To understand how creditors, like your bank, view a consumer proposal, it’s important to understand exactly what a consumer proposal is and how it affects the money you owe them.
Here’s the quick version:
A consumer proposal is a federally regulated process to settle your debts for less than what you owe. It will not change secured debts like a mortgage or car loan. If you want to keep your house or car, you have to continue with those payments. However, a consumer proposal will settle virtually all unsecured debts like credit cards, bank loans, overdraft, payday loans, even income taxes.
Because it is filed under federal legislation, a consumer proposal provides legal protection so that your creditors cannot garnishee your wages or seize your assets. You don’t even require all of your creditors to agree to the compromise. As long as the majority votes in favour of your proposal, it is binding on all of them.
So what’s the catch?
If you have consulted with a licensed proposal administrator and are considering filing a consumer proposal, it means that you probably can’t pay your debts as things stand. You don’t have sufficient assets to sell to pay your debts. It means that you don’t have enough equity in your house to borrow money for a consolidation loan.
Bottom line, you would only file a consumer proposal if you cannot pay all of your debts, despite your best efforts. You might otherwise be considering personal bankruptcy, but a consumer proposal provides another option.
So what do the bank’s think?
Banks and credit card companies would obviously prefer that you pay back the full amount of the debt, including all of the interest. Therefore, logic would dictate that banks do not like consumer proposals. However, what’s going to happen if they reject a consumer proposal? If a consumer proposal was not an option to deal with your debts you might have to file personal bankruptcy instead. If this were the case your creditors would receive even less. This is the fundamental reason why well more than 90% of consumer proposals are accepted. Even though banks don’t really like consumer proposals, they like them better than the alternative.
What’s in it for me?
We’ve now established that a consumer proposal is a good deal for your creditors since they get more money than if you file bankruptcy. It’s normal to wonder why you would voluntarily agree to pay back more than you have to, especially if you’ve been struggling with high interest payments for years.
Many people have the mistaken impression that filing bankruptcy means that the creditors don’t receive anything. For some people that is true. However, the costs in bankruptcy, and therefore the money the creditors receive, depend on your income level and your assets. Essentially, you pay more if you have a high income level. You are allowed to keep some assets, but often not all. If filing bankruptcy meant losing your house, you would almost certainly prefer to file a consumer proposal where you keep all of your assets and pay back a manageable part of the debt through one monthly payment.
Even if bankruptcy did not mean losing assets, many people choose to file a consumer proposal because it just feels better than bankruptcy. It is difficult to put into words, but I think it comes down to feeling satisfied that you did the best you could with respect to your obligations.
Insolvency statistics show that the number of consumer proposals being filed has risen in recent years across Ontario and Canada. That tells me that more and more people are learning of the benefits. However, that is not to suggest that a consumer proposal is the right answer for everybody. If you are struggling, you should consider consulting with a licensed trustee. A trustee will review all of your options so that you can be satisfied that you’ve found the best solution.