Myths about Consumer Proposals

I’ve seen and heard recently some negative comments with respect to consumer proposals, so I thought I’d take some time today to answer some of these myths about consumer proposals.  Here are some of the comments I’ve come across or various websites and radio interviews recently:

  • “A consumer proposal lasts 5 years”

Not true.  A consumer proposal can last up to a maximum of 5 years.  Proposals can range from 1 month to 60 months and the length will depend on how quickly you think you can repay your proposal.   Furthermore, if you offer a 5 year proposal and the creditors agree to the proposal, you can pay it off as fast as you like – if you make extra payments at any time, it will reduce the length of the term of the proposal.

  • “You have to pay an up front fee to file a consumer proposal”

Not true.  A trustee gets paid from the money that’s paid into the proposal and normally your first payment on a proposal is due to paid within 30 days of the proposal being filed. Here at Hoyes Michalos & Associates, we don’t receive a cent from a proposal until after the proposal has been filed with your creditors.

  • “Trustees that file consumer proposals work for creditors”

Not true.  To be an administrator of consumer proposals, you have to be a licensed trustee in bankruptcy.  This licence is issued by the government – the Office of the Superintendent of Bankruptcy.  Trustees are appointed by the government (not the creditors) to administer the consumer proposal.  The trustee does not work for the creditors.

  • “If trustees are paid from the money distributed to creditors, they must be in a conflict of interest position”

The first part of the sentence is true, the trustee is paid when money is distributed to the creditors, however if there is no money available to distribute because the payment was set too high for you and you could not afford it and the proposal fails, then the trustee does not get paid.   The trustees motivation in a consumer proposal is to find a common ‘sweet spot’, a number high enough that the creditors will likely accept and a number low enough that it is affordable for you to pay each month.  If the proposal does not work for either you or the creditors, the trustee won’t be paid.

  • “Creditors increasingly don’t accept Consumer Proposals”

Not true.  At Hoyes Michalos & Associates, approximately 99% of consumer proposals filed are accepted by the creditors.   As the decision to accept a proposal rests with the creditors, so therefore a trustee cannot give you a 100% guarantee that your proposal will be accepted as it’s not up to the trustee.   Although creditors have the right to reject a proposal if they see fit, it’s rare for them to do so if they’re satisfied the proposal is going to return them a greater benefit than they’d receive if you were to file a bankruptcy instead.  What creditors are increasingly not accepting is debt settlement offers put forward by unregulated, unlicensed debt consultants and debt settlement firms.

  • “People with assets have no business filing consumer proposals”

Not true.   One big difference between a consumer proposal and bankruptcy is that in a proposal you don’t assign control of your assets to the trustee, so a consumer proposal could make a lot of sense if you have an asset that you’d lose in a bankruptcy that you don’t want to lose.  Examples of assets you could lose in a bankruptcy include, equity in your house, equity in your car, investments such as savings bonds, RESP’s.

If you have $15k in RESP’s saved up and a $60k debt load to handle;

  1. Simply cashing in the RESP’s will still leave you a $45k debt to repay and no savings for the kids.
  2. If you file bankruptcy the trustee will cash in the RESP and disburse the funds to the creditors, so you have no debt, but no savings either.
  3. If you file a consumer proposal for $20k ($400 for 50 months), the creditors would consider accepting it ($20k is better than the $15k RESP they’d get in the bankruptcy) and you get to keep the savings intact for the kids

So as you can see, in this case having an asset (the RESP) does not exclude you from option 3 of filing a consumer proposal – in fact you’d probably argue it’s the most logical choice of the 3 options.

  • “It’s the same as bankruptcy”

Not true.  A consumer proposal is federal law that is regulated under the Bankruptcy & Insolvency Act, but it is a complete different procedure to a bankruptcy.  Our article outlines some of the major differences between the two. Some people think the rating on your credit is the same as bankruptcy, again not true.  I’ll be the first to tell you it’s not significantly better on your credit, but it is different.  Bankruptcy is rated as an R9 on your credit and stays there for 6 years after your discharge.  A Consumer Proposal is reported as an R7 on your credit for 3 years after you completed your proposal (so if you pay a 3 year proposal it will be there for 6 years in total).

The key is that you consider all your options when you consider what to do about a debt problem.  Don’t jump to conclusions and assume that because a family member, a friend or colleague picked one option that the same option must also be the best for you too.   Do your research, call a professional and make sure you feel confident that all your options have been explained to you before you decide what to do.

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