Debt in a Consumer Proposal
In all simplicity, a Consumer Proposal is a legally binding agreement that provides you with immediate protection, applicable from the moment of filing from Debt Collectors.
A Consumer Proposal agreement is administered by a Licenced Insolvency Trustee (LIT), it serves as an alternative to Personal Bankruptcy and is often cited to be the preferable or “better” alternative when compared to the idea of a Personal Bankruptcy.
You are then given a period of Five Years to pay back your creditors in installments or monthly payments to settle your debts, often having to pay a portion of your debt at the start of the same time period.
The payment goes to your LIT, who distributes it to your creditors.
What Happens in a Consumer Proposal?
Almost all Wage Garnishments will stop immediately.
Interest on your debt stops being accumulated from the day you file for a Consumer Proposal.
Unlike Personal Bankruptcy, you are not at risk of losing your personal assets, for example your house or vehicle etc.
Your payments do not increase if your Income increases.
You get an R7 Credit Rating, which while not the best in any way is still preferable than the dreaded R9 Credit Rating you get when you file for Personal Bankruptcy.
You get an avenue to pay back a portion of your debt.
How the Consumer Proposal Works
You meet with a LIT, who oversees and then evaluates your current financial conditions and then offers you the options that are available for you to pursue.
If you decide to go ahead with filing for a Consumer Proposal, your LIT works with you make a Consumer Proposal that works for both you as well as your creditors in order to ensure that it is approved.
The LIT then files the Consumer Proposal with the Office of the Superintendent of Bankruptcy (OCB).
As soon as this is done, lawsuits that your creditors might have against you are dropped and they cannot legally garnish your wages anymore as well as you stop making payments to your creditors.
The LIT will then proceed to submit the agreed upon Consumer Proposal to your Creditors, accompanying the Consumer Proposal will be a report on your current personal situation alongside reasons of your financial predicament.
Your Creditors can then opt to call for a meeting of Creditors to vote on the Proposal, for this they would need to have 25% of your debt owed, in order to call for the meeting.
The Meeting must be called with 45 Days of filing for the Consumer Proposal and must be held within 21 days after the Call for the Meeting has been made, it is also possible that the OCB asks the LIT to call for such a meeting.
At the meeting, a vote is held on the proposal to determine if it will be accepted or rejected, the votes are divided based on percentage of debt owed, a simple majority, which is 50% + 1 is needed to pass the Proposal.
If no meeting is called within 45 days, then the Proposal is considered passed, after passing there is a 15 day period during which the OSB or any other party that has a vested interest can ask for the Proposal to be reviewed and/or evaluated by the court, if such a request isn’t made by any party then the Consumer Proposal will be considered to be accepted by the Court.
You will now have a specified time frame in which you have to make sporadic payments to your LIT equaling to the total amount of debt to be repaid agreed upon and attend two Financial Counseling Sessions.
Tax Debts in Bankruptcy
It is an established fact that half if not more of the Personal Bankruptcy or Consumer Proposal Filings in Canada come as a result of Tax Debt.
Contrary to popular belief, Taxation Debt accumulated such as Income Tax, General Sales Tax (GST) and Harmonized Sales Tax (HST) to name a few, are given the same treatment as that provided to debt accumulated through Credit Cards, Bank Loans and other unsecured loans.
Similar to how debts accumulated by devices that are mentioned above, Tax Debt is also forgone when Individuals in Canada file for Personal bankruptcy or Consumer Proposals.
If you owe a fair bit of Tax Debt, the odds are something went wrong somewhere along the road, in this scenario your best bet is to have an inexpensive way to clear out your debt.
The best two ways for that remain to be either:
- Filing for Personal Bankruptcy;
- Filing for a Consumer Proposal.
Short of that, it is unlikely that you will become scot-free of the debt without any hassle.
But what option do you have and is Bankruptcy the way forward for you?
Canadian Revenue Agency Policies
The Canadian Revenue Agency (CRA) has custom tailored policies for different scenarios, an example is how someone who has never filed taxes would be you wouldn’t be treated as nicely as say someone who has been filing taxes annually for the last decade, for whom it is fair to assume that they will be subjected to a “less harsh” treatment by the CRA.
The Real Question that stems from considering if you should file for Bankruptcy to erase Tax Debt is how this Tax Debt came about as a result.
Meeting with your Bankruptcy Trustee to evaluate the factors that resulted in this Tax Debt is essential, after which your Trustee will inform you of your available avenues for tackling the debt and the recommended course of action.
What if I don’t want to file for Bankruptcy?
The CRA does not in any form negotiate or settle the debt that it is owed, you are free to try and strike up a conversation in the hopes of reducing the amount owed, but it will prove simply futile, this is due to the CRA simply not being willing to engage in any form of Negotiations.
That does not mean you do not have alternative options in the case of you not wanting to file for Bankruptcy.
You can apply to the Fairness Commission of the CRA to have the penalties and interest on your debt reduced.
