Myth-busting Consumer Proposals — three common misconceptions to avoid

Filing a consumer proposal is a big and often difficult decision. During the stressful weeks and months leading up to that decision, you may be inclined to do some research online or ask the advice of your close confidants, to see if a proposal is the right move for you. That’s normal, and doing your own research is a wise first step.

But not all sources of information online are trustworthy, and the well-intentioned advice from your friends and family can be misleading too. Many applicants enter their first conversation with a Licensed Insolvency Trustee (LIT) having a few misconceptions about proposals — fortunately the LIT’s duty is to clear things up and answer your questions.

Here are three common misconceptions our firm has encountered about consumer proposals:

1. A proposal won’t work for me because I can’t afford to pay an LIT’s fees on top of my debts.

On the surface, the concept of paying an LIT to help you manage an excessive load of debt may seem counterintuitive. But if fears about LIT fees are what’s stopping you from getting needed help through a proposal, they may be misplaced.

There is no upfront cost to file a consumer proposal in Canada. The LIT profession is federally regulated, and LIT’s fees are fixed under the Bankruptcy and Insolvency Act, meaning trustees are not permitted to set their own prices. LITs don’t work for free; but their fee comes directly from the settlement amount offered to your creditors, meaning no additional costs fall on you, as the applicant.

Keep in mind that the consumer proposal is a tool designed to give financial relief — a fresh start — to people who need it. If you go directly to a Licensed Insolvency Trustee for help, there are no added or hidden fees laid on top of your current debt.

2. I won’t benefit from getting a raise or financial windfall during my proposal, because it will all go to my creditors.

The rules behind surplus income can be confusing because they differ between consumer proposals and bankruptcies. While the amount you pay each month under a bankruptcy fluctuates with your earnings (i.e., if you earn more money, you must pay more surplus income to the Trustee), payments under consumer proposals do not increase if you receive a raise, GST rebate, income tax refund, inheritance, or financial windfall of any kind.

This is because in consumer proposals, the amount you pay will be calculated at the beginning of the proposal and will remain fixed throughout the duration of it. You can choose to use surplus funds to pay down your proposal faster, but it’s not mandatory.

The same applies if your assets increase in value: If the value of your home goes up in a bankruptcy, for example, your creditors may be entitled to some of that increase. But in a proposal, your payments are only based on a “snapshot” of your assets’ values at the beginning of the proposal, and those amounts don’t change.

3. I’m too ashamed to apply for a consumer proposal because everyone will know about it.

All conversations with your trustee, including your initial consultation that takes place before your proposal even begins, are kept fully confidential. LITs are bound by a Code of Ethics to not disclose your information, unless you give them permission or it’s required by law.

You, your creditors, and your trustee will be aware of what happens during your proposal, and it will show up on your credit history for three to six years after you initially file. Aside from that, you can choose to what degree you disclose your situation to family, coworkers, and friends. And, under section 66.36 of the Bankruptcy and Insolvency Act, your employer can’t dismiss, suspend, lay off or otherwise discipline you for filing a consumer proposal.

We’re here to help

In many cases, a consumer proposal is the most painless and sensible option for becoming debt-free. If you’re considering filing a consumer proposal, a local trustee at MNP Debt will answer your questions and help ease your worries by arming you with the best information available.