee fees for a consumer proposal are set by legislation and are the same across all LITs in Canada.

You do not make any payments until your consumer proposal is officially filed with the federal government. Filing your consumer proposal is what provides protection from creditor actions. Beware anyone asking you to make payments under a contract that is not your official consumer proposal filing documents.

Your consumer proposal documents will include the agreed upon settlement and monthly payment you propose to your creditors. This offer amount is the only cost of filing a consumer proposal. There are no additional payments to the trustee. Trustee fees are included as part of the single monthly payment you make in your proposal to eliminate your debt. Your unsecured creditors in the proposal receive any balance from the monthly proposal payment after trustee fees have been paid. Effectively, your creditors are covering the cost of a consumer proposal as part of the formal proposal agreement and payment terms.

The costs of filing a consumer proposal include the following:

• A filing fee of approximately $100 paid to the OSB,
• Counselling fees of $85 for each of two mandatory credit counselling sessions,
• Proposal fees to the consumer proposal administrator (trustee) of $1,500 plus 20% of creditor distributions,
• Levy of 5% of creditor distributions payable to the OSB

There are no hidden, up-front, or additional costs in a consumer proposal or any interest charges. Your trustee will explain all the costs to you before your filing.

How are consumer proposal payments calculated?

The goal of a consumer proposal is to help you eliminate your unsecured debt with the most affordable repayment plan that both fits your budget and satisfies your unsecured creditors.

Your trustee will consider three basic factors when determining your consumer proposal payment calculation:

• Who you owe money to and the amount,
• What, if any, assets you have or what you would have to pay in a bankruptcy,
• Your budget and how much you can realistically afford to repay.

As part of the consumer proposal process, the trustee’s job is to balance affordability for your budget, offer an amount that allows your creditors to recover more than they would if you were to file a personal bankruptcy, and to offer enough that your consumer proposal will be accepted by your creditors.

For the lowest monthly payment plan, you can extend your consumer proposal up to a maximum of 5 years or 60 months. But if you can afford it, you also have the option to shorten your proposal term or you can even offer a lump sum payment.

Summary

The key takeaway is that any fees you pay in your consumer proposal filing are already included in the same monthly payment you make to eliminate your unsecured debt, and nothing extra. Your licensed insolvency trustee will work closely with you to help you decide on the best debt relief option for your financial situation. If that option is a consumer proposal, the trustee will help you craft a realistic proposal plan for your budget.

If you are struggling to repay your debts, contact a licensed insolvency trustee today for a free consultation and get on a path to becoming debt free.

The post Do You Have To Pay a Fee To File a Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

How a car loan is treated in a consumer proposal will depend on decisions you make about the impact your car loan or lease has on your finances. I will explain what happens whether you want to keep your car or walk away from a costly loan or lease.

The key takeaway is that you can keep your car in a consumer proposal unless you choose not to.

What debts can be included in a consumer proposal?

First, let’s quickly review which debts can be included in a consumer proposal:

• Unsecured personal loans
• Credit cards
• Lines of credit
• Payday loans and other high-interest rapid loans
• Students loans (if you have been out of school for 7 or more years)
• Income tax debts

For the most part, a consumer proposal allows you to eliminate all unsecured debts. Your total debts also cannot exceed $250,000 (excluding mortgage on principal residence).

What happens to a car loan in a consumer proposal?

Debts that cannot be included in a consumer proposal include debts secured by an asset like your car or home. What this means is that you can keep your vehicle, but you must also keep up with your monthly payments. Your secured lender retains all their rights under the loan agreement or lease to repossess your vehicle if you miss payments.

Since a car loan or lease is considered a secured debt, it cannot be included in a consumer proposal. You may consider this good news if you wish to keep your car. If you make your car loan payments on time, a consumer proposal filing will have no effect on your vehicle.

What if you cannot afford your monthly car loan payments?

If your car loan is causing you financial hardship and you are becoming delinquent on loan payments, you may consider handing back your vehicle. Speak to your lender about returning your car and doing a voluntary repossession.

If you find you owe more on your car than you have in equity, you are not alone. About 19% of insolvent Canadians with a vehicle had negative equity in their cars in 2022. On average, they owed a shortfall of $9,348. Luckily a consumer proposal allows you to walk away from a bad car loan arrangement and include any car loan shortfall as an unsecured debt. Effectively, this is how a consumer proposal helps you clear your car loan.

Can you refinance a car loan while in a consumer proposal?

If your car loan payments are too high for your budget, but you don’t want to surrender your vehicle, you may wonder if refinancing the loan is a viable alternative. While you can refinance your auto loan during a consumer proposal, this is not done through the proposal but rather requires the agreement of your car loan lender. Your financing company may not approve your application after you file a consumer proposal because a proposal will cause a temporary hit to your credit report. For this reason, if you want to get a cheaper car or refinance, we recommend making those arrangements before you file your proposal.

And even if your lender is willing to refinance your vehicle, likely by extending your loan term, be aware you will likely pay a higher interest rate. Smaller monthly payments may fit in your budget but you will pay more in interest over time and carry the auto loan for longer than the car may last you. This will only increase the odds of owing negative equity debt and needing a costly loan rollover.

The point of a consumer proposal is to help you eliminate unsecured debts and more importantly build a healthy financial future. Your financial situation will still be at risk if you owe too much on your car, even if you have paid off your other debts. If you really need a vehicle while in a consumer proposal, we suggest doing a voluntary surrender first before you file and look for a more affordable car, with a short loan term (between 3-4 years).

How long after filing a consumer proposal can I get a car?

The amount of time it takes to get a car after you have successfully completed your consumer proposal depends on your financial situation and credit score. To qualify for low interest rates on auto financing, you will need to rebuild a good credit history. Saving a down payment can help with your application, will lower your monthly payments and can allow you to qualify for a lower rate.

