Updated Consumer Proposals Offer Relief
for Debt-challenged Clients
Brian Pritchard
Advisor’s Edge
September 2009
There hasn’t been a lot of positive financial news over the past year; therefore advisors with clients who have lost a business or a job or who are dealing with other serious money challenges will be pleased to know that on September 18, a valuable debt solution became more widely available.
Individuals struggling to resolve debt problems have a number of options, including consolidation loans, debt management plans, proposals or bankruptcy. A debt consolidation loan from a financial institution, for example, enables individuals to combine and pay off multiple higher-interest debts. Instead of making several payments to different creditors, they can pay off balances with the loan and make only one monthly payment. Debt consolidation loans can be helpful when someone is paying high interest rates on several accounts and has the ability to repay these debts, but wants to reduce monthly payments. The downside – defaulting on loan payments risks losing assets assigned as security.
A debt management plan is another common solution. This plan typically involves contracting with a financial counsellor who negotiates with an individual’s creditors to reduce interest and fees and/or extend the amount of time required to repay debts. The client makes a single monthly payment at an agreed rate of interest to the counsellor who in turn pays creditors. Creditors, however, have no obligation to agree to a debt management plan. As well, fees for these plans are not regulated and can vary widely.
When final and long-anticipated amendments to the Bankruptcy and Insolvency Act came into force on September 18, they included a particularly helpful change to increase accessibility to consumer proposals as an alternative to bankruptcy. Bankruptcy is generally the least favoured debt solution because those going through the process must surrender many of their assets.
Consumer proposals, on the other hand, offer a number of important advantages over bankruptcy as well as other debt solutions. A proposal is a legally binding agreement arranged with a trustee in bankruptcy who negotiates with creditors to repay only a portion of the debt owed. This agreement offers clients significant payment flexibility including lump sum, monthly and/or balloon payments for periods ranging from a few months up to five years. Once a proposal is accepted by the majority of creditors and approved by the court, the client makes payments to the trustee, who then pays creditors.
A proposal is best suited to those who owe $20,000 or more of unsecured debt and have the ability to repay a portion of this debt but need time to do so. This is also a good solution for those who have collectors pursuing them, garnishments registered against their wages or other legal proceeding filed against them because when the trustee files the proposal, unsecured creditors must stop any legal actions including phone calls and garnishments. Any interest owed on outstanding debts also immediately stops.
Provided the individual who is participating in the proposal did not pledge any assets as security against a loan, another valuable advantage of proposals is that the client can retain most assets, including a home, vehicles and personal effects.
Until September 18, individuals had to have less than $75,000 in unsecured debt in order to file a consumer proposal. Now, to encourage consumers to file proposals to creditors rather than assignments in bankruptcy, the maximum filing threshold for consumer proposals has been raised to $250,000 -- excluding debts secured by the individual's principal residence.
If someone owes more than this amount, they can opt for a Division 1 proposal. This process, however, is more complex. While creditors have 45 days to consider a consumer proposal, time pressures are more intense for a Division 1 proposal. This requires that a meeting of creditors must be held within 21 days. As well, while a simple majority of creditors is required to accept a consumer proposal, acceptance of a Division 1 proposal requires a 50% plus one majority in number of creditors, and a two-thirds majority in dollar value. And, if a Division 1 proposal is rejected, the debtor is automatically bankrupt. This does not occur for a consumer proposal.
The new amendments also allow defaulted consumer proposals to be automatically revived after 45 days. This reduces the likelihood that a consumer proposal would be annulled if the debtor runs into short-term cash flow difficulties.
If you have clients who have been battered by economic setbacks, they may appreciate knowing that a consumer proposal could be a practical option to help them resolve their financial problems and begin rebuilding wealth.
Brian Pritchard, certified general accountant, chartered insolvency and restructuring professional, trustee in bankruptcy, is a senior vice-president of BDO Dunwoody Limited (www.bdo.ca) who helps individuals and businesses solve their debt problems. You can reach Brian at (905) 436-9100 or bpritchard@bdo.ca.
