Getting Out of Debt: A Guide to Consumer Proposals

In the wake of COVID-19 and its economic shock, over 8.7 million Canadians applied for the Canada Emergency Response Benefit (“CERB”) to pay bills and feed their families during the time of uncertainty. However once jobs begin to return, CERB payments end, and life slowly returns to “normal”; people may realize that the economic implications of the pandemic are long-lasting. Many Licensed Insolvency Trustees expect to see an increase in the number of insolvency filings in the coming months, as deferred payments allowed people to put off dealing with their finances – until now.

Linda Stern, Licensed Insolvency Trustee and Senior Manager at Crowe Soberman Inc., shares her advice for those facing debt problems and how filing a consumer proposal could be the best solution.

What are the key differences between a consumer proposal and bankruptcy?

Consumer Proposals

• In a consumer proposal, monthly payments are usually lower than in a bankruptcy.
• Your assets (i.e.: real estate, tax refunds, etc.) are not surrendered.
• A consumer proposal requires the approval of your creditors through a voting process.
• Payments in a consumer proposal are set for the term of the proposal.
• A consumer proposal can be paid off early, thereby reducing the reporting period at the credit bureau.

Bankruptcy

• Bankruptcy is immediate, although your creditors can oppose your discharge.
• Bankruptcy payments can increase if your income increases.
• Bankruptcy has a set length determined by legislation.

How do I know if I am eligible for a consumer proposal?

To be eligible to file a consumer proposal, you must:

• Be insolvent or unable to pay your debts on time;
• Have total unsecured debts less than $250,000 (excluding, secured debt, such as mortgages and car leases); and
• Have a stable source of income (surplus funds) and be confident that your payments are affordable.

What kinds of debt are included in a consumer proposal?

• Credit cards;
• Lines of credit;
• Personal loans;
• Payday loans;
• Certain student loans (you must be out of school for at least seven years);
• Income tax debts; and
• HST for self-employed individuals.

How long does a consumer proposal last?

The maximum payment term for a consumer proposal is 60 months and the total amount paid is commonly referred to as the Proposal Fund. If you can afford more each month, you can shorten your proposal terms or offer a lump sum payment.

When will my consumer proposal be approved?

Your creditors have 45 days to consider your proposal from the date it is filed. A consumer proposal is approved if a majority (51 per cent) in dollar value of creditors vote in favour.

A meeting of creditors is required if at least 25 per cent of your unsecured creditors request one.

A proposal can be amended if there are more votes against than in favour.

What are the fees associated with a consumer proposal?

The fees are set by tariff pursuant to the Bankruptcy & Insolvency Act and are deducted from the Proposal Fund so that there are no additional fees or costs required to be paid.

The tariff allows the Administrator fees of $1,500, plus 20 per cent of the available funds for creditor distributions, plus applicable taxes.

What happens to my credit cards when I sign a consumer proposal?

When you file a consumer proposal, you will surrender your credit cards to the Administrator. You will not be able to apply for a new credit card while you are making payments on your proposal unless it is a prepaid or secured credit card. Your credit card companies will cancel the card.

What happens if I miss monthly payments on my consumer proposal?

Most consumer proposals call for regular monthly fixed payments. Before COVID-19, the law stated that if you missed three payments, you would be in default.

On April 27, 2020, a Court Order was issued by the Ontario Superior Court of Justice extending the three missed payments to six missed payments between March 13, 2020 and December 31, 2020.

Default can be cured by a revival process if:

• The Administrator considers it appropriate to do so, and there are no objections by the creditors; or
• The debtor can make an application to Court to have the consumer proposal revived.

The Court will revive a consumer proposal if it feels you can continue your payments based on your monthly income and expenses.

How will my credit score be impacted? How long will a record of the consumer proposal stay on my credit report?

There are two main credit reporting agencies in Canada: Equifax and Transunion.

Equifax removes a consumer proposal from your credit report three years after you complete all the payments, pursuant to the terms of the consumer proposal.

Transunion removes a consumer proposal from your credit report either:

• Three years after you complete all the payments pursuant to the terms of the consumer proposal; or
• Six years after you sign the proposal (whichever is sooner).

How do I rebuild credit after a consumer proposal?

• Apply for a secured credit card. A secured credit card is a credit line guaranteed by a previous deposit. For example, to have $1,000 of credit, you would have to deposit $1,000 with the card’s bank. By making your payments by the due date, your credit rating will improve.
• Get an Registered Retirement Savings Plan (“RRSP”) loan. If you have contribution room on your RRSP, you can take out a bank loan. Your retirement savings are increased and your rating will be improved. You may need a co-signor for this loan.
• Stay within your budget. Simply paying your utility bills on time helps rebuild your credit rating.
• Pay off your proposal earlier.

When will collection calls stop?

Once a consumer proposal is filed, your creditors are notified, and collection calls typically stop within 1-2 weeks.

If creditors do call, advise them of your consumer proposal filing and ask them to contact your trustee.

Can I include tax debt on my consumer proposal?

Yes. The following examples of Canada Revenue Agency (“CRA”) debts will be eliminated through the terms set out in the consumer proposal:

• Income tax debt;
• HST debt;
• Director liabilities personally assessed for unremitted business payroll deductions and HST; and
• Interest and penalties accrued on the debts mentioned above.

If CRA has registered a lien on real property for outstanding taxes, that becomes a charge against the real property and is not a debt that is eliminated in a consumer proposal.

Does a consumer proposal eliminate my student loan debt?

Yes, but only if the end of study period is more than seven years from the date of the proposal filing.

Can I exclude a creditor on my consumer proposal?

No, you must include all debts when filing a consumer proposal. A proposal is a legal process that deals with all creditors fairly and allows you to complete the process completely free of debt.

Can I pay off my consumer proposal early?

Yes, you can pay off a consumer proposal early, ahead of the completion date.

Even better news, it can be paid down early without penalties or interest. The sooner you complete the proposal payments, the sooner your credit rating will improve.

We can help.

There will be life after COVID-19. Contacting a Licensed Insolvency Trustee is the first line of defense for people battling debt problems. Our professionals are non-judgmental and easy to talk to. We offer free telephone or video consultations. From there we will assess your situation and help you formulate a monthly budget. With true commitment to the process, you can climb out of your debt, no matter how bad it is.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.