Financial Recovery Articles
Unsuccessful Mortgage Applicant? Propose a Proposal
George and Sonia walk into your office with high hopes that you will help them buy their dream home. You advise them to get pre-approved for a mortgage so they can present a strong offer when the time is right.
Unfortunately, the bank turns down their mortgage application. As does the next bank. And then the mortgage broker. George and Sonia may have big dreams – but, unfortunately, they also have a poor credit rating.
So what’s a real estate agent or broker to do when a prospective client approaches you to purchase a home – but a poor credit record makes a mortgage too risky for any lender?
Rather than disappointing a prospect, you could offer a solution: suggest a consumer proposal.
A consumer proposal to creditors offers a debtor time to pay down debts. A proposal is a legal process administered by a licensed trustee in bankruptcy under the Bankruptcy and Insolvency Act. The best prospects for proposals are consumers who have unsecured debts (such as credit card, line of credit, personal loan, and income taxes) of up to $75,000 – plus the ability to repay part of this debt, given some time.
Consumer proposals offer debtors a number of important advantages – especially in comparison with another, better known debt solution -- bankruptcy:
- The debtor has the opportunity to negotiate to repay a portion of the debt owed.
- The debtor can arrange monthly payments to suit his or her ability to pay.
- All collection calls, legal actions and wage garnishments by creditors immediately cease upon filing a proposal.
- All unsecured debts are frozen and interest ceases to accrue.
- A debtor can retain assets that may be available to creditors in a bankruptcy, including a house, vehicle and RRSP.
- The proposal remains on the debtor’s credit record for only three years following completion of the terms, versus six years for a bankruptcy.
- Since creditors receive more from a consumer proposal than they would from a bankruptcy, a proposal is a “win, win” for everyone
These are the benefits that a consumer proposal can offer an unsuccessful mortgage applicant. But a proposal also offers real estate agents and brokers an important advantage: at the end of the proposal process, a grateful prospect will often return as a significantly stronger candidate for mortgage financing.
A Consumer Proposal for George and Sonia |
| |
Goal |
Want to spend $250,000 to purchase a house |
Annual Income |
$80,000 |
Credit History |
Poor credit rating, line of credit of $10,000 and $15,000 in credit card debt |
Solution |
Consumer proposal based on liquidation of $8,000 of RRSPs, plus monthly payments of $500 for 24 months |
Result |
Candidates for mortgage with certain lenders after 1 year under a consumer proposal |
|
When you refer a prospective client to a trustee in bankruptcy to discuss the possibility of filing a proposal, here’s what happens. To start, the trustee will evaluate the individual or couple’s financial situation, explain what options are available and outline the impact of a consumer proposal.
If a proposal is the best option, the trustee will file the proposal with the Office of the Superintendent of Bankruptcy and will notify the debtor’s unsecured creditors. Creditors have 45 days to vote for or against the proposal. If the majority (50% + 1 in number and a majority in dollar value voting) accept the terms of the proposal, then it is deemed to be approved by all creditors. Fifteen days following, if there are no objections, the proposal will be deemed approved by the Court. If creditors reject the proposal, the trustee will discuss other options with the debtor.
When the proposal is accepted, the debtor makes payments to the trustee and the trustee distributes the funds to the creditors – both according to the terms of the proposal. This may involve lump sum payments and/or monthly payments for a period of up to five years. When all of the required payments have been made, the trustee will issue a certificate indicating that the terms of the proposal are complete.
At the end of the proposal process, your prospective clients will be in a stronger financial position – with a better chance of becoming clients who make wise use of your home buying expertise.
Julie Savage, CIRP, is a vice-president of BDO Dunwoody Limited (www.debtworries.ca), which has been helping individuals and businesses solve their debt problems for over 40 years.
