Debt can be difficult when you don’t know how to handle it. It’s no mystery that money causes a lot of stress on a person, and that stress only grows when you’ve got bills that are unpaid, calls from creditors, or your wages are being garnished. While sometimes it feels like bankruptcy is the only option, there is another form of debt relief that people aren’t always familiar with: the consumer proposal.
If you’re looking for a way to reduce your debt, pay back your creditors, and repair your credit history in the long-run, then a consumer proposal might be the best way to find debt relief. In this article, we’ll cover how much debt can really affect an individual and the importance of finding relief. We’ll focus on the consumer proposal and what it means for someone who wants to climb out from underneath difficult debt.
How to Tell When It’s Time to Ask for Help
When is it time to ask for help with debt relief? A bankruptcy trustee, now known as a Licensed Insolvency Trustee, will review your finances and explore your options with you, including whether or not you are eligible for a consumer proposal. Consultations are free, but for many, it’s an intimidating step. If you are experiencing any or all of these personal financial danger signs, it’s time to make that call and ask for help:
#1 You can only afford to make minimum payments
Minimum payments are a kind of debt-trap on high-interest types of credit like credit cards. When you only make minimum payments, the money you owe balloons well beyond the amount you actually borrowed. That’s why it can feel like you’re never making any progress. If you only make minimum payments, you can wind up doubling the time it takes to pay back and significantly adding to the total amount you pay.
Think of it like this: you buy a $1,000 laptop on your credit card. Your minimum payment is fixed at $25 a month and you pay 20% APR. It will take you 65 months to pay off that purchase, and you will pay $613 in interest. The real cost of your new laptop is now $1,613.
Only making minimum payments can also show up on your credit report. As your balance climbs, your credit utilization does as well. While some credit utilization is positive, if your balance is out of control, it will ultimately hurt your credit score.
#2 You’re borrowing money to pay off other loans
Borrowing money to pay back the money is a sure sign that you’re in trouble. If you’re taking out high-interest cash advances to pay for utilities or credit card payments, you are likely to wind up even deeper in debt. Before you borrow even more money, think about this: if you can’t afford to pay for it now, how are you going to pay for it later? You could be doing more harm to yourself by borrowing more rather than seeking help now.
#3 You spend more money than you earn
Look at your banking statements for the past 6 months. Have you spent more money than you’ve earned? Even when you have savings, that’s still a path toward financial precarity. When you’re making up the difference with credit, you’re going to wind up in more debt than you can handle.
There are a few steps you can take to fix this problem without debt relief. Find those areas where you can spend less and cut them out of your habits. This can include:
- Eating and drinking out
- An expensive internet or phone plan that could be replaced with a cheaper one
- Spending a lot on gas if there’s an alternative way to commute (you could even sell your car if you live somewhere with good public transportation)
- Shopping as a recreational activity
- Buying groceries and other essentials at high-end stores
- Paying for things you could do yourself, i.e. laundry
#4 More than 20% of your monthly income goes to paying back loans
If you spend more than 20% of your net monthly income on paying back loans, think about getting debt relief. That number does not include your mortgage, which is a shelter cost in addition to being secured debt. Once you’re spending that much to pay back the money, you’re not able to save and you do not have much wiggle room to increase your payments.
#5 You have no savings or emergency fund
Emergency expenses happen. Your car could break down, you could injure yourself and not be able to work, or you could suddenly need to invest in a new computer to do your job. There’s never a good time for any of these things to happen. When they do, you need savings or an emergency fund to draw on. Otherwise, you’re going to rely on debt to cover the costs, and paying that debt back is the problem.
What Is a Consumer Proposal?
A consumer proposal is a formal binding offer made to your creditors to settle your debt for less than the full amount owing. An alternative to bankruptcy, it is a legal process filed under the Bankruptcy & Insolvency Act through a Licensed Insolvency Trustee. At the completion of the proposal, all unsecured debts included in the proposal are forgiven.
If you are an individual and your total debts do not exceed $250,000 (not including debts such as a mortgage secured by your principal residence), a consumer proposal might be the best way for you to solve your debt issues. Compared to bankruptcy, consumer proposals often allow for the insolvent party to hold onto personal assets that would otherwise have to be relinquished.
These consumer proposals are a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). In this process, the LIT will work with you to develop a “proposal” — an offer to pay creditors a percentage of what is owed to them or extend the time you have to pay off the debts, or both. The term of a consumer proposal cannot exceed five years.