There are car loan lenders who specialize in consumer proposal auto loans. Initially you will pay a high interest rate, however a reputable lender will help you manage your loans to lower that rate over time. Speak to your Licensed Insolvency Trustee about options in your area if you need to get a new car loan.

Remember that once you are debt free, you must be mindful of any new debt you take on and ensure that you maintain a low debt-to-income ratio. The last thing you want is to get back into a debt cycle.

Bottom line

As you can see, how you deal with car loan debt in a consumer proposal depends entirely on your finances and how you choose to proceed. If your car payments are unaffordable, we recommend finding a cheaper transportation alternative. Of course, if your car loan is reasonable for your monthly budget, then you can keep your car while eliminating other debts. We know having reliable transportation is important. Always talk with your Licensed Insolvency Trustee about your options.

If your car loan is causing you financial distress or if you have unsecured debts you want to eliminate, speak to a licensed insolvency trustee in a free consultation today and get on the path to debt relief.

The post Can You Include Your Car Loan in a Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

You make this proposal based on your financial circumstances at the time of filing. Can you simply change your mind and cancel a consumer proposal? What happens if you can no longer afford to continue with your proposal payments? Can you cancel a proposal once it is running? If so, what are the consequences?

How can a consumer proposal be cancelled?

Here are a few ways a consumer proposal can be cancelled:

• Withdrawal of the consumer proposal before it is deemed court-approved or before the court hearing for court approval
• Filing for bankruptcy
• Missing payments for a total of 3 months.
• An interested party requests the court to review the consumer proposal. Upon review of the facts, the court decides to refuse approval of the consumer proposal or annul it.

When can you withdraw a proposal?

A consumer proposal can be withdrawn within 60 days of filing and before the court approves it. This 60-day window is based on 45 days for the creditors to vote plus 15 days for the court to approve the proposal.

Once your consumer proposal is approved or deemed approved by the court, you can no longer change your mind and withdraw your proposal. You can only get out of a court-approved proposal by completing the proposal payments, letting the proposal become annulled by missing three months or filing bankruptcy.

When can the court cancel a consumer proposal?

The court doesn’t regularly hear consumer proposal matters. Most consumer proposals are deemed approved by the court 15 days after the creditors accept. Deemed acceptance happens without any need to attend court.

However, there are times when a court hearing is required. Any time within fifteen days after the creditor accepts the consumer proposal, an interested party or the Office of the Superintendent of Bankruptcy can request the court to review the proposal.

The court can disapprove or reject a proposal filing

At this hearing, the court can approve or reject the consumer proposal based on the information presented. If the court determines that the terms of the proposal are not fair or reasonable to the debtor or the creditors, it can refuse to approve the consumer proposal.

The court can also refuse to approve a consumer proposal in Canada if it determines that the debtor has committed an offence under the Bankruptcy and Insolvency Act (BIA) (S. 198-200) or that the consumer debtor was not eligible to make a consumer proposal.

How the court can annul an active consumer proposal

Even if your proposal was approved, the court could subsequently annul the proposal. Reasons for a consumer proposal annulment may be that you committed a bankruptcy offence, were not eligible to file a proposal, approval was obtained by fraud, or the consumer proposal cannot continue without injustice or undue delay. 

What happens if your consumer proposal is cancelled?

There are severe consequences to cancelling or annulling a consumer proposal.

1. Any payments you have made into your consumer proposal are lost and not returned to you. Funds will be used to pay any licensed insolvency trustee fees, and depending on the total paid, dividends may be paid to your creditors.
2. The most serious consequence is that your debts return. The creditors’ rights to collect revive if your consumer proposal is cancelled or annulled. They can pursue you for the entire debt owing plus interest accrued since the date of the proposal, less any dividends they received from the proposal.
3. You cannot file another consumer proposal on the same debt without court approval.
4. You are left to deal with your debts by either filing a bankruptcy, paying them off on your own, or letting them go to collection.

Cancelled vs Rejected vs Annulment

I’ve used a lot of terms in this post. To be clear, here are some definitions:

Cancelled: Cancelled is a term that some people think of when their consumer proposal ends early. It is not a term in the Bankruptcy and Insolvency Act. Individuals may wish to cancel their consumer proposal if their financial situation changes. If this is the case, it is best to speak with your Licensed Insolvency Trustee to determine your next steps. It may make sense to amend the consumer proposal and continue with it to deal with your debts.

Rejected: A consumer proposal is an offer to your creditors. At the beginning of the consumer proposal process, the unsecured creditors have 45 days to vote to accept or reject the offer. If the majority of creditors reject the offer, the proposal will not proceed further. Typically, creditors will suggest an amount they would be willing to accept. There can be a short period of negotiation where there can be counteroffers on the amount being offered. The Administrator of your consumer proposal deals with this negotiation process in conversation with you and your creditors. If no agreement is reached, then the consumer proposal is considered rejected by your creditors. An outright rejection is rare.

Deemed Annulled: Most consumer proposals are written so that there are monthly payments over up to five years. If you are in arrears a total of 3 monthly payments, your consumer proposal is deemed annulled. If your consumer proposal does not involve monthly payments, it is deemed annulled when it has been three months since any of your payments should have been made.

Court Annulment: As mentioned above, the court can annul your consumer proposal on application, if the court has determined that:   

1. You were not eligible to make a consumer proposal
2. The consumer proposal cannot continue without injustice or undue delay
3. The approval of the court was obtained by fraud

Can you remove a consumer proposal from a credit report?

A consumer proposal is on your credit report for three years from the date of completion of the consumer proposal or six years from the date of filing. You cannot have it removed earlier than that.

