When someone meets with a professional to get advice on which option is best to deal with their specific financial difficulties, it can become evident very quickly when filing bankruptcy is not the best choice. At times, a consumer proposal is the more appropriate alternative. To better understand when a consumer proposal might be a good debt solution for you, read the categories below to see if they apply to your personal situation.
The High Income Earner
When considering which option is best for your situation, you must keep in mind that if you file for bankruptcy, there are rules mandated by the federal government as to how much income you can earn before you have to start paying some of your hard earned money to your creditors as a “penalty” under the bankruptcy process.
Consider This Example:
Joe has a decent job, earning $60,000 annually. He usually ends up paying 25 percent in taxes, leaving him with $45,000 after taxes. On a monthly basis, his net take home pay is $3,750. Joe is single, so the federal government says he can earn up to $2,014 before he has to start paying any of his income to his creditors. Joe is over that limit by $1,736. He must pay half of this to his creditors, $868 on a monthly basis, and this lasts for 21 months. In this bankruptcy scenario, Joe would be paying his creditors a little over $18,000, solely based on how much income he earns.
Joe’s cash flow would be severely strained if he had to come up with $868 on a monthly basis. After his rent, his transportation expenses (including car lease and insurance payments), groceries, and some basic personal living and entertainment expenses, he has about $500 left over.
In this situation a consumer proposal might be a better debt solution. Joe could offer his creditors $450 a month for 60 months, totaling $27,000.
This is a win-win situation. First of all, Joe can afford these payments and it still leaves him a $50 monthly cushion. Secondly, his creditors would now receive much more in proposal payments ($27,000) than they would in bankruptcy surplus income payments ($18,000).
Settle Your Debt
Talk to a consumer proposal administrator about your options.
If you own a home, a big question when considering your debt relief options is, will I be able to keep my house? To answer this question, your trustee will complete an analysis to see how much equity is in your home. We look at the realistic value (selling price) of the property, what is outstanding against their mortgage and any other charges such as property taxes. We then deduct expected selling expenses such as real estate commissions and lawyer fees.
The creditors in this situation don’t want to force a sale of the home; they simply want to be paid the equity that is available. So you are faced with the task of coming up with this money, which you don’t have it lying around, otherwise you would not be speaking to a trustee. The reality is, you may have a hard time qualifying for a second mortgage due to your overall debt load.
A good solution is to pay out this equity to your creditors over time, by filing a consumer proposal .
Consider this Example:
After crunching the numbers, Bob finds that the equity in his property works out to $50,000. If Bob’s cash flow can manage it, he can offer to pay this out over the maximum 60 month period that a consumer will allow; which works out to $835 a month. If he can afford these monthly payments, Bob can keep his home, settle his debts and avoid filing bankruptcy.
Gambling or Other Addictions
Sometimes, debts are incurred through an unfortunate addiction, such as gambling. In this case, you are not eligible for an automatic discharge in the bankruptcy process. What this means is that your bankruptcy will not end automatically, as the majority of bankruptcies do. You will have to attend at a court hearing and the judge will not only want to know what steps have been taken to remedy the addiction, and will likely impose a penalty requiring you to repay a portion of the debt.
By filing a consumer proposal that is accepted by your creditors, you have avoided the court process and will know with some certainty the amount that you will have to pay based on your monthly payments.
If you are considering filing bankruptcy for the first time, you are eligible for an automatic discharge after nine months. If this is your second bankruptcy, this period is extended to 24 months. If you are a high income earner, like our friend Joe was, this period will be extended to 36 months (three years). If you have previously filed bankruptcy and still need debt relief, a consumer proposal might be a good option. A proposal can last up to 5 years, but monthly payments might be smaller and if possible, you have the option to pay off the proposal faster.
If any of these scenarios apply to you, contact a licensed Consumer Proposal Administrator in your area to discuss how a consumer proposal could help to eliminate your debt and avoid bankruptcy.