This will not in any way reduce the debt owed to the CRA, but it may reduce the penalties and interest if you have a sufficiently valid reason as to why the debt wasn’t paid.
Tax Court of Canada
You can object to a Tax Assessment and if your objection is unsuccessful, you are clear to file an appeal to the Tax Court of Canada
You will need a Tax Lawyer and an Argument explaining how the application of the Tax Laws present within the Country are not applicable to your case in particular and you should be exempted.
If you win, your debt is reversed, but however if you lose; you will owe the Debt, the Penalties, the Interest alongside the now large Legal Bill you would have accumulated.
There exists only one sole Federal Government or Debt Settlement Program in Canada where you are able to clear your Tax Debt for an amount lower than that of the amount you owe.
And that is filing a Consumer Proposal.
How Long Will Filing Bankruptcy Last?
There exists a fair bit of confusion with regards to how long an individual is affected for and, when they file for Personal Bankruptcy, they are bombarded with myths going along the lines of how an individual cannot open a Bank Account for approximately a decade or so.
For how long are you “Bankrupt” for?
Bankruptcy refers to the period from the moment you file for Personal Bankruptcy to the point when you are no longer “Bankrupt”, this is when your Bankruptcy is deemed completed.
If you work and are employed at a modest wage, which would refer to the set government standard and if you perform you’re assigned duties appropriately, you will be discharged or be done with Bankruptcy, within Nine months.
However if your income is higher than the set Government Standard, in that scenario, your bankruptcy will last for a time period of Twenty One months (for a first time bankrupt).
If for whatever reason you are unable to complete the duties that are assigned to you, you will not be “discharged” from your Bankruptcy.
The Bankruptcy will last till you have completed the duties assigned to you, the timeframes mentioned above are the lower limit, as in the bare minimum amount of time deemed necessary by the Government.
How long does “Bankruptcy” show up on your Credit Report?
Your Credit Report will have the information of the fact that you filed for Bankruptcy for the duration of your “Bankruptcy” as well as for a tenure of Six Years from the Day you are discharged from “Bankruptcy”.
However if you have ever filed for bankruptcy before, that would lead to the same fact showing up on your Credit Report for a time duration of Fourteen Years from the moment you were discharged from your most recent Bankruptcy filing.
This is contingent on the specifics and time duration of your Bankruptcy prior to the most recent one.
How long to recover from Bankruptcy?
First things first, approximately around Ten Percent (10%), of all Canadians will at least once in their life file for either Personal Bankruptcy or for a Consumer Proposal.
It is in no way something that will end up ruining your financial future and cause you fiscal trouble for the rest of your life.
As for the opening a Bank Account, it is recommended to be one of the first things you do after you file for Personal Bankruptcy, if not right before you file for Personal Bankruptcy.
Bankruptcy should be evaluated as a chance to start anew, with a Clean Slate.
As mentioned Bankruptcy won’t ruin your entire fiscal future; failing to pay off the debt you owe will destroy your financial future faster.
Unless you need to immediately purchase a house or a vehicle of a substantial financial value, you don’t even need to worry about the bad credit rating that you would acquire (an R9) after having filed for Personal Bankruptcy.
You are no longer dealing with calls from Creditors of unsecure debt or have the burden of dealing with monthly financial payments to said Creditors.
Because of freedom from this headache and a stronger monthly cash flow due to the lack of requirement to give payments, there exists a stronger cash flow which you can build up into Savings for when you get a good credit rating.
The only significant blockade in terms of access to credit will be during your Bankruptcy and around 2-3 years after it, after that access to credit should become easier and after your discharge from Bankruptcy you can start rebuilding your credit up, initially with a secured Credit Card and then you are able to transition back into having access to “traditional” Credit.
How does filing bankruptcy impact gifts and other windfalls?
The requirement of seizure, sale, and distribution of any non-exempt assets to creditors by a licensed insolvency trustee is mandatory (in almost all cases) when filing bankruptcy in Canada.
This includes every asset owned before, and all assets received after the bankruptcy filing date.
Understandably, all this can have severe implications and consequences if you are to receive a windfall or a large gift that has some monetary or financial value.
So, what should you do in the case of such an incidence and how can you protect your assets or gifted assets from bankruptcy seizures?
As a rule of thumb, you must always be completely honest and forthcoming with your trustee or debt consolidator or bankruptcy expert about any current or potential windfalls you will or are likely to receive while you’re in bankruptcy.
This would of course include all gifts with monetary value, lottery tickets and winnings, bonds, as well as inheritances.
In the case where you win money with a lottery ticket or something very similar, the winnings are the eventual property of the bankruptcy estate.
The winnings are then customarily dispersed to your creditors as per your debt and bankruptcy situation.
It doesn’t make a difference if you decide to withdraw or collect your winnings until after your bankruptcy is resolved: if you held a legal entitlement to the money while you had filed for bankruptcy or were in bankruptcy, it legally is the property of your bankruptcy.
