Consider A Consumer Proposal Or Debt Management Program
Going bankrupt is generally a last resort for solving financial problems. If you’re struggling with debt, there are two common alternatives you should know about: filing a consumer proposal and setting up a debt management program.
Consumer Proposal
A consumer proposal is a legal agreement between you and your creditors. It allows you to settle your unsecured debt on different terms then were originally intended, usually for significantly less than the total amount you owe. The settlement amount is based on your ability to pay, your total debt, and the creditor’s willingness to accept the proposed reduction. In some cases, it can be up to an 80% less than what you owe.
To help facilitate a successful proposal, a Licensed Insolvency Trustee compares the creditors’ anticipated return from a bankruptcy with the return from filing a proposal. For the proposal to be accepted, the majority of your creditors must accept; the dissenting creditors are then bound by the terms of the proposal.
In British Columbia, only a Licensed Insolvency Trustee can administer a consumer proposal. Trustee fees are regulated by the government and included in the total amount of your proposal.
Debt Management Program
Another option is a debt management program (DMP). A DMP can either reduce or eliminate interest that is charged by creditors. However, it usually cannot reduce the principal amount of a debt.
A DMP is created by a credit counsellor, who assists you in developing a budget and an affordable repayment plan based on your total debt. The plan normally sets a monthly payment amount (which includes the counsellor’s fee) paid over a maximum of 60 months. The money is distributed to creditors until the debt is paid in full.
Deciding What’s Best For You
During our initial assessment of your financial situation, we’ll review both the consumer proposal and DMP options. We use several key questions to guide us in recommending the best solution for you.
Is there a need to stop creditor actions and a Stay of Proceedings?
A consumer proposal grants a Stay of Proceedings that halts all collection actions, including judgments and garnishees. This action usually allows the debtor to negotiate acceptable and viable settlement terms.
Generally, if a creditor has already initiated a court action to collect a debt, you are no longer eligible to file a DMP.
What is the amount of government debt?
A consumer proposal includes unsecured government debt such as income tax and GST. Assuming a viable acceptable proposal is negotiated, the government debt is settled by the proposal.
Unfortunately, government debt can’t be included in a DMP. Government debt includes income tax, student loans, ICBC, GST (for self-employed), and government overpayment of EI, GST, and CTB.
However, if the government debt is small, sometimes a DMP may still be appropriate. The government debt would just need to be dealt with separately.
What is the Interest charged and total amount owed?
A consumer proposal stops interest. The amount to be paid to settle your total unsecured debt is often greatly reduced from the total amount you owe.
Credit counsellors usually make arrangements with participating creditors to eliminate or significantly reduce interest being charged. However, the DMP does not reduce the principal amount to be repaid.
Is there a need to break a secured loan or lease contract obligation?
Sometimes, the total loan/lease obligation is not only for an amount well in excess of the value of the related asset (negative equity), but the contract also is based on a high interest rate. In this case, the debtor may need/wish to break this contract.
A consumer proposal can incorporate terms to effectively break the loan/lease obligation. If the secured creditor still has a right to pursue the debtor for the shortfall (total obligation less value of the asset), that difference will also be settled by the proposal.
Normally a DMP does not include secured creditors.
Affordability (overall cost, including fees and interest)
With a consumer proposal, the fees charged by the trustee are set by law. They are paid out of the total sum to be paid according to the proposal terms.
Unlike a consumer proposal, a DMP does not normally reduce the principal owed, and the fees charged are added to your total debt. Typically, you make a monthly payment (including fees and any reduced interest) for a period not exceeding 60 months. For example:
Consumer Proposal vs DMP
Total debt – 48,000
DMP Total Payment, including fees ($900 x 60) = 54,000
Consumer Proposal Total Payment, including fees ($450 x 60) = 27,000
Despite the preceding differences, we often recommend a DMP as the better option when
- the unsecured debt is relatively small,
- your non-exempt assets (such as home equity) are close in value to the total unsecured debt, and
- the unsecured debt is relatively small compared to your income (usually a budgeting issue).
Call Us Today
R. West & Associates Inc. is here to serve you with COVID-19 safety procedures in place. Whether we use a video conference or meet in person, we’ll listen to your concerns and explain your debt management options.
Our offices are in Surrey (Guildford) and in North Burnaby (Production Way & Lougheed Hwy). Call 604-591-7634 to set up your free initial assessment.