You can begin the process of re-establishing your credit rating before your proposal is finished. You can also pay off a consumer proposal early, removing this notice sooner. Options to pay off your proposal quicker can include increasing the frequency of your payments, increasing your payment amount or making periodic lump sum payments if you can afford to.

Setting your proposal up for success

A consumer proposal is a debt settlement solution that can help you deal with overwhelming credit card debt, student loans, income tax debt, payday loans and any other unsecured liabilities you might owe.

Your best course of action is to work with your Licensed Insolvency Trustee to create proposal terms you can afford. Be honest with your trustee about your finances to ensure that the proposal you enter into is the right decision for you. Your trustee should outline the feasibility of all debt relief options, including debt consolidation, credit counselling and personal bankruptcy. Your repayment plan should be affordable based on your circumstances.

You should not feel any pressure to act immediately unless there is a viable reason, like stopping a wage garnishment. Take the time to think through the consequences of filing a consumer proposal so that there will be no second thoughts prompting you to change your mind.

If you have any questions about how a consumer proposal works or would like to explore your best debt relief solutions, contact us for a free consultation.

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But what happens if your financial situation changes – for better or worse? In today’s post, I’ll discuss what happens if you receive an unexpected windfall during your proposal, if your income increases and what your options are if your income drops, perhaps due to a job loss or illness.

Does an income change affect your consumer proposal payment?

Once your proposal is accepted, your repayment terms are fixed for the life of the proposal. That means that the monthly payment that is accepted will remain the same even if your income goes up after it is accepted. This is one of the big advantages of a consumer proposal over bankruptcy, where your payments will go up if your income increases while bankrupt.

But what happens if your income falls or your expenses change, and this adverse change in your circumstances makes it difficult to keep up with your proposal payments?

If your income goes down such that you are unable to continue the proposal as filed, speak with your trustee about a possible amendment to the proposal.  Your trustee will discuss with you the changes in your situation and help determine what your best next step is.

What happens if you default on a consumer proposal?

A consumer proposal is deemed annulled if you fall behind on a total of three monthly payments. If your consumer proposal is structured so that the payments are not required monthly, then a deemed annulment happens if it has been three months since the payment was due.

If your consumer proposal is annulled, your unsecured debts return. The stay of proceedings you benefited from ceases and creditors can pursue full payment of the debt still owing including interest that has accrued since the date of filing. Collection calls will return and you may be subject to a future wage garnishment so this is not something you typically want to happen.

What are your options if you have a material adverse drop in income?

It is possible to revive an annulled proposal if action is taken soon enough (within 30 days of default), but it is much better to be proactive if your income drops and you suspect you will not be able to complete your proposal as originally filed.

If you have a material adverse drop in income, speak with your Licensed Insolvency Trustee before you begin missing payments.

You may be able to amend the proposal for a reduced monthly payment, or if your proposal is almost complete, you may be able to file an amended consumer proposal for the amount already paid to date.

It is up to the creditors to accept the amendment although most are willing to negotiate based on your new financial situation.

If the creditors do not accept the amended consumer proposal, it will not revert back to the original terms; your proposal will have failed, and your debts will become due in full again.

When you are amending your consumer proposal, your LIT will have to review a bankruptcy versus proposal analysis at that time. If your income has increased or you have more assets, this will affect the amendment process.

If you are unable to amend the proposal your options will be to file bankruptcy (and continue to receive debt relief) or let the proposal become annulled (and the debts will return).

What happens if you receive a windfall?

In a consumer proposal in Canada, your assets vest with you, meaning you keep your assets and are free to use them how you see fit. Any new assets you obtain once your proposal is approved are also yours to keep. Your consumer proposal is considered deemed court-approved 15 days after it has been accepted by the creditors.

Even if you win the lottery, receive an inheritance, earn a bonus or raise at work, there is no change to your proposal terms as long as that happens after your proposal is approved. The same holds for any increase in the value of any of your assets, such as your home equity or increase in earnings post-filing. Your unsecured creditors are not entitled to any of this new money once your proposal is accepted by the court.

What happens if I get into debt again?

Re-establishing your credit is something most people want to do after filing a proposal.

Acquiring and using a credit card, even a secured credit card, can help you re-establish your credit rating. The key is to pay these balances in full each month, avoiding further late payment notices on your credit report and avoiding interest costs. Once your credit score improves a little, you may qualify for other credit like a car loan.

We strongly recommend avoiding the temptation to apply for high-interest payday loans or lines of credit from alternative lenders. While credit cards typically charge 21% to 29%, online and quick cash lenders charge rates of 39% and up to 59%.  New high-interest loans are tough to repay and could jeopardize your current proposal payments.

It is very important to understand that you are not able to add new debts to your proposal if you incurred the debts after your proposal was filed.

Taking on significant new debt while in a proposal can make it difficult to keep up with your required proposal payments. As mentioned, if you miss three payments, your proposal will be annulled. If you filed a proposal to protect your assets, taking on new debts also puts these assets at risk.

You cannot add debts incurred after the date of your proposal filing to your existing consumer proposal. You also cannot file a new consumer proposal on new debts while in an active proposal. If you are unable to pay your monthly bills and consumer proposal payment due to new debts, your option at that point will likely be to file for bankruptcy. A bankruptcy would deal with all of the proposal debts and the new debts.

Talk to your Licensed Insolvency Trustee

If you are in a proposal and struggling because your finances have changed for the worst, talk with your Licensed Insolvency Trustee about your options. Filing a proposal is meant to be a fresh start, but we recognize financial problems can arise during a proposal. Talk to your proposal administrator as soon as you start seeing signs of difficulties.

If you are considering a consumer proposal and believe your income may increase or are worried about a future inheritance, a consumer proposal may be a good option. Book a free consultation with a LIT to discuss potential debt solutions that can help you become debt free.

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Does a consumer proposal get filed with the court?

