Justin & Jessica. A Real Life Consumer Proposal Story.

Sometimes the best way to determine why a consumer proposal is better than a bankruptcy is to give an example.

I met a couple last week at our Vaughan office, I will not use their real names, so I will call this couple Justin and Jessica.  Jessica and Justin were in their 30’s and recently had some changes in their lives. Justin had been working at an automobile parts manufacturer and in the past had been able to work overtime which is no longer an option. Furthermore, he had a few times where he was laid off and received employment insurance rather than his regular wage. The couple had their second child in 2009 and Jessica was also collecting employment insurance during her maternity and parental leaves. The couple, during these tough times, often relied on credit to make ends meet.

After Justin explained how they got into debt, Jessica interrupted and said, “We are in too deep, we have to file for bankruptcy”.

I responded, “Bankruptcy is one option, but there may be a better option for both of you”. Jessica and Justin both looked a little surprised and I continued, “Bankruptcy is often the last alternative and in many cases, there are better options available”.

After looking at there situation we summarized their unsecured debts (not counting mortgage and car loans) were as follows:

  • Three credits cards from banks totaling – $23,500
  • Line of Credit  – $24,400
  • Two credit cards from department stores and a gas card – $7,600
  • Bank Over-daft – $1,000
  • Personal income tax (Justin) – $2,600
  • Total unsecured debts – $59,100 (joint debts)

Their assets were summarized as follows:

  • House equity $ 9,500 – (House value less mortgage principle balance and the reasonable selling costs)
  • 2 vehicles (both financed and no equity)
  • RRSP $7,800  – ($2,400 contributions in the last 12 months)
  • Household Goods $4,000 (furniture, appliances and other household goods)
  • Personal Effects $2,500 (jewellery, clothing and personal effects)

Jessica and Justin were both back to work and their income can be summarized as:

  • Jessica was paid $1,020 bi-weekly (net after taxes)
  • Jessica also received child tax benefit $205 and the universal child care benefit $100
  • Justin was paid $540 weekly (net after taxes)

The couple had already seen a Credit Counsellor, and knew they could do a debt management plan with payments of $1,250 a month over four years (48 months). They now wanted to know how much a bankruptcy or consumer proposal would cost?

I am going to start with the bankruptcy option.  If the couple were to file bankruptcy their non-exempt assets would vest with trustee. This means the couple would either make arrangements to buy back these assets or they would be sold and the money would be paid to the trustee for the benefit of the creditors. The following would be the assets that would be exempt (they can keep in a bankruptcy):

  • 2 vehicles (both financed and no equity – provided they can afford to make the payments as agreed to the finance agreement, they can keep these vehicles)
  • RRSP $5,400  – ($2,400 contributions in the last 12 months is not exempt)
  • Household Goods $4,000 (furniture, appliances and other household goods)
  • Personal Effects $2,500 (jewellery, clothing and personal effects)

The following are the assets that would not be exempt:

  • House equity $ 9,500 – (House value less mortgage principle balance and the reasonable selling costs)
  • RRSP $2,400 (contributions in the last 12 months

If Jessica and Justin wanted to keep the non-exempt assets, they would have to make arrangements to pay $11,900 to the trustee before the bankruptcy would be completed.

The next thing to evaluate is the surplus income. The government has set net monthly income amount for a person or a family to maintain a reasonable standard of living in Canada. These amounts increase depending on the number of people in the household. Every dollar that a bankrupt family makes above the threshold set by the government is subject to a surplus income payment of 50%.

The following was the estimate for Jessica and Justin’s surplus income based on the threshold limits at the time (for the most recent limits see here:

Total Monthly Family Net Income:  $4,855


Non-discretionary expenses:             $800    (non-discretionary expenses include child care, child support paid, fines paid, etc.)

Net Monthly Income                             $4,055

Government threshold:                        $3,579  (Family of Four)

Surplus Income:                                      $476

Surplus Payment                                     $238

If Justin and Jessica were to file bankruptcy and their income were to stay the same they would have surplus income and would be bankrupt a minimum of 21 months and would have to pay $238 * 21 = $4,998.

In order to file for bankruptcy there is also an administrative fee of $1,800 that we would charge. That means that for Jessica and Justin to file for bankruptcy and keep their assets, it would likely cost around $18,700. That is around $890 a month, if they were to get their discharge in 21 months.

In my analysis for the consumer proposal option I must consider a number of issues. First a consumer proposal must offer more in dollar value to the creditors than they would get in a bankruptcy.  Creditors get to vote on a proposal and a simple majority in favour is required for the proposal to be legally binding on all creditors. Therefore, reviewing the creditors and knowing what their recoveries they are likely to accept is an important part of my analysis.

Thirdly, I look at whether or not the debtor can afford to make the payments. The couple had provided me with a budget and when looking at their monthly income compared to their monthly expenses they had o $400 left for debt repayment.  That would imply $400 would be the maximum monthly payment they could afford to offer in a proposal.

After taking into account the above and the voting history of their creditors, I recommended offering consumer proposal that would pay $350 a month for five years (60 months). This would give the creditors $21,000, which would be more than they would get in a bankruptcy and was within Jessica and Justin’s budget.

The following were the reasons that Jessica and Justin decided to file a consumer proposal:

  • Its not bankruptcy, they did not want to file bankruptcy and this was a way to avoid it.
  • The monthly payment amount was more affordable
  • They were able to keep control of their assets
  • Better rating on your credit report than bankruptcy.
  • You don’t have to worry about surplus income, if overtime became available again Justin could work as much as he likes and would not be penalized because the proposal payment is fixed.
  • It is less stress compared to bankruptcy – no worrying about how much the surplus income payments would be, no filing monthly income reports with the trustee, no worrying about possibly having to go to mediation or bankruptcy court and no funny tax rules.

A consumer proposal is the number one alternative to bankruptcy and many more people in Canada are opting to got the consumer proposal route, rather than file for bankruptcy.

If you would like more information about consumer proposals, bankruptcy or any other options with dealing with your debts, please contact a consumer proposal administrator in your area for a free, confidential consultation.J

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