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What’s a Consumer Proposal and How is it Different from Bankruptcy?

You may have heard the term consumer proposal. But do you understand what it truly means? And do you know how it’s different from a bankruptcy?

Both consumer proposals and bankruptcies help you get rid of debt and assist from a monthly cash flow perspective. However, the way they achieve these outcomes is very different.

In this blog post, we’ll take a look at exactly what a consumer proposal is, how a consumer proposal works and why you might benefit from filing for a consumer proposal over a bankruptcy.

What’s a Consumer Proposal and How Does it Work?

A consumer proposal is a formal arrangement that’s negotiated with the creditors to whom you owe money. This legally binding agreement is negotiated and administered by a Licensed Insolvency Trustee (LIT). A consumer proposal is another way to handle debt besides filing for bankruptcy. It protects you from creditors who are seeking immediate debt collection, sometimes via legal action.

When filing a consumer proposal, you should work with an experienced LIT you can trust. Together, the LIT will work closely with you to come up with a proposal your creditors are likely to accept. At its core, the consumer proposal can:

  • Pay your creditors a percentage of what’s owed to them;
  • Lengthen your payment schedule (to a maximum of 5 years); or
  • A combination of both.

When filing a consumer proposal, instead of paying creditors directly, you’ll make the payments through the LIT you’re working with. The LIT will then pay the creditors based on the agreed upon repayment schedule and amount in the consumer proposal.

Creditors will usually accept a consumer proposal if they believe they’re likely to receive more money than they would under a bankruptcy.

What are the Benefits of Filing a Consumer Proposal?

Are you considering filing for a consumer proposal or bankruptcy, but you’re not sure which one to go with? Here three key benefits of filing a consumer proposal over bankruptcy:

1. Avoiding Bankruptcy. 

A major benefit of filing a consumer proposal is that you’re not filing for bankruptcy. A consumer proposal offers you short term debt relief, plus a better opportunity to rebuild your credit score over the long term.

For instance, the debts included in your consumer proposal filing will be marked as “R7” or “I7” on your credit report. An R7 or I7 means that you have compromised or settled your debts and it remains on your credit bureau report for 3 years after your proposal is paid in full. Bankruptcies, on the other hand, result in your debts being marked as an “R9” or “I9”, which is the worst possible status on a credit report. An R9 or I9 represents a bad debt write off, meaning you defaulted on your debt. And an R9 or I9 will remain on your credit report for 7 years from the last date of any activity or payment on your outstanding debt.

2. Better Cash Flow. 

Since the amount of time you have to repay your debts may be extended – or the amount of money you’re required to repay may be reduced – your cash flow will almost always improve. Interest also stops accruing when you’re in consumer proposal, helping you save on the total amount of interest you’ll pay.

3. Keep Your Assets. 

One of the biggest concerns many people have when they file for bankruptcy is that they’ll lose the assets they’ve worked so hard to acquire. Unlike a bankruptcy, where you may have to turn over the keys to your home and car, a consumer proposal typically protects those assets from being seized by creditors.

What Happens Once You’re in a Consumer Proposal?

There are several things that will happen when you enter into a consumer proposal.

First, your LIT will file your proposal with the Office of the Superintendent of Bankruptcy (OSB). Once your proposal is filed, you stop making any further payments to your creditors. Any collection or legal actions initiated by your creditors (including collection calls, wage garnishes or court actions) will cease immediately.

Next, your LIT will submit the proposal on your behalf directly to your creditors. The proposal will include a detailed report about your personal situation, as well as the source of your financial difficulties. Your creditors will then have 45 days to either accept or reject the proposal. If they accept it, you will begin making payments according to the terms you have agreed to.

Can You Get Out of a Consumer Proposal Early?

Luckily, if you have the ability to, you can make additional payments towards your consumer proposal to pay it off earlier.

At Climb, we’ve designed a custom program, called the Climb Accelerator Plan, that provides the option for clients in consumer proposal pay if off earlier, while also building their credit score.

If you’ve recently filed a consumer proposal, our plan may be right for you. Learn more about the Climb Accelerator Plan today.

Updated: March 27, 2020
Originally Published: February 12, 2019

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