Why Do Consumer Proposals Have Different Payments When the Debts are the Same?

A consumer proposal is a great way to eliminate your debts, but how much will it cost? The amount you will be required to pay in a consumer proposal is based on many factors.  Here is an example to illustrate how payments are determined.

consumer proposal questions answers I recently met with Evan (not his real name).  He had $60,000 in total debt, so he offered a proposal of $400 per month for 50 months, for total payments of $20,000.  Evan’s creditors (the big banks and credit card companies) will generally accept a proposal of approximately one third of the total debt, which is why Evan’s creditors accepted his $20,000 proposal.

Evan was very happy with the deal, because he was paying almost $2,000 per month in minimum payments, so not only will the proposal eliminate his debts in just over four years, but he also saves a lot of money each month.

Evan told his sister Brenda (also not her real name) about the proposal, and since she also had a lot of debt, I met with her to review her situation.  Her debts were also totalled $60,000, but I advised her that her proposal would cost $30,000, or $500 per month for 60 months.

She asked me the obvious question:

“My brother and I both owe $60,000 on our credit cards, unsecured bank loans and lines of credit, so why does his proposal cost $20,000, and my proposal will cost $30,000?”

Good question.

The answer is that the cost of a consumer proposal is based on a two factors:

First, your creditors will generally want a minimum “cents on the dollar”.  Even if they may get nothing in a bankruptcy, it is generally not worth it for them to only accept, say, 5 cents on the dollar in a proposal, because it’s not worth it for them to cash very small cheques over many years.  As a “rule of thumb” most creditors will accept proposals in the range of one third of the total amount owing, although there are some creditors that will accept less.  Contact a consumer proposal administrator to find out what may be an acceptable offer to your creditors.

Second, the consumer proposal must offer more than they would receive in a bankruptcy, otherwise they would prefer that you simply declare bankruptcy.  That’s why Brenda had to offer more than Evan.

Brenda owned a house with equity, and she had surplus income, so the creditors would have expected to receive approximately $28,000 in a bankruptcy.  So, Brenda offered $30,000, and the creditors accepted the proposal, because it’s more than they would have realized in a bankruptcy.

Why didn’t Brenda take the less expensive option and just file bankruptcy?  Because her bankruptcy would last for 21 months, so she would have paid over $1,300 per month over those 21 months if she wanted to keep her house, which is more than she can afford.  The proposal cost slightly more, but the monthly payments are much more reasonable, and Brenda can make extra payments and pay it off sooner.

After I explained the math to Brenda she agreed that the proposal was the best option, and she was happy when the creditors accepted her proposal.

Is a consumer proposal the right option for you?  What would it cost?  Contact a consumer proposal administrator today for a no charge initial consultation.

 

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