However, this also doesn’t mean if you win a huge sum of money or a huge jackpot, all your money will be distributed even if it amounts to more than the sums required to pay off your creditors and your bankruptcy.
In such cases, trustees and bankruptcy experts will first distribute the funds until your bankruptcy is cleared, this includes interest as well as any contractual financial agreements, and any leftover money is handed back to you.
You are legally required to report everything you receive as a gift to your Trustee.
From a Principle standard, your Trustee could pretty much seize any gift that you do receive, even if it’s the 3 dollars you got from your sibling for Gas Money.
Practically how it works is your trustee isn’t going to seize every dollar that you may get from friends and family, however if say you were given $1000, that is a significant amount and should immediately be reported to your Trustee.
The Rule for Physical Items is the same.
There is an exemption clause for Clothing and Household effects, so effectively it shouldn’t be any sort of an issue if you were to receive modestly priced appliances or wardrobe items.
But receiving something that has a significant Monetary Value is a prime example of what should be reported to your debt consolidator i.e. receiving a Car or an Antique, which would have significant enough monetary value, anything that isn’t part of your Bankruptcy Exemption Clause has to be reported.
In similar circumstances as that of winning the Lottery, if you gain knowledge of the fact that you are in the position to inherit assets with monetary value, such as leftover Funds, or Real Estate, you are legally bound to pass on this information to your Trustee.
The trustee will in turn contact the Estate executor for the required documentation and in turn pay out your Creditors.
This does not necessarily translate to you losing the entirety of your inheritance.
Any Financial Capital left after the repayment of debt to your creditors is transferred over to you to spend at your leisure, similar to how you would have the winnings left over from your Jackpot in the lottery after you have paid off your bankruptcy
Debt Relief Help From a Consumer Proposal Administrator
When you’re in financial difficulties, you can file for bankruptcy or a consumer proposal.
Both are legal procedures to help you regain financial health.
However, only authorized individuals known as trustees are allowed to file these two proceedings.
The Office of the Superintendent Bankruptcy Canada provides the license necessary for someone to practice as a Licensed Insolvency Trustee (LIT).
Recently, Consumer Proposal Administrators have made their appearance.
It must be mentioned that by law the only authorized professionals allowed to file either bankruptcy or a consumer proposal are referred to as LIT’s.
Nevertheless, a Consumer Proposal Administrator is responsible for filing consumer proposals.
Duties of a Consumer Proposal Administrator
A consumer proposal is different from bankruptcy by the fact that it is a negotiated agreement between the debtor and the creditors to pay part of the debt and the rest forgiven, while bankruptcy is a process by which the debtor’s assets, savings, and part of their income are retained as forfeiture.
To file a consumer proposal, the Bankruptcy and Insolvency Act requires the assistance of a Licensed Insolvency Trustee (LIT) who acts as a Consumer Proposal Administrator.
He/She has the following duties.
- Decide whether the debtor should file for a consumer proposal as a solution for debt relief depending on their circumstances;
- Act as a referee between the debtor and the creditors to negotiate a repayment deal;
- Opens up a consumer proposal by filing the necessary forms to the Office of the Superintendent of Bankruptcy;
- Ensure that the debtors takes care of their responsibilities by attending the mandatory counselling sessions and pays the agreed amount;
- Collect and remit the payment made by the debtor;
- Initiate the procedure for discharge when all responsibilities are satisfied by the debtor.
They will provide a certificate of completion.
From the above, it is clear that the consumer proposal administrator plays a significant role throughout the entire procedure of filing for a consumer proposal.
If fact, without the consumer proposal administrator, you cannot file a proposal because they are the only ones allowed by law to file a consumer proposal.
When you visit a Consumer Proposal Administrator, he/she will work with you closely to produce an acceptable consumer proposal that you can present to your creditors.
They will provide you with all necessary information and what to expect.
It’s therefore important to find a consumer proposal administrator you are happy to work with.
Selecting a Consumer Proposal Administrator
The internet is the first means you’ll go to when searching for a consumer proposal administrator.
Official websites or others with authority dealing with debt relief often have in their repertoire a list of Licensed Insolvency Trustees in your neighbourhood. It’s important to consult more than one trustee.
The initial consultation is free of charge.
However, if you do find a consumer proposal administrator you desire to work with, there are administration costs and the fee of the trustee for handling your case.
The bankruptcy legislation in Canada sets the fees you’ll have to pay to the consumer proposal administrator.
They are usually paid by a tariff out of the payment you make in the proposal.
Each province has a set of particular rules that along with the Bankruptcy and Insolvency Act serve as guidelines a debtor, creditors and the consumer proposal administrator must follow when dealing with a consumer proposal claim.
Consumer proposal administrators act as referees between the creditor and the debtor.
The administrator ensures that the entire procedure of filing for a consumer proposal is undertaken according to the guidelines.
The rules governing a proposal are set from the Bankruptcy and Insolvency Act.
They are the only professionals allowed by law to file a consumer proposal.