While all proposals are approved by the court, filing paperwork with the court is not automatic and is not always required.

The BIA provides two types of proposals for Canadians to eliminate debt: a Division I proposal and a Division II proposal, commonly known as a consumer proposal.

A Division I proposal is a more complex process used by individuals when the total debts involved (excluding a mortgage on a principal residence) exceed $250,000. Under the BIA rules, the court is involved in a Division I proposal automatically and the terms of a Division I proposal must be filed with the court and approved by the court as well as the creditors.

A consumer proposal was designed to be a simpler debt solution for individuals with debts of $250,000 or below, excluding a mortgage on a principal residence. As a result, the courts are only involved in a consumer proposal if needed, specifically when a request has been made for the court to be involved by the creditors, the licensed insolvency trustee or the official receiver.

When is the consumer proposal approved?

If consumer proposal documents are not automatically filed with the court, how is the deal approved by the court?

There are actually two approvals that are required in the proposal process, firstly from the unsecured creditors and secondly from the court.

Creditor approval

Once your consumer proposal is filed, the creditors have 45 days to vote. The proposal has to be accepted by the majority of creditors in dollar value. A creditor gets one vote for each dollar it is owed. The proposal can be deemed approved if the creditors don’t ask for a meeting of creditors, or approved at a meeting of creditors.

Creditors can also vote against or reject a consumer proposal, although this is rare. Consumer proposals are usually accepted as filed and negotiations can take place between you and your creditors with the help of your Licensed Insolvency Trustee to gain a positive vote. At Hoyes, Michalos 99% of the proposals we file on behalf of our clients are accepted.

Court approval 

Once a consumer proposal is (deemed) approved by the creditors, there is a 15-day waiting period to allow an interested party or the Office of the Superintendent of Bankruptcy to request the court to review the proposal. The consumer proposal is deemed to be court-approved on the expiration of the 15th day if no one has asked the court to review it.

An interested party or the Office of the Superintendent of Bankruptcy (OSB) can request the court to review the proposal before it is deemed court approved. This does not happen often. Some examples of why a court would be requested to review the proposal would be if an interested party (a creditor, LIT or Official Receiver on behalf of the OSB) is aware that there are errors of omission in the documents or if they believe the terms are not appropriate or fair.

If the proposal is reviewed and approved by the court, it is court-approved the day the court hears the matter and makes its order.

Will I have to go to court?

As most consumer proposals are deemed-approved, a court hearing is usually not necessary. However, if a hearing is requested you may need to attend. Your trustee will appear in court to answer any questions but the court may have questions for you directly.

With the courts increasing their usage of video, courts are now more insistent that people attend court. It is also advisable for you to attend court as you will want to ensure you provide the court with any necessary information about your financial situation to ensure your proposal is approved so you can clear your debts.

The court will hear from the Licensed Insolvency Trustee, you, the consumer debtor, and any interested party. If the court determines that the terms are fair and reasonable and there is no evidence of wrongdoing on your part, it will approve the proposal.

If the situation is complicated, you may wish to retain independent legal counsel. Your LIT is the Administrator of the Consumer Proposal and an officer of the court and as such must present the proposal and cannot advocate on your behalf.

What court is involved

If the court is required to adjudicate a matter, the process begins with the provincial or territorial court where the proposal is filed. For example, for a consumer proposal filed in the Province of Ontario, the Superior Court of Justice hears personal bankruptcy or proposal matters.

The Courts of Appeal can hear appeals related to insolvency matters. And finally, as the highest court, the Supreme Court of Canada has jurisdiction to hear and decide matters brought before it.

For the approval of a proposal, it will be heard by a Superior Court justice.

Can the court reject a consumer proposal? Why would a judge reject a proposal?

Yes, a court can reject a consumer proposal, even one that has been accepted by the creditors.

The court can reject a consumer proposal if:

• there are technical or legal reasons why the proposal should not have been filed in the first place, or
• the court determines that the terms of the consumer proposal are not reasonable or fair to the consumer debtor and the creditors, or
• you, as the debtor, have committed an offence under the Bankruptcy and Insolvency Act.

For example, you cannot file a new consumer proposal if you still have debts owing from a previous failed proposal. If you filed bankruptcy to eliminate those old debts and have received your bankruptcy discharge for those debts, you can file another proposal on new debt you have incurred but cannot file a proposal for old debts under a previous proposal.

Again, this only happens if a court hearing is requested. If no request is made within 15 days of a deemed approval by your creditors, the proposal is automatically deemed approved by the court.

What does court approval mean?

Court approval means that the court has ensured that the requirements set forth in the Bankruptcy and Insolvency Act have been adhered to.

Once the consumer proposal is (deemed) approved by the court, it is a set contract. It cannot be changed without going through an amendment process and it cannot be stopped unless you stop paying for it or an interested party asks the court to annul it. An annulment by the court is rare. If you stop a consumer proposal after it has been court approved, you cannot file another consumer proposal on the same debt unless you first receive court approval.

Before court approval, you can withdraw your proposal and then file another proposal on the same debt at a later date. Why would you do that? Well, for instance, if you thought it had been more than 7 years since you stopped being a student but learned that it was actually only 6 years and 9 months, you can withdraw the proposal and refile it after the 7-year mark. We do encourage everyone who has student loan debt to call Canada Student Loans to ensure their end of study debt.

Creditor approval vs. court approval

Creditor approval is the first approval required for your proposal to move forward. A consumer proposal is an offer to your creditors to settle your debts, therefore the creditors have the right to agree or disagree with your offer. Creditors are agreeing to the terms as you set them out or they negotiate for an offer that they would find acceptable. Court approval is the court approving that the proposal has met the requirements of the Bankruptcy and Insolvency Act. An LIT is required to ensure your proposal follows the BIA requirements. If a proposal is deemed court accepted and an interested party notices that the requirements are not met, that party can request that the court annul the proposal on those grounds. The court and/or Superintendent of Bankruptcy would review the LIT’s actions if the LIT failed to include the basic requirements of a consumer proposal.

