Consumer Proposals: Flexibility to Deal With Your Debt

One of the major benefits of a consumer proposal arrangement is that you have a lot of flexibility in crafting a repayment plan for your debts. While your creditors must accept the proposal, there are no ‘set rules’ on what you can and cannot do. Here is the story of how one couple solved a lot of issues by choosing a consumer proposal over bankruptcy.

consumer proposal kitchener storySteve had separated from his wife Krista about three years ago. They had already sold the family home because neither could afford it on their own. They had used the proceeds to pay down debt, but some debts still remained. Steve had agreed in the separation agreement to pay the $30,000 line of credit that was in both of their names. He had been making the minimum payments, but the balance was still at $30,000. Since the separation, his credit card debt had grown from $5,000 to $12,000. Steve was also required to pay $800 monthly for child support.

Steve had managed to juggle all of these obligations until he lost his job six months ago. He had been able to find a new job, but at a 25% reduction in wages. The child support and other living expenses were up to date, but the debt payments were starting to slip and Steve did not see how he would be able to pay everything back.

When I first met with Steve in my Kitchener, Ontario office, he was certain that bankruptcy was the only option for him. He had done some research online and thought that bankruptcy was the best way to put the debts in the past. He had a few questions though.

First, Steve was looking for confirmation that a bankruptcy would not affect his ex-wife. He was not happy with my answer. I explained that both he and Krista were responsible for the full amount of the joint line of credit (ie. not 50/50) and that the separation agreement did not change the original agreement with the bank. Basically, the bank would go after her for full payment if he stopped paying. I explained further that bankruptcy, if only he filed, would also not change the bank’s rights with respect to Krista. I asked if she would be able to make the payments. He confirmed, as I suspected, that her budget was even tighter than his.

Second, Steve wanted to know what would happen to the RESP he and Krista and started for the children. Again, not the answer he was looking for when I explained that an RESP is not a protected asset in bankruptcy. His relationship with Krista had remained somewhat amicable, but he started imagining how furious she would be if he filed bankruptcy. She would be left owing the line of credit and part of the RESP would be lost.

Lastly, Steve wanted to know what would happen to his RRSP if he filed bankruptcy. I explained that it would be fully protected because there had been no contributions to it in the last year. That was some good news, but small consolation given the other matters we had just discussed.

As a result, Steve was very keen to hear about options other than bankruptcy. He liked the sound of a consumer proposal. The appeal of a consumer proposal is that it provides the same legal protection as bankruptcy and the RESP would not be touched. We discussed making an offer to pay back $15,000 of the $42,000 total debt through monthly payments of $250 for five years.

The issues? Krista would still be left paying the remaining balance on the line of credit. Also, Steve was anxious about a fixed payment for five years given his reduced wages, ongoing support obligations and other living expenses.

At that point, we dug a little deeper for a solution. I asked if his RRSP (with a value around $18,000) was locked-in. He said no. Even though the RRSP would be a protected asset in bankruptcy, my advice was to voluntarily remove the funds from the RRSP and offer those funds as a “lump sum” consumer proposal. There would be one payment shortly after filing, not monthly payments for five years. Furthermore, I advised that it might make sense to file a joint proposal with Krista.

Steve was reluctant to bring Krista into the conversation. He knew she would be upset because he had agreed to pay the joint debt. The bottom line is that she was going to find out in any scenario where he didn’t continue paying that debt. For the next meeting, they came together. Steve had tried to explain things to Krista, but she was a little confused and skeptical in addition to being quite upset.

After we walked through the various considerations, she agreed that using Steve’s RRSP for a joint consumer proposal was the best option. Krista felt some satisfaction that it was Steve’s RRSP being used since he had made the commitment to pay for the joint debt.

With Steve’s income tax rate being just over 30%, the consumer proposal provided for a one-time payment of $12,500. All creditors were in agreement with the offer. It was the preferred choice for Steve and Krista, but it serves the interests of the creditors as well since they receive the funds within a few months rather than spread out over several years.

Are things perfect for Steve and Krista? Of course not. With each of them being a single income household, the budgets will continue to be tight. However, through communication and co-operation, and some creativity with a consumer proposal, they were able to find resolution to the debts from the past so that they can start to focus on the future.

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4 thoughts on “Consumer Proposals: Flexibility to Deal With Your Debt

  • norm

    I have been in a proposal for 4 1/2 years now with all payments made on time on $80K debt ($400 month for 60 months). During my proposal I was involved in an accident and I am about to receive a large settlement. What happens to this money? Do I keep it? Or does it go to the creditors?

    Reply
    • Ian Martin Post author

      Norm, with a consumer proposal the settlement money is yours to keep. That’s not always the case in personal bankruptcy. Furthermore, it does not change the amount you are required to pay to complete the proposal. If the accident has kept you away from work, obviously you’ll need funds to manage normal living expenses. However, you should consider using part of the settlement funds to pay off the proposal in full. There’s no penalty for early repayment and that way you know it is complete.

      Reply
  • George

    Hi there my wife and i have been in a 5 year joint consumer proposal for 2 years now..She has a locked in rrsp of $40000..But cant touch it unless theres harship..is there anyway possable she could get half if it out to pay the remaining proposal out of 15000..Thanks…

    Reply
  • J. Douglas Hoyes

    Hi George. I believe you answered your own question. You must demonstrate hardship to the pension commission to unlock a locked-in RRSP, and in most cases wanting the money to pay off a proposal would not be considered to be hardship. You could check with the pension authority in your province, but it’s unlikely they would approve the un-locking.

    Reply

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