As one of the leading filers of consumer proposals in Canada, I read with interest a blog post by Richard Cooper of Total Debt Freedom titled What is a Consumer Proposal? Mr. Cooper correctly states that, once accepted, a consumer proposal stops collection calls, prevents court action, and eliminates your debt. He then says this:
I would even argue a consumer proposal does more damage then just filing straight bankruptcy due to the time frame to debt freedom being considerably longer.
Here is my problem with consumer proposals. Trustees make more money off you, for less work. I’m not making this up. Its by their own admission that they prefer to sell you a consumer proposal over filing for bankruptcy. That could potentially leave you exposed to a trustee that is in a position to look out for their own profits, versus what might be best for getting you debt free.
Let’s address both of these points.
First, is a consumer proposal more damaging than just filing bankruptcy in Canada? Sometimes yes, sometimes no. If it’s your first bankruptcy, and you have no assets and no surplus income, a bankruptcy may cost you something less than $2,000 (perhaps payments of $200 per month for 9 months) and in nine months you are discharged. There will be a note on your Equifax credit report for six years after the date of discharge (so about seven years in total), and that’s it.
If you filed a consumer proposal where you paid $200 per month for five years, you are obviously paying more than a bankruptcy, and the note on your credit report will stay on your credit report for three years after the proposal is completed, for a total of eight years. I would therefore agree with Richard that, in this case, a bankruptcy is a less expensive option, and would be on your credit report for a shorter period of time.
However, I can give you examples where the opposite is true.
For example, a second bankruptcy remains on your Equifax credit report for 14 years, which is obviously significantly worse than the 8 years maximum for a consumer proposal.
In addition, if you have surplus income, your bankruptcy will be extended for an additional year, and you will pay a lot more than the minimum payment. That’s why surplus income is a hidden trap in bankruptcy in Canada.
Here’s a simple example:
Tom is a single guy with no dependents, and he owes $30,000 on credit cards, and one of them is garnisheeing his wages. His net income before the garnishment is $3,006 per month. If this is his first bankruptcy, he is allowed to earn $2,006 per month (using year 2013 surplus income limits), so he is $1,000 over the limit, requiring him to make a payment of $500 per month for 21 months in his bankruptcy. That’s total payments of at least $500 x 21 = $10,500.
Instead of bankruptcy, Joe could offer a consumer proposal of $200 per month for five years, or $12,000 in total. It is very likely that the creditors would accept that proposal.
So, back to the question: which option is better for Tom, a consumer proposal or bankruptcy? The total cost of the bankruptcy is less expensive, but the cost per month of the bankruptcy is greater, because he is making the payments over a shorter period of time. If Tom can’t afford to pay $500 per month, a consumer proposal at $200 per month will be easier on his cash flow.
I would also suggest that if Tom has an affordable monthly payment he is less likely to go back into debt to keep up with living expenses. Many people even find they can begin to save money while in a consumer proposal. This sets them up well financially for when they complete their proposal.
It is true that the consumer proposal will remain on Tom’s credit report longer than the bankruptcy, but only if he takes five full years to pay off the consumer proposal. Tom can pay it off as quickly as he wants. Once the creditors accept the proposal he can accelerate his payments and pay it off faster. If he can pay it off in three years (by increasing his payments from $200 to just over $333 per month) then the proposal will be off his credit report in six years, which is quicker than in a bankruptcy.
Here’s another example: what if Fred has debts, and he owns a house with equity? If he goes bankrupt he may lose his house. If he files a proposal that is accepted by his creditors, he can keep his house. Fred would probably argue that, in his case, a proposal is better than a bankruptcy.
That’s my point: bankruptcy is the appropriate solution in some cases, but is not the appropriate solution in other cases. A professional must review your situation and provide you with advice on the implications of each option.
Do Trustees Make More Money in a Consumer Proposal?
Richard’s second point is that trustees make more money in a consumer proposal than in a bankruptcy. In many cases, he is is correct. As a trustee my fees are legislated by the government of Canada. I am paid a percentage of the money that is in the file, so if there is more money in a consumer proposal, I will get paid more.
In the example above where Joe offered a proposal of $12,000, my fees would be approximately $3,500. (The math is complicated, but it works out to approximately $1,500 plus 20% of the funds distributed to the creditors).
If instead Joe filed a bankruptcy and paid $10,500, my fees would be: $5,584.
Wow. In this example Richard is incorrect, because I would actually make more money in a bankruptcy than in a proposal, because the percentage I earn in a bankruptcy, up to a set amount, is actually larger in a bankruptcy than in a proposal. Even better for me, the bankruptcy would be over in 21 months, where it could take me up to five years to get all of my money in a proposal.
Of course I could give you examples where I make more in a proposal; each case is different.
I agree with Richard that a trustee could “potentially leave you exposed to a trustee that is in a position to look out for their own profits, versus what might be best for getting you debt free.” That’s true, but that is true of every “professional” advisor. All business people exist to make a profit. If we don’t make a profit, we are out of business.
Richard does not work for free. I do not work for free. Even not for profit credit counsellors get paid for what they do, as they should.
I will make you this promise: if you meet with me, or any other professional listed on this site, we will explain all of your options. We will give you all of the facts, and let you decide.
In some cases, I will tell you to call Richard because a debt settlement is the best option for you. In some cases I’ll tell you to talk to your accountant, or a mortgage broker, or a credit counsellor. I will also explain the costs of bankruptcy and a consumer proposal, and if you ask, I will tell you exactly how much I will get paid in each option.
Why am I open and transparent? Because after 25 years in this business, a significant portion of my work is from referrals from people I have helped in the past, and if I was just in it for the money I would not have thousands of people willing to refer friends and family to me for help.
As always, research your options, crunch the numbers, and make an informed decision.
To help, here are some more reasons why a proposal might be preferable to many over bankruptcy.
10 more reasons why a consumer proposal is better than a bankruptcy.
- Your payment is fixed, even it your income increases. If you expect your income to increase, or if you simply want the certainty of knowing what your payment will be each month, a proposal may be the solution for you.
- Less “homework” is required. Unlike a bankruptcy where you are required to submit proof of your income (paystubs and budgets) each month to calculate potential surplus income, in a consumer proposal there are no monthly reports required. You will meet with your administrator to work out a plan, and once it’s approved, that’s it! You simply make your payments each month until your plan is completed.
- It may or may not be better for your credit rating. A consumer proposal is an R7 (not great) but a bankruptcy is an R9 (even worse). If this is your second bankruptcy, a proposal will come off your report sooner.
- It gives the exact same legal protection against collection agents, wage garnishments, phone calls etc.
- Employment is usually unaffected (in a bankruptcy you cannot be bondable which some employers require and certain professionals cannot go bankrupt)
- Retain control of all of your assets that you might lose in a bankruptcy (your car, house, RESP’s etc)
- You don’t lose your tax refund (in a bankruptcy you lose any tax refunds due to you up to the year of bankruptcy)
- Can be paid off early. While your total payments are fixed, you can make extra or early payments without penalty.
- Bankruptcy is not open-ended, meaning if your bankruptcy is 21 months, you are in the legal state of bankruptcy regardless how soon you make your payments
- Creditors can’t change their mind once a proposal is accepted. If a creditor objects to your bankruptcy ending (your discharge), you are required to attend a court hearing. Since a proposal is approved by the creditors at the start of the process, there is no court hearing.