When else might the courts be involved in my consumer proposal?

The court can be involved in the approval process but it can also be involved during the proposal.

Any interested party or the Office of the Superintendent of Bankruptcy can request the court look at the proposal at any time.

For example, there are certain rights limited under the Bankruptcy and Insolvency Act, such as a secured creditor cannot change the terms of a loan agreement solely because a consumer proposal has been filed. The court can declare that this section does not apply or applies in a limited capacity if it can be proved that the creditor will be caused significant financial hardship because of that section. However, this is very rare.

Two more common reasons when the court is involved during a proposal are:

• a proposal is being annulled, or
• you are asking for an annulled consumer proposal to be revived.

A proposal is deemed annulled when 3 monthly payments have been missed, or 3 months have passed since your payment was required to be made if you don’t pay monthly. This happens automatically without the court. However, the court can annul a proposal when there has been a default made in the performance of any term of the proposal, where it appears to the court that the debtor was not eligible to make a consumer proposal, where the court feels the proposal cannot continue without injustice or undue delay, or that the approval of the court was obtained by fraud. The court can also annul a proposal if the consumer debtor was convicted of an offence under the Bankruptcy and Insolvency Act.

If a proposal is deemed annulled because you’ve missed three payments, talk with your Licensed Insolvency Trustee. If the timeframe has passed for an automatic revival to occur, your LIT may apply to court to revive the proposal as long as you weren’t bankrupt when you filed your proposal and as long as your LIT considers it appropriate to do so. The court will then review the matter and if it determines that a revival is appropriate, it will make an order to that effect.

What is the consumer proposal application process?

To file a consumer proposal you need to meet with a Licensed Insolvency Trustee (LIT) for a free consultation. You and your LIT will review your financial situation and make sure a consumer proposal is your best debt relief option to deal with your debts. They will review your budget to help you make an offer which is affordable to you and likely to be accepted by your creditors. Terms of the proposal can include a lump sum payment or monthly or periodic payments over a period of time of no more than five years.

Your LIT will gather information from you, prepare your documents, and meet with you to sign them. The LIT will then file these documents with the government and send a copy to your creditors.

As noted previously, your creditors vote to accept or reject your proposal. Your LIT will count the votes and notify you of the result.

In addition to making your required payments, you will be required to attend two credit counselling sessions.

Most people file a consumer proposal to deal with financial difficulties that make repayment of credit card debts, payday loans and other unsecured debts impossible to repay in full on their own. A consumer proposal is an alternative to a debt consolidation loan. Proposal payments are more affordable and are interest-free. Depending on your credit rating, the interest rate on a consolidation loan can be prohibitively expensive. We have seen people charged as high as 59% for unsecured consolidation loans, only to file a consumer proposal after these types of options fail.

A consumer proposal provides a stay of proceeding which can stop wage garnishments.

A proposal does not deal with secured debts like a mortgage or car loan, although it is possible to surrender a vehicle under a loan or lease that you cannot afford and include any shortfall in your proposal.

Upon completion of your proposal, you will receive a certificate of full performance which relieves you of any future obligation to repay the unsecured debts included in your proposal. You are now debt-free.

The post Why Does The Court Have To Approve A Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

Is there a Consumer Proposal Act?

There is no separate act that regulates consumer proposals in Canada. A consumer proposal is a legal process governed by the Bankruptcy and Insolvency Act (BIA or the Act). The BIA allows for two types of proposals – Division I proposals primarily for commercial businesses and Division II proposals for individuals. Consumer proposal laws are outlined in the Division II proposal section of the BIA. A consumer proposal allows individuals to make a settlement arrangement with their creditors. It works by offering to pay creditors a percentage of the owed debts with payments payable over time. Once you complete your payments, you are legally released from further debt obligations.

The Bankruptcy and Insolvency Act is federal legislation. This means that consumer proposal laws are applicable and the same in every province in Canada.

Provincial laws do not direct how a consumer proposal is administered but do impact creditor collection rights outside a consumer proposal and what assets are exempt from seizure under the BIA. Provincial asset exemptions can impact the cost of your consumer proposal. Individual provinces sometimes offer their own debt-relief options, like Alberta’s Orderly Payment of Debts.

The Bankruptcy and Insolvency Act helps Canadian citizens by protecting their rights when they are in debt. It also protects the rights of creditors to ensure a fair settlement. The Act allows people to offer their creditors a settlement on money owed with the protection of the court system.

The Office of the Superintendent of Bankruptcy (OSB) governs BIA filings and all Licensed Insolvency Trustees who work as consumer proposal administrators. The OSB also regulates and supervises public records of filings, including reporting consumer proposals filed and completed to the credit bureaus. Consumer proposal records are searchable, but you must pay to obtain any information and what is available is limited. Each credit reporting agency determines rules around the timely removal of consumer proposals from your credit report; however, proposals are removed the earlier of six years from the date of filing or three years from completion.

The OSB also publishes monthly consumer proposal statistics on the number of proposals filed by province and is responsible for handling complaints from creditors or debtors.

Now that you know a little about how consumer proposals are legislated, here are the most important sections of the BIA that regulate consumer proposals.

Consumer proposal rules and regulations

A consumer proposal must be filed with a Licensed Insolvency Trustee

Section 66.13 of the BIA states that a person wishing to make a consumer proposal must commence proceedings through a consumer proposal administrator known as a Licensed Insolvency Trustee.

