Published: October 24, 2018 • Last updated: November 28, 2021 at 17:24 pm
Personal, Joint & Second Time Proposals Explained
In this article we’ll look at the 5 most popular questions when it comes to consumer proposal (click on your question to jump directly to that section):
- How does a consumer proposal work?
- Who is eligible for a consumer proposal?
- Will my spouse be affected by my consumer proposal?
- OSAP & consumer proposals
- Second-time proposals
How Does a Consumer Proposal Work
Consumer Proposals (“proposal”) are the main alternative to filing an assignment in bankruptcy. A consumer proposal is an arrangement between you and your creditors which enables you to pay a portion of your debts over an extended period of time.
The amount that you pay and the length of time you pay this amount is determined in consultation with a trustee in bankruptcy who acts as the Administrator of your consumer proposal and is based on the amount of your income, living expenses, and any other financial responsibilities you have. A consumer proposal is also called a “Debt Consolidation Arrangement”.
Acknowledgement: This material was provided by my colleagues at Rumanek and Company
How Does a Consumer Proposal Help Me?
As soon as a consumer proposal is filed by the administrator, the rights of the creditors to start or continue any legal or collection procedures against you are suspended. In other words, if a creditor is threatening to garnish your wages or seize your assets, they will not be able to do so any longer, regardless of whether or not they have already started legal action.
The filing of the consumer proposal gives you time to deal with your creditors over a long period of time – up to a maximum of five years. Interest stops immediately upon the filing of the consumer proposal.
You can also make a lump sum settlement consumer proposal.
This might happen where a homeowner refinances their home with a new mortgage to make a settlement with their creditors.
It is quite normal that you and the administrator negotiate a reduction in the principal amount of the total debt, which is paid over the period of time – the length of which is negotiated with your creditors. Ultimately the amount that is payable each month and the number of months that this amount is payable is based on many factors such as:
- your income
- the income of other members of your family that is contributed to family living expenses
- the value of any assets that you have that could be vulnerable to creditors if they reject the proposal (equity in a house, cottage, boats, cash surrender value of life insurance, RRSP, RESP, etc.)
A variation of the “normal” proposal is to offer to the creditors a lump sum “advance” payment coming from refinancing your house (via a second mortgage) or borrowing against life insurance and adding a small monthly payment thereafter from your monthly income.
This makes the proposal much more attractive to the creditors because of the lump sum payment. The downside is that you, the debtor, pay interest on the money borrowed for the upfront payment, but this is offset by the lower payments you make during the proposal.
In our experience, when debts begin to overwhelm you and your family, and a solution is called for beyond simply better budgeting or credit card management strategy, most of our clients are served best by either a Consumer Proposal, or perhaps even a Personal Bankruptcy.
There were significant changes to the Bankruptcy Act which came into effect in September 2009; changes which tilt more in favour of Consumer Proposals for most people.
Many personal bankruptcies will now last for 21 months, as opposed to 9 months, as was the case previously.
Bankruptcy law is pretty tight in terms of which assets you can keep, and which you must give up or ‘share’ with your creditors. It is often best reserved for people who have little, if anything, left to lose.
But many people have things they wish to hang onto – like their home equity; their business; their newish car; their RRSP’s, RESP’s, and TFSA. Or paid-up life insurance policies; jewelry, works of art and antiques.
Or they may be anticipating an inheritance or some other windfall (a large year-end bonus for example).
The rules for a Consumer Proposal are less onerous in this regard. That said, a trustee will always assess your file in both ways, however – to determine what is best and fair and most practical for your creditors.
Keep your money for spending on things that matter to you – as opposed to shelling out so much of your hard-earned cash to atone for past problems and mistakes.
Who is Eligible for a Consumer Proposal?
Every Canadian or Permanent Resident can file a consumer proposal for their unsecured debts.
In order to file a Consumer Proposal, your debts must be less than $250,000 in total. These are called Division II proposals. Secured debts (mortgages on your principal residence and vehicle leases) are not included in this $250,000 figure, but all other debts must be included.