To help you decide if a consumer proposal is a right option for you, we’ve provided some answers to the most frequently asked questions we receive about consumer proposals in Canada.
Who Is the Licensed Insolvency Trustee?
These trustees were formerly known as bankruptcy trustees, though their function has not changed with the change in their name. A LIT is a license-holding professional that has been qualified by the Superintendent of Bankruptcy to administer proposals and bankruptcies and manage assets held in trust.
The trustee can give a debtor information and advice about both the proposal and bankruptcy processes and make sure that both the debtor’s rights and the creditor’s rights are respected. It is legally required that you must work with a Licensed Insolvency Trustee when filing bankruptcy or consumer proposals.
Trustees are also the most highly trained and educated Debt Consultants in Canada. Almost all Trustees have both an accounting designation and a university degree. In addition, all must complete and pass a rigorous three-year bankruptcy and law course and be investigated by the RCMP before being granted a trustee license. Ongoing professional development is mandatory.
In most cases, it will be more cost-efficient to use a trustee instead of other debt consultants. This is because bankruptcy trustees have their fees regulated by the government. Your trustee will explain your duties in detail, to ensure that you complete your bankruptcy or consumer proposal as quickly as possible.
You also get a certain level of protection that comes with teaming up with a LIT. They offer you security and financial protection:
- By the fact that the federal government regulates trustees
- By the stringent code of ethics to which all trustees are subject
- By the mechanism in place to mediate any dispute you may have
Because of their expertise, these trustees should be the number one place you go for advice when considering consumer proposal or bankruptcy as a means of debt relief.
Building Rapport with Your Trustee
It’s very important that the relationship that you establish with your trustee is built on trust and understanding. Depending on what your debt relief journey looks like, it’s possible that you’re going to be seeing a lot of your trustee. IF you’re not sure how to go about establishing a good relationship with a financial professional, we can offer some tips and tricks on how to build a good rapport with your trustee.
- Ask essential questions. Find out what you really need to know. They can be a valuable source of information.
- Listen closely. Listen to the full answer to your question. The art of good questioning lies in truly wanting the information that would be in the answer. You can learn a lot from a bankruptcy trustee about your available options and the best way out of debt.
- Transition naturally. Use something in the answer to frame your next question. Even if this takes you off your planned path for a while, it shows that you’re listening, not just hammering through your talking points, and it ensures that you get all the information you need.
What Debts Can Be Included in a Consumer Proposal?
When you file a consumer proposal, it is sent to all of your unsecured creditors. The proposal includes debt such as credit card debt, unsecured lines of credit, personal loans and other such debt. You cannot include secured debts such as mortgages or automobile loans.
What Happens During a Consumer Proposal?
There are three big things that happen when someone files a consumer proposal. As mentioned, only the bankruptcy trustee can file a consumer proposal on the behalf of an individual. When the consumer proposal is filed, the bankruptcy trustee will get into contact with the Office of the Superintendent of Bankruptcy (OSB), at which point there is an immediate stay on any action being taken against the debtor.
After that, the trustee submits the proposal to the creditors. It will include a report on your situation, your assets, and the contributing causes of your financial difficulties. From there, the creditors have 45 days’ time to accept (or reject) the proposal. In some cases, a meeting of creditors may be held. There, the creditors will vote to either accept or refuse the terms of the proposal.
How Does Filing a Consumer Proposal Affect Your Assets?
One common thing that is of primary concern for those who are looking at debt relief is how their debt recovery plan will affect their assets. The trustees at David Sklar are familiar with the intricacies of consumer proposals and bankruptcies, so they can guide you through the best strategies to find debt relief while minimizing the losses you might experience.
One important difference between consumer proposals and bankruptcies comes down to asset control. When you get help filing a consumer proposal, your consumer proposal does not usually involve losing any assets. If you continue to make payments on your mortgage and vehicle loans as needed, you should be able to keep these assets.
So long as your creditors agree to the proposal, you are allowed to keep the assets that you own. Consumer proposals are not meant to punish the insolvent party, it is expected that the person going through the debt recovery process maintain a standard of living. What’s more, money invested in RRSPs is typically protected under a consumer proposal (with some exceptions) and money invested in RESPs and TFSAs may also be protected under a consumer proposal, depending on the specifics.
Your trustee will provide you with specific information on what will happen to your assets before you make the decision to file a consumer proposal. However, a consumer proposal does not generally involve surrendering assets. Still curious? Go ahead and follow this link to learn more on our consumer proposal FAQ page about what the process includes.