The trustee’s role is to investigate and review your financial affairs, including your debts and property, to determine the cause of your insolvency and assess if filing a consumer proposal is reasonable in your situation. They must provide counselling on other debt relief options and, if you choose a consumer proposal, will prepare the necessary forms and documents for you to sign. Your trustee will then file your proposal with the official receiver, a civil servant with the Office of the Superintendent of Bankruptcy.

Stay of proceedings under a consumer proposal

Since a consumer proposal is part of the BIA, section 69 of the Act that governs stay of proceedings applies to proposals as well as bankruptcies.

Specifically, as soon as you file a consumer proposal with the government, no creditor can commence or continue legal action to recover on a debt included in your proposal.

A consumer proposal is filed to deal with unsecured debts. The Act does not prevent secured creditors from enforcing rights under a security agreement. As a result, a mortgage or secured car loan is not covered by a consumer proposal. You must maintain secured payments if you are keeping those assets.

Protection of the debtor goes beyond a stay of proceedings from unsecured creditors. Section 66.34 prohibits a secured creditor from terminating or changing the terms of a secured loan simply because you filed a consumer proposal.

Debt limit

Consumer proposals are for insolvent people who cannot meet the payments on their debt. You must have at least $1,000 worth of debt to qualify. Consumer proposals have a debt limit of $250,000, excluding your mortgage. If your debts exceed this amount, you can file a Division I proposal.

Otherwise, a consumer proposal eliminates the same types of debts as are eligible for discharge in bankruptcy, including credit cards, personal lines of credit, payday loans, bank loans, personal loans, income and other tax debts and some student loans.

Debts not released are listed in Section 178 (1) of the BIA and include fines, alimony or support payments, debts due to fraud and student loans if you have not been out of school for seven years.

Term of a consumer proposal

Section 66.12(5) states that the performance of a consumer proposal is to be completed within five years.

This section sets a maximum term of 5 years for a proposal. It does not prohibit you from paying off your consumer proposal faster than the terms agreed to with your creditors.

Consumer proposal rules do not specify other terms and conditions you must offer your creditors. Each proposal is unique. The percentage you pay is based on your budget and what you can afford versus what your creditors think they can recover through other means like bankruptcy.

Meeting of creditors

A meeting of creditors in a consumer proposal is only required if requested by the Official Receiver or if creditors holding at least 25% of your debts ask for a meeting. Both requests must be made within 45 days of filing a proposal.

Voting

Section 66.17 of the Act defines the voting process in a consumer proposal. The Act states that any creditor with a proven claim may assent or dissent to a consumer proposal within 45 days following the filing of a consumer proposal.

A consumer proposal is deemed accepted if there is no meeting of creditors (Section 66.18).

If a meeting is held, creditors can vote to accept or refuse the consumer proposal as filed or as altered at the meeting (Section 66.19).

Requirement for court approval

A successful consumer proposal must get accepted by the court. Most consumer proposals are automatically or deemed approved by the court fifteen days after your creditors accept the proposal. The administrator is only required to apply to the court for review if requested by the official receiver or a creditor.

Binding on all unsecured creditors

Section 66.28 of the BIA states that once a consumer proposal is accepted, or deemed accepted by the creditors and approved, or deemed approved, by the court, it is binding on all unsecured creditors. If you surrender secured assets as part of your proposal (for example, you decide to hand back an expensive car), then your proposal is binding on any secured creditor filing a claim as well.

Since it is federal legislation, a consumer proposal also binds the Canada Revenue Agency.

Annulment

According to the Bankruptcy and Insolvency Act, specific actions deem consumer proposals annulled. Section 66.31 deems a proposal to be annulled if you default an amount equal to three consumer proposal payments.

A proposal can also be annulled if you default on other terms of your agreement, if the proposal was invalid to start or obtained by fraud, or if continuing will cause significant hardship.

The Act, under Section 66.31 (2), requires the administrator to file a report on the annulment with the official receiver and send a notice to creditors informing them of the deemed annulment.

The BIA also prohibits someone with an annulled proposal from filing a new consumer proposal on the same debts.

Annulment essentially erases the consumer proposal. The original debt amount returns, and all conditions to reduce the total debt are void. Any creditor protection you received under the proposal is also cancelled.

The Act also outlines steps to revive a consumer proposal; however, it is always best to work with your trustee to ensure that you can successfully complete the terms of your proposal. If you are struggling, you can talk with your trustee about the possibility of amending your original proposal, which is allowed under Section 66.37 of the Act.

Certificate of consumer proposal performed

If you complete the requirements under your consumer proposal agreement, the administrator is required to issue a certificate noting your full performance to you and the official receiver.

The trustee cannot issue this certificate if you have not also completed two credit counselling sessions.

Ask a Licensed Insolvency Trustee if a consumer proposal is right for you

The legal process to file a consumer proposal is set up to help you rebuild financial stability. It is designed to stop collection calls, solve your debt problems, and help you become debt free.

If you’ve been living paycheque to paycheque or your credit cards are out of control, take the time to talk to a Licensed Insolvency Trustee about how a consumer proposal works and whether it is the right debt relief solution for you.

Contact the experts at Hoyes Michalos today for your free consultation.

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Here are 8 possible disadvantages of a consumer proposal and how they may impact your decision to file a consumer proposal.

A consumer proposal will affect your credit score.

A consumer proposal is debt restructuring. This means you’ve acknowledged to your creditors that you can’t pay back your debts in full. When you file a consumer proposal, a note is added to your credit report, which will hurt your credit score for a short while. A consumer proposal remains on your credit report for a maximum of six years. However, filing a proposal helps you eliminate debt, and high debt balances also hurt your credit rating. Getting out of severe debt is the first step to rebuilding credit.

You will have to turn in all credit cards, and any lines of credit will be cancelled.

