Why Would a Creditor Accept a Consumer Proposal?

Good question! If you owe $50,000, why would your creditors accept a deal where you only pay, say, $20,000? The answer is simple: the people you owe money to would rather receive something than nothing.

Here’s the same question, asked another way: what happens to your creditors if they reject your proposal? If they don’t take the deal, your only other option may be to declare personal bankruptcy. If that happens, they will most likely get less, perhaps a lot less, than you offered in the proposal.

So, for the creditors, accepting your proposal is their best option for collecting the most money possible.

Why Would I File a Proposal Instead of Going Bankrupt?

Also a good question. If the creditors accept my proposal because I am offering to pay them more than if I went bankrupt, does that not also mean a proposal costs me more than if I went bankrupt? The answer, in most cases, is “yes”. If you offer your creditors less than they would receive in a bankruptcy, they have no reason to accept your proposal; they would prefer that you go bankrupt.

However, a proposal may still be your best option, for a number of reasons.

  1. You are avoiding bankruptcy. That’s an excellent reason for filing a proposal.
  2. With a proposal you have certainty. You know exactly what you are required to pay each month and your payments may be more affordable.
  3. You are allowed to keep your assets, such as your house, which you may lose in a bankruptcy.

Let’s look at an example. You owe $50,000 and if you filed bankruptcy your creditors would expect to receive $15,000, including $7,000 equity in your home and $380 a month in surplus income payments for 21 months. To buy out your equity in your home from the trustee, and make your surplus income payments, your total monthly payment in your bankruptcy would be $715 per month for 21 months. You offer your creditors $19,200 by paying $400 per month for 5 years.

Benefit to your creditors: They receive $4,200 more than they would in a bankruptcy.

Benefits to you: You get to keep your home and your monthly payments drop from $715 per month to $400 per month.

Filing a consumer proposal is a win-win for both you as debtor and your creditors. With the help of your trustee, you negotiate a deal you can both agree to. Get started today.

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