How much will a consumer proposal cost? More specifically, how much do I have to offer my creditors to get them to accept my consumer proposal?
My name is Douglas Hoyes, and as the co-founder of Hoyes, Michalos & Associates Inc., one of the largest consumer proposal administrator firms in Canada, I have administered thousands of successful consumer proposals over the last 15 plus years, so speaking from experience, here’s the general answer:
In order for your creditors to accept your proposal, you must meet three tests:
- Exceeding expected realizations
- Giving your creditors an expected recovery rate
- Making sure you can afford the payments.
TEST 1: Realizations
First, you must offer more than they would receive in a bankruptcy. This first test is critical. Here’s how it works: If you file personal bankruptcy in Canada, you are required to make payments based on your income. The more you earn, the more you are required to pay. It’s called surplus income, and it’s based on government of Canada guidelines that determine what you are required to pay, based on your income, certain expenses, and the size of your family.
We won’t explore the calculation of surplus income in detail, but let’s assume that in your case you would be required to pay $10,000 during your bankruptcy due to your income. To meet this first test, you will need to offer a proposal of more than $10,000, or else your creditors would prefer to get the $10,000 they would receive in a bankruptcy.
The cost of bankruptcy in your specific case will be determined by your surplus income, and also by any assets you may lose if you go bankrupt (such as your tax refund, equity in a car or house, or other assets). Most people file a consumer proposal because they don’t want to lose any assets like they would in a bankruptcy, but that’s also why you need to offer more in a proposal than your creditors would receive in a bankruptcy.
TEST 2: Recovery
The second test you must meet is that most creditors will require a certain number of cents on the dollar in your proposal. For example, if you would be paying $2,000 in a bankruptcy, based on the first test you might assume that paying $3,000 would be sufficient. However, if your total debts are $100,000, most creditors would reject a proposal where they are only getting 3 cents on the dollar. Most creditors would require a minimum amount, often in the range of 15 to 40 cents on the dollar, even after test #1 is met.
Why is that range so large? There’s obviously a big difference between 15 cents and 40 cents. The answer is that each creditor sets different rules, and they will often change their rules over time. That’s why it’s critical that you deal with a consumer proposal administrator with a lot of experience. At my firm we maintain a database of all creditors, and we keep track of how many cents on the dollar each creditor requires, so that we can offer proposals that are most likely to be accepted.
This means that if most of your debts are owed to Bank ABC, and that bank always wants a minimum of 30 cents on the dollar, we know that offering a proposal of 10 cents on the dollar will most likely not be accepted. You want to know in advance how likely it is that your proposal will be accepted, and that’s why an experienced consumer proposal administrator is critical.
TEST 3: Affordability
The final test is easy to understand: is the plan affordable for you? Based on the first two tests it may be determined that you will need to offer $500 per month in your proposal. If your monthly family budget shows that you can only afford to offer $200 per month, it’s unlikely that your proposal is viable. Before you file the proposal it will be necessary to cut your expenses, or increase your income.
The opposite is also true. If your budget shows that you can easily afford $1,000 per month, the creditors are unlikely to accept only $500 per month. In that case it may be prudent to offer the $1,000 per month, but over a shorter period of time. That may mean that instead of offering $500 per month for 60 months, you offer $1,000 per month for 30 months. The total you pay is the same, but you pay off the proposal quicker, and the creditors get their money faster, so that higher monthly payment proposal may be in the best interests of both parties.
Ultimately that’s the best test of a good deal: is it in the best interests of both you, and the people you owe money to? If you can afford the payments and get a break on your debts, and if the creditors get more than they would in a bankruptcy and they don’t have to worry about harassing you for the money, the proposal will probably be successful.
As you can see there are a number of factors that go into a successful proposal, so for more information, and to arrange your no-charge initial consultation, contact a licensed consumer proposal administrator today.