Since you are settling your debts through a consumer proposal, you will no longer have access to those credit accounts. Creditors will close your accounts, and you are required to stop using your credit card and line of credit. Your trustee will ask you to hand back or cut up your cards. It is possible to obtain a new credit card within a year of filing a consumer proposal. You may qualify for an unsecured card or you may need to apply for a secured credit card, depending on your credit rating before you filed.

A consumer proposal does not deal with secured debt.

A consumer proposal covers only unsecured debts. Secured loans, such as a car loan or a mortgage, cannot be included in your proposal. This can be both a disadvantage and an advantage. If you can afford the monthly payments on your car or house, you can continue to pay the secured lender and keep those assets. However, if you cannot afford your car or mortgage payment, you can opt to surrender these assets back to the secured creditor. They can then file a claim in your proposal for any shortfall after selling the asset to pay back the loan.

Your creditors may reject your proposal.

Creditors have 45 days to vote in your proposal, and the weight of their vote is measured by how much you owe. A proposal can be rejected if more than 25% of your creditors (by dollar value) ask for a meeting, AND at the meeting, more than half of the creditor’s claims vote against your proposal. Consumer proposal rejections are rare. Licensed Insolvency Trustees are experienced at preparing consumer proposal offers, and most proposal terms are accepted as filed. If a creditor does not accept your initial offer, most will make a counteroffer. Your trustee will work with you to negotiate terms acceptable to both you and your creditors or may recommend rescinding your proposal if an agreement cannot be reached.

A consumer proposal cannot be filed if you owe more than $250,000.

Consumer proposals have a debt limit. A consumer proposal can only be filed if you owe less than $250,000 in debts not including the mortgage on your primary residence. If you owe more than the consumer proposal debt limit, you must file a Division I proposal. There is an added risk with a Division I proposal. If your creditors reject a Division I proposal, you are automatically bankrupt. This does not happen with a consumer proposal. If your creditors reject a consumer proposal, you are in the same position as you were before filing.

Large creditors can dictate higher payment terms.

Because creditors get a vote based on the dollar value of their claims, creditors with very large balances can demand a higher payout percentage. Most major bank creditors have a minimum percentage they will expect before voting yes on a proposal. If you owe a significant amount to one of these creditors, you may need to offer more in your proposal for it to be accepted. It is essential to work with a Licensed Insolvency Trustee who knows what creditors expect when deciding how much a consumer proposal might cost and what your monthly payment may be.

Some unsecured debts are not eligible for a consumer proposal.

Not all unsecured debts are eligible for discharge through a consumer proposal. A consumer proposal cannot release certain debts, including debts due to fraud, child support or alimony payments, and court fines. Student loan debt cannot be included if you have not been out of school for seven years.

If you miss three months’ payments, your proposal can be annulled.

A consumer proposal is a legal agreement between you and your creditors where you agree to a settlement amount with a fixed payment schedule. Most consumer proposals are based on monthly payments. If you fall behind three monthly payments, your consumer proposal is deemed annulled. When your proposal is annulled, your debts return, and you lose the benefit of the stay of proceedings provided in a consumer proposal that stops collection activity. Your creditors can now call, sue or garnish your wages again.

Not sure if a consumer proposal is right for you?

A consumer proposal is an alternative to bankruptcy. You may be looking at your debt relief options because you can’t repay your debts. A consumer proposal is intended to help you pay off debt faster.

Here are some positive points to consider about consumer proposals:

• A consumer proposal is a deal to repay less than you owe so you get out of debt sooner.
• It legally binds all your creditors to the same debt settlement plan. No creditor can back out.
• It provided creditor protection against collection actions like a wage garnishment or lawsuit.
• A proposal preserves any assets you have, such as tax refunds, investments and home equity.
• It is generally the lowest cost debt consolidation. You have lower monthly payments than other options, including a debt consolidation loan or credit counselling.
• You will have a fixed monthly payment and avoid the surplus income penalty that can be triggered if you file personal bankruptcy.

Get consumer proposal advice from a Licensed Insolvency Trustee

Talk with a Licensed Insolvency Trustee about a consumer proposal if you are struggling with debt. Only a Licensed Insolvency Trustee can legally file a consumer proposal for you. Do not pay unlicensed debt consultants or credit counsellors for consumer proposal advice, as they will only refer you to a LIT to complete your proposal filing.

Our team at Hoyes Michalos is happy to answer any further questions you may have about consumer proposals and help you decide what debt solution is best for you. Contact us for a free virtual or in-person consultation.

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Legal obligations of consumer proposals

A consumer proposal is a legal arrangement under the Bankruptcy and Insolvency Act. Under this agreement, you have specific responsibilities when you file a consumer proposal.

An approved consumer proposal requires that you:

• make regular required payments to your Licensed Insolvency Trustee
• attend two credit counselling sessions
• follow any extra conditions within the proposal

There are legal obligations for your creditors as well. Once your consumer proposal gets filed, your creditors must stop contacting you. All correspondence occurs through your Licensed Insolvency Trustee.

Interest and other penalties become frozen. Your consumer proposal legally protects you from further debt. But, to reap these benefits, you must make your required payments on time.

Missing payments on your consumer proposal

Your primary financial responsibility in a consumer proposal is to make your required payments. Late payments do not get reported to the credit bureau. However, missing payments on a consumer proposal do have consequences.

The Bankruptcy & Insolvency Act provides for some payment flexibility in the event of an unexpected event. You are allowed to defer up to a maximum of two monthly payments.

However, this deferral has limits.

• If you miss three consumer proposal payments, your agreement is automatically annulled.
• To complete your consumer proposal and obtain your Certificate of Full Performance, you must eventually make these payments. Simply not paying is not an option.

It’s also important to note that there is no penalty for making extra payments. I’ll talk more about that later when explaining ways to avoid a consumer proposal annulment.

