Three Best Rated® Award-winning Licensed Insolvency Trustee in Surrey, BC, Randy West explains the purpose, merits, and demerits of a consumer proposal.
People become overburdened with debt for many reasons. Often, it happens gradually and only becomes apparent when something unexpected occurs such as losing a job, divorce, expensive car repairs, or even COVID-19 issues. Suddenly, you’re forced to do a reality check. The interest per month on your debt is almost the same or higher than your actual monthly payments. You may feel like you’re treading water far from shore and getting tired – you need a lifeline.
Going bankrupt isn’t always the best solution. You need a plan that allows you to deal with your debt and still leaves you enough money to meet your ongoing living expenses. That plan is often a consumer proposal.
A consumer proposal is a negotiated monthly payment plan for a specific time period. It settles your debt obligations for significantly less than the total amount you owe. It is often a viable alternative to bankruptcy.
In British Columbia, only a licensed insolvency trustee can administer a consumer proposal. The trustee will assess your financial affairs and review available financial options. If you choose a proposal, the trustee will assist you in drafting the proposal terms.
But what are the risks involved in it? What are the advantages and disadvantages of a consumer proposal?
Randy West of R. West & Associates Inc., shares the main Pros & Cons of Consumer Proposal.
Pros:
- The interest on the debt is stopped, even though the settlement payment plan usually takes years.
- The proposal monthly payment is usually less than the amount that would be required in bankruptcy; the reason is that the proposal is for a longer period than a bankruptcy.
- The initial cost to draft the terms of the proposal and present it to creditors is set by the government. If an acceptable proposal is negotiated, the fees to administer the proposal are part of the proposal terms and not an add-on.
- Once the proposal terms are accepted, there is certainty about the total amount to be paid and the payment terms. If income rises, the debtor just has an easier time meeting the proposal terms.
- A debtor is allowed to have a credit card, whereas a bankrupt is normally not allowed one.
- You only need greater than 50% in value of the voting creditors to accept the proposal terms. Also, the creditors that rejected the proposal are bound by the terms of the accepted proposal (majority rules).
- A proposal takes away the uncertainty that may exist with a bankruptcy. It is a contract with explicit terms; changes to your circumstances (inheritance, change of job, or a raise in income) do not change the terms. Also, a proposal avoids the possibility of an opposition to discharge from a bankruptcy proceeding.
- With a proposal, a person’s credit rating will indicate R7 (settlement of debt). That rating continues for three years after completing the proposal terms. In contrast, bankruptcy has an R9 credit rating, which normally stays for six years after discharge from bankruptcy.
Cons:
- Most creditors demand that a proposal obligation be based on 60 months. In contrast, the bankruptcy alternative is usually based on 21 months (for a first- time bankrupt) or 36 months (if a previous bankruptcy exists).
- Creditors usually insist on a minimum percentage return on debt and minimum monthly payment. The acceptability of the offered payment is usually compared to the amount that would have been paid monthly in bankruptcy. Depending on the creditor’s demands, the accepted total proposal obligation can at times be more than double what the total bankruptcy obligation would have been.
- If the debtor can’t meet the payment terms of the proposal and defaults, the original debt obligation is reinstated less the amounts paid under the proposal. Often, the debtor will then go bankrupt, but their payments under the failed proposal are not considered when determining their obligations under a bankruptcy.
- If income is unstable or inconsistent, it is often difficult to negotiate a viable proposal. Given the Covid-19 issue and the uncertainty it is causing, we are presently asking people to be cautious and consider the stability of both their income and the household’s income prior to committing to a proposal.
About RANDY WEST – R. WEST & ASSOCIATES INC
Randy West is a CPA who changed to the insolvency field of practice and became a licensed insolvency trustee in 1991. He has 30 years of experience in the business. With his extensive accounting background, Randy is able to analyze cash flow and other not so obvious issues to develop the best restructuring plan for debtors and help them to move forward. His knowledge and understanding of what the CRA is demanding helps him negotiate acceptable and viable restructuring proposals (even when the CRA is the only creditor).
Randy founded his company on the simple idea of helping people who are struggling with debt to find the right solution and get a fresh financial start.
Randy feels honoured to be listed in Three Best Rated. He believes this recognition reflects his firm’s effort to make a difference in people’s lives and also reflects how the public perceives his firm’s service.
About ThreeBestRated®
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