Have you recently started a consumer proposal, or are you considering filing one? If so, you may have concerns about what happens if you default on a consumer proposal or fail to keep up with your monthly payments. In this article, we explain the consequences of defaulting on a consumer proposal and your options if you do.
The Consequences of Not Paying Your Consumer Proposal
Once the court approves your consumer proposal, it becomes a legally binding agreement between you and your creditors. Under this agreement, your most important responsibility is making monthly payments to your trustee. In turn, your trustee distributes the funds to your creditors.
You’re only allowed to miss two payments during your proposal (though you’re still responsible for covering these missed payments at the end of your proposal term). Your consumer proposal is deemed annulled if you miss three or more payments. In other words, the agreement is cancelled.
If a deemed annulment occurs, you become responsible for your debts in full again, including any interest accrued since filing your proposal. In addition, you lose the legal protection that a consumer proposal offers from creditors. Your creditors are now free to resume collection actions against you. These may include collection calls, wage garnishments, and bank account freezes. They can also register a lien on your home.
Can you reinstate your consumer proposal after defaulting?
Yes, it’s possible to revive your consumer proposal after you’re defaulted. Your trustee can help you do this, provided your unsecured creditors agree to revive the proposal and you get your account current. You have 30 days to reinstate your consumer proposal after the default date.
What happens if you miss the 30-day deadline? In that case, it’s still possible to revive your proposal, but you’ll need permission from the court. Unfortunately, this route can be expensive and may require assistance from an insolvency lawyer.
Your options if you can’t afford your consumer proposal payments
During your consumer proposal, you may experience a financial setback that prevents you from making your monthly payment. Here are some options to consider if your consumer proposal becomes unaffordable:
Rework your budget
Review your monthly spending and brainstorm ways to lower your expenses. A few minor tweaks to your budget could free up enough cash for you to complete your proposal and avoid default. Discretionary items like streaming services and restaurants are good places to begin your cost-cutting mission since you can survive without them. You can also negotiate recurring bills for cell phones, internet, and car insurance.
Use financial windfalls
Have you recently received a large, unexpected amount of money? You may have filed your taxes and realized you’re getting a big refund, or your boss was extra generous with Christmas bonuses this year. If so, consider applying this financial windfall toward your proposal payments. Alternatively, keep the funds in reserve as a financial cushion in case you fall behind on your payments in the future.
Under a consumer proposal, you’re free to make lump-sum payments toward your balance whenever you wish. So, applying extra money when you come across it is wise. Not only do you avoid defaulting on your proposal, but you pay it off faster.
Amend your proposal
Under Canada’s Bankruptcy and Insolvency Act (BIA), you have the right to amend your consumer proposal if your financial situation has worsened since your filing date. Amending a proposal involves asking creditors to change the terms of the agreement to better suit your needs. Your LIT will help you determine a lower monthly payment and file the amendment for your creditors to consider. There are no additional fees you have to pay to make the changes.
However, there are risks with altering the terms of your consumer proposal. If your creditors reject the new offer, your proposal automatically fails, which means your debts become due in full. The reason is that when you submit the amended proposal, the current one no longer exists, so you cannot return to it. Therefore, if you pursue this strategy, choose your terms wisely to ensure creditors accept the offer.
Your trustee can advise whether amending your proposal is a good idea or switching to bankruptcy is better. We explain the latter option below.
Convert your consumer proposal to bankruptcy
Many people file a consumer proposal to avoid bankruptcy. But sometimes, the latter solution is more practical and effective. If you’re financially in bad shape and anticipate missing three proposal payments, bankruptcy makes more sense. This is especially true if you’ve only recently started your consumer proposal and have a substantial amount left to pay under your agreement.
If you default on your proposal, bankruptcy may be your only option for eliminating unsecured debts, as you cannot file a new proposal. However, defaulting doesn’t mean you’re legally bankrupt – you must still apply to begin the process. You can file for bankruptcy before or after you default on your proposal.
The bottom line on defaulting on a consumer proposal
A consumer proposal can be a highly effective tool for reducing your unsecured debts. But you’ll only benefit from this debt-relief program if you keep up with your monthly payments. Once you miss three payments, the proposal is annulled, and your creditors can resume their collection activities.
If you struggle to maintain your proposal payments, address the issue honestly. Maybe you’ve strayed too much from your budget? If so, the solution may be to simply reign in your spending.
However, if your income has dropped significantly, amending your proposal or filing for bankruptcy may be a better option to explore. Regardless of your situation, talk to your Licensed Insolvency Trustee (LIT) if your consumer proposal is too much to handle. They can help you make the best decision to deal with your debts.
Are you contemplating filing a consumer proposal but still unsure if it’s the best way to get the debt relief you need? Learn more about the differences between a consumer proposal and bankruptcy.