When is a consumer proposal deemed annulled?

The most common reason for a consumer proposal annulment is missed payments.

A proposal is deemed annulled when you are three payments in arrears.

How does payment frequency affect this period?

If your proposal calls for monthly payments, your proposal is annulled when you fall behind a total of three monthly payments. If the terms of the proposal are for you to pay weekly, your proposal is annulled if you are behind a total of three weeks’ payments. Please note this is based on the payment frequency noted in your consumer proposal. If your terms say monthly, but you pay your trustee weekly you are in practice paying one quarter of your monthly payment each week. In this case, you are annulled when you are a total of three months’ payments in arrears.

Are missed proposal payments consecutive?

No, the determination is cumulative. You must be behind a total of three contractual payments for your proposal to be annulled.

For example, if you miss one payment, make the next, but miss the next two, you are behind three payments, so your proposal is annulled.

Conversely, extra payments early in your proposal put you ahead. These early payments offset any future missed payments. You are fine until your unpaid balance due totals the equivalent of three payments.

Is a consumer proposal annulment automatic?

Yes. A consumer proposal is automatically annulled the day your third payment is late. Your trustee has no control over this; it’s part of the Bankruptcy & Insolvency Act rules and regulations.

How else can a consumer proposal be annulled?

Payment default is the most common reason a consumer proposal is annulled. However, the court, upon application by a creditor or the trustee, can also annul a consumer proposal if:

• the debtor defaults on any provision in the consumer proposal
• the debtor was not eligible to file a consumer proposal
• the consumer proposal cannot continue without hardship
• court approval of the proposal was obtained by fraud

Consequences of a consumer proposal annulment

Deemed annulled means your consumer proposal is null and void, and annulment comes with severe consequences.

If your proposal is annulled:

1. Any money you’ve already paid out will not get returned (as the funds will have been distributed to your creditors).
2. Your financial situation goes back to owing the total debt, along with all fees, interest, and penalties (less any distributions to your creditors).
3. You lose the creditor protection provided by the proposal.
4. Your creditors can start contacting you again about your debt and begin legal collection proceedings.
5. Your credit rating will be harmed even further. Creditors can begin reporting defaulted payments again.

Annulled proposal on your credit report

An annulment counts towards negative information on your credit report, and a deemed annulled proposal stays on your credit rating for six years.

During an active consumer proposal, your credit rating shows a score of R7. This means you are making regular payments under a formal payment arrangement.

When deemed annulled, the R7 status changes to R9. This is the lowest score possible on the rating system.

As mentioned, when a proposal is annulled, your debts are no longer in a proposal and become due and payable again. Creditors can report more late payments to the Canadian credit bureaus, further lowering your credit score. They may send your account to collection, and this too will be noted on your credit report.

Options When Your Proposal Is Annulled

What should you do if you default on a consumer proposal and it is annulled?

Unfortunately, you cannot file a second consumer proposal to cover debts included in an annulled proposal.

Your options after a consumer proposal is annulled include:

1. Revive the proposal. A proposal can be revived through your trustee within 30 days of default or through the courts after 30 days.
2. File bankruptcy. Going bankrupt is not an automatic process after a consumer proposal annulment. You must go through the process of making a bankruptcy application.
3. Renegotiate with your creditors. A deemed annulment means your creditors can contact you regarding your debts. You can work with them to settle debts on your own.
4. Ignore the debts. Another option is to ignore the debts and wait for them to fall off your credit report. This can be a good option if they are old debts and too small for a creditor to sue.

How to Revive an Annulled Consumer Proposal

Even if you default on your consumer proposal payments, it is possible to revive an annulled consumer proposal.

The Bankruptcy and Insolvency Act allows a deemed annulled proposal to be revived within 30 days without involvement by the court. Your creditors must agree to the revival, and you must be able to bring your payments current. Since this is a time-sensitive option, talk with your trustee right away. Your trustee will notify your creditors about your financial situation as well as how you plan to pay back your proposal arrears and keep up with future proposal payments.

If action is not taken within 30 days, you must apply to the bankruptcy court to revive a consumer proposal. This generally requires the assistance of an insolvency lawyer and can be costly. Again, you will be required to demonstrate how you will continue without further payment deferrals. Sometimes the court allows for submitting a new proposal, although your creditors can object.

How to Avoid Consumer Proposal Annulment

Your best course of action is to avoid having your proposal annulled. It is always best to work with your trustee to ensure your proposal payments fit within your monthly budget.

Here are some things you can do to avoid the risk of having your proposal deemed annulled:

1. Do not start a consumer proposal unless you have the income to support the payments.
2. Choose a longer repayment period to lower your monthly payments. A proposal can have a maximum payout period of five years or 60 months. You can always pay a proposal off sooner, even if you negotiate a longer term.
3. Automate your payments with preauthorized payments, so you don’t forget any payments.
4. Schedule your consumer proposal payments to fall in line with your paydays. This will decrease the chance of bouncing a payment with your trustee.
5. Increase your payment frequency. Even if your proposal agreement requires a monthly payment, you can pay your trustee weekly. Paying ahead, and making an extra payment in a five-week month, can help you if you run short of funds temporarily.
6. Make extra payments. Making extra payments when you have the funds, perhaps from some overtime or a bonus, can provide some cushion if you miss a later payment.
7. Talk with your trustee about amending your consumer proposal. Your proposal is a legal agreement, but it is possible to request revised terms, both in terms of payment time and amount, from your creditors. Talk with your trustee about proactively asking for an amendment versus letting your proposal fail.

If you’ve filed a consumer proposal, you must meet your legal requirements to avoid getting deemed annulled. However, there is no shame in experiencing financial hardship. If you are struggling with your proposal payments, talk with your trustee sooner, rather than later.

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