If your unsecured debts exceed $250,000 you can still file a proposal, but it falls under the Division I proposal rules. This type of proposal is well suited to certain professions which cannot, for licensing reasons, for example, consider bankruptcy as an alternative.
Acknowledgement: This material was provided by my colleagues at Rumanek and Company
Effect of Consumer Proposal on Spouse
Many readers ask me what will happen to their spouses’ credit ratings when they file a consumer proposal. Some have joint debt, while others are just concerned that somehow it will spill over.
First, let me address the spillover concern – there will be no “spillover” if you and your spouse have completely separate debts. Meaning, the credit cards, and loans you’d like to include in the consumer proposal are in your name only, and your spouse is an authorized user in the worst case (not a co-applicant or co-signer).
A reader asks…
“Hi Ross, my wife and I have a joint MasterCard with a $25,000 limit, and we are maxed out. I have several other significant debts and I plan to enter into a consumer proposal. My wife is petrified her credit history will be adversely affected by this.
In fact, she wants to pay the whole thing off from her own money before I begin. Is this legal, and if so, can we avoid even mentioning the debt in my consumer proposal?” R.L., Toronto.
Yes, this is legal, and you would not have to turn over the credit card with zero balance to the administrator of the proposal.
If the current balance on the joint MasterCard is entirely of your making, your wife can actually file a proof of claim and will be entitled to a pro-rata share of the net proceeds of your proposal. If the debt had been incurred by both of you, she would not be able to make this claim.
By the way, technically your wife’s credit report should not be affected by your consumer proposal. But she may have a battle with the reporting agencies on her hands. I have seen such instances where the “innocent party’s” tradeline now reads “included in a consumer proposal”.
Ira Smith, a trustee in bankruptcy serving the GTA, comments
“In a consumer proposal, the debtor does not have to turn credit cards over to the Administrator, regardless if the balance is zero or higher. The credit card issuer upon receipt of notice of the CP will probably cut off credit, but, the debtor does not turn them in at all.”
I double-checked with my good friend Ron Klein, also a trustee in bankruptcy. He responded to Ira’s comment as follows:
“I don’t agree. While it is true that BIA Directive #3 only mentions that a “bankrupt” must deliver his/her credit cards to the trustee, I believe most trustees, myself included, have interpreted this to mean both bankrupts and proponents. Even if the proponent does not deliver his/her credit cards to the trustee, the credit grantor will cancel the card upon filing the proposal, especially if a balance is owing to them.
It is even possible the credit grantor may take the position that if the debtor uses the card post-proposal, they have reaffirmed the debt and the proposal will not apply, meaning that the debtor will be responsible for the full balance notwithstanding he/she filed a proposal.”
“Dear Ross, my wife and I have a joint line of credit (LOC) for $20,000. I am considering entering into a consumer proposal, and during this process, I will pay back $5,000 or so directly to this LOC via my payments to the trustee.
I understand my wife remains liable for the original debt but is there a process we can go through to ensure she would not overpay – i.e. pay the full $20,000 on top of the $5,000 I pay? Thanks,” RL, Pefferlaw, Ontario.
Unfortunately, there is no formal process to ensure this is dealt with fairly and properly. Your trustee will send you a statement each year showing the disposition of your payments to each creditor.
Your wife will continue to make payments to the joint LOC, and she will receive monthly statements as before. Every three months the statement will also show the payments being made by the proposal.
Keep in mind the line of credit will continue to accumulate interest against your wife. As your wife (and your payments) approach a low balance owing on the line of credit, I suggest you contact the bank, and ask for a meeting wherein you provide full disclosure on all the payments thus far; and the planned payments yet to come from the proposal, and ensure your wife has a fixed target to work towards.
As with all things financial, the better and more detailed personal records you keep, the more likely you will be to resolve this question accurately. Open a file folder and include all the monthly statements, and a copy of the annual trustee reports to you about the disposition of your payment to the line of credit.
