A consumer proposal is a court sanctioned way to negotiate a settlement with your creditors and one of the best ways to avoid filing bankruptcy in Canada . As I am a licensed trustee in bankruptcy and consumer proposal administrator with Goth & Company Inc., I see a large number of consumer proposals and recognize the importance of crafting a proposal properly. Unfortunately not all proposals are created equal, nor are all proposal administrators. There are factors that can affect the success of your consumer proposal.
While some of the specific information that needs to be contained in a proposal is set by the legislation (i.e. must offer more to creditors than available in a bankruptcy, must be made for the general benefit of all creditors etc.), there are four specific factors that must be considered when drafting the proposal if you want to your proposal to have the greatest likelihood of success.
- Estimated recovery in a bankruptcy vs. the estimated recovery in a proposal
- Monthly Cash flow
- Consistency of income
- Breakdown of Creditors involved
Comparing Returns To Bankruptcy
To start, you must determine what your creditors are likely to receive should a bankruptcy be filed. To do this you need to meet with a licensed trustee in bankruptcy so that he can perform what is referred to as an “Assessment of an Individual Debtor.” To do this, the trustee will have to meet with you to review your income, family situation, assets owned, and the type and nature of your debts. From this he will be able to estimate what would take place should you file bankruptcy, what the anticipated costs and fees are, and most importantly how much of a recovery each of your creditors could expect. While this gives us a starting point, most creditors will not even consider a proposal If you simply meet the minimum requirement. The offer must be sufficient to entice the creditors to cooperate with the proposal. Many circumstances can affect the percentage of recovery required for a proposal to be accepted, and that is why it is important to consider the remaining factors before one is able to determine what the best offer to be made within the proposal.
Your Monthly Budget
Equally as important to the success of your proposal is your monthly cash flow. As part of the proposal process you are required to prepare a Statement of Income and Expenses for your creditors. This is essentially a breakdown of what happens with your household finances in a typical month. When the creditors review this information they are essentially trying to gauge if your expenses are reasonable, and if the monthly payment being proposed is fair. Reasonableness of your expenses is important. For instance, how do you think the creditors would react to us asking them to take a write down of their debt if they saw a debtor making a $1,500 car payment each month? If you want your creditors to take your offer seriously you have to do your part.
You need to make sure that your spending patterns are sensible. You need to have tried to trim down your spending habits in advance and be able to demonstrate to your creditors that they are not the only ones having to make a sacrifice. Now this doesn’t mean you are not allowed to have any entertainment expenses, or that you are expected to live on bread and water, it simply means you need to be cautious. The other aspect of cash flow to be considered is the proposed payment amount. You don’t want to insult the creditors – your monthly payment needs to reflect the money you have coming in and be representative of the money you have left after your reasonable expenses. For example, if you put together your budget and after your reasonable expenses you find that you have $900 left and made an offer of $200 per month within the proposal itself, this is not likely to sit well with your creditors. For your creditors to feel like you are treating them fairly, you would likely have to consider making a monthly payment of $600 to $700 each month. As long as your creditors feel you are being fair with them, they are often open to the idea of helping avoid a bankruptcy.
Stability of Income
Consistency of income is one of those aspects of a proposal that doesn’t directly influence the amount that you must offer, but definitely can influence the outcome of a vote, or for that matter of the proposal itself. To offer a proposal that the creditors are going to cooperate with, you need to have consistent employment history. If you have had 6 employers in the last two years, a couple of periods during which you have collected EI, and there is no assurance of consistent and regular income, then a proposal is not for you, nor is it something your creditors will consider. Of course this is one of those areas that we don’t have total control over, as employment status can change from day to day and that is normal. The key is that your creditors will be presented a small breakdown of your employment history and if this history appears questionable, the creditors are going to require a higher margin of recovery, as they will perceive the likelihood of success as questionable.
What Creditors Want
Clearly, the creditors play a critical role in the proposal process. For any consumer proposal to be approved, we must have the creditors cooperation. Therefore, when crafting a proposal it is important to consider what creditors are involved, whether or not those creditors have any consistent voting trends that can be identified, and what percentage of the total debt each creditor represents. This information is critical when determining the type of offer that needs to be made, and allows the trustee to anticipate what is going to be required for success. As a result it is important that you are using a licensed trustee and proposal administrator who is familiar with the process, has some experience putting together these proposals, and pays attention the voting trends.
Ultimately, it is very easy to structure a consumer proposal with a high likelihood of success. If you structure the proposal properly, and carefully consider the estimated recoveries, your current cash flow, and the consistency of your income, then creditors are likely to agree to the proposal. When proposals are carefully crafted by a licensed and experienced professional , the acceptance rate is very high. For instance, at Goth & Company Inc. we have a 97% acceptance rate for the proposals we have put forward. This not simply due to our extraordinary negotiation skills, it is because we take the time to evaluate how the proposal is crafted in an effort to maximize the likelihood of success.
As a result, the filing of a consumer proposal is a very viable option for many Canadians who are struggling to be able to simply get by. If this sounds like you I would encourage you to contact a local consumer proposal administrator, and they will be able to assist you during your no charge initial consultation to determine if you would qualify to file a consumer proposal. But also be sure to ask the consumer proposal administrator about the factors they consider when putting forward a consumer proposal, you want to make sure that the advice you are given is well reasoned and the only way you will know is if you ask.