What You Keep In a Consumer Proposal

There are many lucrative benefits of a Consumer Proposal. One is you get a clear path to a fresh start, free from debt, while also being able to keep most or all of your assets. That makes it a unique and potentially favourable option compared to both Bankruptcy and any informal debt solutions you may have available.

If keeping your home is a priority, a Consumer Proposal may be the best choice for you. Although you will be expected over time to pay into your proposal an amount equivalent to the net equity in your home (what you would get ‘in hand’ if you were to sell it, adjusted for any provincial exemptions ). As long as you keep your mortgage payments up-to-date, your house remains yours to live in.

How do various debt solutions compare?

You have several options available to help overcome your debt­ — two of which (Consumer Proposal and Bankruptcy) are legal proceedings governed by the Bankruptcy and Insolvency Act, plus several others which you can access on your own or with the help of a non-profit credit counsellor.

Deciding which is the best solution for you will depend on the amount you owe, what you want to keep, and how quickly you hope to be debt-free. 

Consumer Proposal

A legally-binding settlement offer to unsecured creditors (e.g., credit cards, personal loans, lines of credit) which you can pay over a maximum five-year period. Payments are interest-free, and you will often pay less than half the total amount you owe.

Creditors included in a Consumer Proposal do not have a claim on your property, however, they must receive more than they would in a Bankruptcy.

Bankruptcy

A legal process that provides relief from some secured (e.g., mortgage, auto financing, etc.) and most unsecured debts. If it is your first Bankruptcy, this option could help you become debt free within nine to 21 months. You surrender any property (home, automobile, furniture, electronics, tools, etc.) required by law — or pay a prescribed amount to keep it.

Depending on your earnings, you may also be required to make surplus income payments.

Informal debt solutions

You have several options to reduce and overcome your debt, including orderly payment of debts, debt management plans, or reaching out to your directors directly to negotiate a lower interest rate or monthly payment. You can work with your creditors directly, or a non-profit credit counsellor can do so on your behalf.

Unsecured creditors will not have a claim on your assets through these informal arrangements, however secured creditors can still repossess your items if you miss any payments. These arrangements are also not legally binding and cannot guarantee debt relief.

What does it mean to keep assets in a Consumer Proposal?

The premise of a Bankruptcy is realizing on your property to repay a portion of the outstanding debts you owe to your creditors. In contrast, a Consumer Proposal allows you to keep your property and repay your creditors with cash instead.

Many debtors prefer a Consumer Proposal because it is more flexible and often less disruptive. Most importantly, it allows them to keep certain items they would otherwise have to give up. But just because you’re allowed to keep certain things in a Consumer Proposal doesn’t necessarily mean you can afford to — or would want to.

The following examples may help to illustrate:

Home

You may worry insolvency will force you to give up on your dreams of home ownership. Fortunately, it is often possible for you to keep your home if you file a Consumer Proposal.

For this to work, you must be able to afford your monthly mortgage and Consumer Proposal payments. If you cannot, you will either need to sell your home — and pay any leftover funds toward your Consumer Proposal — or consider an alternative debt solution.   

If you own your home outright, this likely won’t be a concern. However, you may consider downsizing as an option to avoid a Consumer Proposal altogether.

Automobile

Similar to a mortgage, a Consumer Proposal will not impact an auto financing loan. You can keep your car, provided you can afford both the Consumer Proposal and auto financing payments. Though you might consider whether this is the most financially appropriate decision.

One option is to sell your vehicle and use a portion of the funds to pay down your Consumer Proposal. Unfortunately, many cars lose their value faster than you repay your loan. That means you may owe the auto financing company more than you’d get by selling.

Another option might be to surrender the vehicle back to the financing company. Once the debt is no longer secured, you could include any shortfall (outstanding debt owing) in your Consumer Proposal.

Personal assets and possessions

Unlike a Bankruptcy, your unsecured creditors will not have any claim to your personal property in a Consumer Proposal. You must disclose your income, assets, and possessions to the Licensed Insolvency Trustee — but only so they can prepare a fair and equitable settlement.

Many people choose to sell high-value items such as recreational vehicles, jewelry, vacation properties, etc., to help repay their proposal. Creditors may stipulate such a sale of assets before voting in favour of the Consumer Proposal — though, this is typically the exception rather than the rule.

Investments and savings

Insolvency proceedings mostly protect registered savings plans such as RRSPs. While creditors may have a claim to any contributions in the previous 12 months in a Bankruptcy, a Consumer Proposal protects the entire value of your RRSPs.

Similarly, there is no requirement to empty your savings or liquidate investments in a Consumer Proposal.

However, you may consider withdrawing funds from any institution where you also owe debts. Lenders may withdraw funds from your accounts to set off any outstanding debt payments. They can perform these set-offs without warning or permission until you file a Consumer Proposal (or Bankruptcy).

Tax returns, GST rebates, and other government benefits

You will continue to file your annual income tax returns while you repay your Consumer Proposal. What happens to any applicable refunds will depend on whether you owe an outstanding balance to the Canada Revenue Agency (CRA).

If you have an outstanding balance: The CRA will pro-rate your refund to the date of your proposal. They will apply the pre-proposal amount to your income tax debt and send you the remainder.

If you do not have an outstanding balance: The CRA will send you the full refund, which you are free to spend (or save) as you wish.

The story is much the same for GST rebates and other government benefits. You will receive any government payments you are entitled to, including the Child Tax Benefit, Old Age Security, Canada Pension Plan, and GST Rebates.

Summary

A Consumer Proposal can be an excellent option to eliminate your unsecured debt while protecting certain assets you may otherwise have to give up in a Bankruptcy. It will not impact your secured creditors, and you can generally choose which property to keep and which (if any) to sell to fund your proposal.

• Home: You can keep your home provided you continue with the mortgage payments and make the proposal payments as well.
• Car: You can keep your automobile provided any financing payments do not interfere with your Consumer Proposal.
• Personal possessions: You can keep all your personal property.
• Investments and savings: You can keep your RRSPs, stocks, and savings, though it may be wise to transfer any funds to a bank where you do not owe any debts.
• Tax returns and government benefits: You are entitled to keep any tax returns, provided you do not owe money to the CRA. The government cannot withhold any payments you are entitled to through the duration of your Consumer Proposal.

Although you may have the option to keep many of your assets, it’s helpful to consider the benefits of letting go of certain items. Make a list of everything you own and note what you must keep, want to keep, and what you might be willing to let go.

Bring this to your Free Confidential Consultation and ask the Licensed Insolvency Trustee for an informed and unbiased opinion on what to do next.