For a consumer proposal to be successful it must be acceptable to several parties. First you must be assured that you will be able to afford your monthly payments and that this is the best solution to eliminate your debts. Creditors are primarily looking at the total money they can expect to receive over the term of the proposal. They have certain ‘expectations’ and a successful plan takes these factors into consideration.
Each person’s situation is unique, but the rules that are used to determine how much a person is likely going to be able to settle their debts for in a consumer proposal are based on some pretty simple guidelines.
In order for a consumer proposal to be accepted by your creditors you need to offer them the greater of:
- The amount they are likely to receive if you were to file personal bankruptcy OR
- An amount sufficiently large to induce them to accept your offer. Currently that is around 1/3 of what you owe
While these are the general principals, there is some give and take in the negotiations. This is where a good consumer proposal administrator can help.
The first point can be accurately estimated – the amount you may be required to pay if you file for personal bankruptcy is based on your income and the things that you own. Your consumer proposal administrator l should walk you through this calculation step by step because you should only decide to file a consumer proposal after you have carefully considered all of your options, including bankruptcy. I have always been a big proponent of consumer proposals – it is a great solution for many people with too much debt, but sometimes bankruptcy just makes more sense. You won’t know if you don’t consider both.
Expected Recovery Rate
The second point allows you a little bit of wiggle room. The major commercial lenders, TD, Royal, CIBC, BNS, and BMO have told us they won’t accept offers below 30%, but that is not carved in stone. It often comes down to the unique facts of each case. For example, when a person’s debts are concentrated with one lender, that insitution will tend to ask the person to repay more of the debt. When the debts are disbursed among a lot of lenders you can get away with offering less.
Having said all this, creditors also want the proposal to be completed. While they will want to maximize their financial return, they also want the payments to continue to flow. This means there may be some give and take as to the length of the term of your proposal in order to balance out the total amount they want to receive with how much you want to pay monthly. They may be as happy with $500 a month for 60 months as they would be $625 a month for 48 months. Both result in a total payment of $30,000 but the first option may be more desirable for you depending on your budget.
You Can Renegotiate
One misconception people seem to have is that if they make an offer and it is rejected then they are done. That’s simply not true. Creditors have the right to accept, reject or counter offer. Rarely does a bank or credit card company say “No”. If they don’t accept your first offer they usually suggest alternate terms, or they are willing to accept an amended offer from you. This implies a certain amount of negotiation, but it is all done by fax and e-mail. About 1 out of every 6 consumer proposals we help people with end up with altered terms. You are involved in this process the entire time.
That’s all there is to it. No secret formulas. No backroom deals.
Of course you also need to know that only a licenced trustee in bankruptcy may file a consumer proposal on your behalf. Before you agree to any plan, before you pay anyone a fee make certain you ask them if they are a licenced trustee. If they are not that means they are going to have to refer you elsewhere to file. That means the fees you pay the first person won’t actually go towards reducing your debt and they are not required.
We can sum this up in three handy rules for a success consumer proposal:
- You must offer your creditors more than what they would get than if you filed bankruptcy in Canada. This makes sense. If your assets in a bankruptcy are worth 10 cents on the dollar, your creditors have no incentive to accept 5 cents on the dollar in a proposal.
- You have to be able to make the consumer proposal payment each month. If you don’t have a job, or a source of income, it’s less likely that your proposal will be acceptable to your credits. Start by making a household budget so you know you can make the payments.
- Your consumer proposal must be filed by a consumer proposal administrator licensed by the federal government. An un-licensed debt consultant can’t file a consumer proposal.
Find a local consumer proposal administrator in your area to talk about how a consumer proposal can help you get out of debt.