A consumer proposal is a formal proceeding under the Bankruptcy and Insolvency Act that will stop collection proceedings by your creditors including a garnishment of your wages.  Many people ask me why they would file a consumer proposal over a bankruptcy. A consumer proposal is less harmful to your credit rating, does not have the same long-term impact as a bankruptcy and allows you to keep your assets. Here is story #4 of debtors named “Terry and Jackie” who filed a consumer proposal.

Terry and Jackie struggled with credit for years, and they owe $140,000 on credit cards and lines of credit. They own a house which could generate $40,000 in equity if it was sold but they would like to keep their family home. They have RESPs for their children that they could cash in to realize $10,000 but they do not want their children to lose these funds. They consistently made their minimum monthly payments, but the debt continued to grow as they used the credit cards on a regular basis for groceries, gas and the high costs of their children’s activities. Terry and Jackie both work full time and would have to make surplus income payments of $550.00 per month for 21 months in a bankruptcy. The debt is in both of their names. I reviewed the following options with Terry and Jackie:

  1. A debt consolidation loan would not be viable at this time as there is insufficient equity in their house to pledge as security and they can’t afford payments of over $2,400.00 per month.
  2. A debt management program would not be a viable option as they are unable to afford a minimum of $3,000 per month to pay the debt in full over 4 years.
  3. A joint consumer proposal is a viable solution. A consumer proposal must offer to the creditors more than they would receive in a bankruptcy and thus must offer more than $61,550.00.
  4. File a voluntary assignment in bankruptcy. The trustee would have to realize on the equity in the house, the RESP and collect surplus income payments.

Based on a discussion of what they could afford on a monthly basis and the fact the proposal must be completed in 5 years, they decided to offer their creditors $67,000 payable at $1,117 per month for 60 months. They understood their creditors must vote by majority (50.1%) to accept the proposal and felt a consumer proposal was the best solution for their family to be debt free in five years.

By Kathy Lenart – Insolvency Partner, Licensed Insolvency Trustee
CPA, CA, CIRP
Member and Secretary of the Ontario Association of Insolvency and Restructuring Professionals (OAIRP)
Canadian Association of Insolvency and Restructuring Professionals (CAIRP)