And take notes of any and all conversations with anyone related to this matter. When the time comes to finalize the account, you will not be relying only on your memory and hearsay.
Can an OSAP or Student Line of Credit be Included in a Consumer Proposal
I met a long-term client today who has returned to school to upgrade his skills and has accumulated a fair amount of debt, including a $40,000 student line of credit from a major chartered bank. He needs relief from all his debts, but if he cannot get relief from the student line of credit, then he would rather just gut it out. For now, while he is in school, the minimum monthly payment is interest only.
The reason for concern is the Bankruptcy and Insolvency Act (BIA) does not grant relief for “any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred……within seven years after the date on which the bankrupt ceased to be a full- or part-time student…..”
Please note that the paragraph above is not complete; there is actually a much longer list within the Act which spells out more conditions; the seven-year rule tends to be the one most often cited. The Rumanek and Company website has an excellent, comprehensive article on this topic, and if you are in this situation, I suggest you read this article.
Back to my client – so here’s the deal. There is a very good chance this is just a normal unsecured line of credit with the word “student” tagged on – in which case it can be included in an insolvency process, and he will get relief from them in a consumer proposal or personal bankruptcy.
The only time that is not the case is if his student line of credit is government-backed in some way – and it’s possible that could be the case and he may not necessarily know it. So it’s back to the fine print. To be sure, I asked him to provide copies of the actual loan agreements he was given when he first took out the loans, and our trustee will examine them in advance.
Filing a Second Consumer Proposal
Question from a reader…
“Dear Ross, I know that if you are a second time bankrupt, you are automatically looking at two or three years before you receive a discharge. Are there any special rules applied if I file a second consumer proposal? I completed my first three years ago, but I have run into new problems and need another fresh start. Thanks,” BN, Thornhill
Good news Bobby, there is no negative impact on the process if you file a second time. You are subject to the exact same terms and duties of a first-time consumer proposal applicant.
However, it is sad to hear you have run into credit or debt problems so quickly after cleaning up the mess from before. There may be very good unforeseen reasons why this happened, but the truth is in most cases, it’s because the lessons taught from the first go-round were never truly absorbed.
There are hundreds of personal finance experts out there keeping us afresh of anything and everything we may wish to know about managing our money – the truth is their material gets recycled over and over again, year after year. That’s why the media crave new mortgage rule changes, or CMHC insurance changes, or new credit cards, or higher RRSP and TFSA limits – it gives us all something new to talk about.
But to be brutally honest, personal finance comes to down to one simple premise from which you can build: SPEND LESS THAN YOU MAKE
It sounds insulting, but I believe a large percentage of Canadians fail at this one simple task. This leads to using credit or borrowing money to live and support our families. I have met hundreds of families who rely on credit to supplement their income. And others who rely on escalating real estate prices to forgive their overspending.
They refinance their home every few years, pay off their credit card balances, feel good about themselves, then start the cycle all over again.
Telling them to develop and work within a budget framework falls largely on deaf ears – it’s like the word “budget” is for wusses.
But what they can do is just figure out where they are spending money by tracking it carefully for a couple of months, and then comparing these totals to how much came in (paychecks, tips, sales tax credits, tax refunds, etc.)
Don’t call it a budget – just figure out if you are spending less than you make. If you are not, don’t lean on credit as a solution. Instead, either SPEND LESS OR MAKE MORE $$.
Financial difficulties happen for a lot of reasons and filing a consumer proposal is a great way to solve your debt problems and begin with a fresh start. If accepted, proposals offer zero interest rates, partial debt write-off and a chance to resume a normal life.
If you or someone you know needs help navigating the debt waters please get in touch, we’ll gladly refer you to one of our trusted, licensed trustees.
- Buying a Home After a Consumer Proposal
- How to improve credit score in Canada: Tips, myths and real case studies
- How Long Do You Have To Wait After Completing a Consumer Proposal Before Buying a House or Condo?
- Why Your Credit Score Sucks After a Consumer Proposal, and What You Can Do About It
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
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