A consumer proposal and debt settlement are two of several debt relief options that might be available to an individual depending upon their unique debt situation.
The purpose of this article is to unpack two debt relief options; a consumer proposal and debt settlement.
PART ONE: INTRODUCTION
1. Debt settlement
In certain circumstances it is possible to negotiate a one-time lump sum payment to your creditor--or its authorized collection agent--for less than what you owe as settlement in full.
This process is referred to as debt settlement or an informal settlement.
Debt settlement is a creature of the marketplace.
It is a simple and incredibly flexible debt relief option.
2. Consumer proposal
A consumer proposal is a creature of federal law.
It is not simple nor is it a flexible debt relief option.
Those interested in making a consumer proposal must do so through a Licensed Insolvency Trustee (LIT). Under a consumer proposal, a consumer will repay a percentage of what they owe their creditors in equal monthly instalments over a period not to exceed five years.
3. Respective merits of these two debt relief options
I am not going to suggest that one of these debt relief options is superior to the other.
Firstly, with respect to any particular individual the debt relief option that is more advantageous will depend upon their unique circumstances. Furthermore, in some scenarios only one of these two debt relief options might be available.
PART TWO: WHEN IS A CONSUMER PROPOSAL AVAILABLE AS A DEBT RELIEF OPTION?
1. Insolvency requirement
You cannot make a consumer proposal unless you are insolvent.
You are insolvent if you satisfy the following two requirements:
(1) Your total debts are greater than your total assets, and
(2) You cannot pay your financial obligations as they become due
Some individuals who cannot meet their day-to-day financial obligations are not insolvent because they have significant equity in their homes and they could simply sell their home and use the proceeds of sale to pay off all their debts.
If you are not insolvent then you are not eligible to make a consumer proposal.
In contrast, there is no requirement that a person be insolvent to eliminate an unpaid account by way of debt settlement.
2. Not available for eliminating small debts
Most, but not all, Licensed Insolvency Trustees, will decline to do a consumer proposal on behalf of a Canadian where the total unsecured debt is less than $10,000.
This means that a consumer proposal is not a debt relief option for small debts.
In contrast, when an individual uses the debt settlement debt relief option the amount of the debt in question is irrelevant.
3. Only available for eliminating unsecured debt
A consumer proposal is only available for eliminating unsecured debt. Accordingly, it is not available for eliminating secured debt such a car loan or mortgage debt.
A consumer proposal is not available to eliminate a debt in circumstances where your creditor has sued you, obtained a judgment against you, and placed a lien on your real property.
In contrast, an individual can use debt settlement to eliminate a secured debt.
4. A consumer proposal can be used to eliminate amounts owing to the government
With few exceptions, a consumer proposal is available to eliminate government debt.
It is not possible to eliminate a student loan owing to the government unless you make your consumer proposal seven years after you ceased attending school.
PART THREE: WHEN IS DEBT SETTLEMENT AVAILABLE AS A DEBT RELIEF OPTION?
1. Not available to eliminate monies owing to the government
Debt settlement is not available as a debt relief option for eliminating monies owing to the government.
2. Only available where an account has been unpaid for a minimum of six months
No creditor is going to entertain a settlement offer unless your account has not had a payment for at least six months.
3. Creditors are under no obligation to negotiate a settlement
A creditor, or its authorized collection agent, are under no legal obligation to negotiate a settlement with you.
4. Settlements can only be funded by one-time lump sum payments
You cannot negotiate a settlement and then pay your creditor using monthly payments.
If you make a settlement your creditor will insist upon a one-time lump sum payment.
5. Available for eliminating all types of consumer debt
Debt settlement is available for eliminating all types of consumer debt or debt arising from a consumer transaction.
This includes both unsecured and secured consumer debt.
Unlike a consumer proposal, it is possible to negotiate a settlement in connection with a secured consumer debt.
This means that you can negotiate a settlement in circumstances where your creditor has sued you, obtained a judgment against you, and placed a lien on your real property.
PART FOUR: WHAT ARE THE ADVANTAGES OF DEBT SETTLEMENT?
1. Potential to eliminate a significant amount of money
One of the major advantages of debt settlement is the opportunity to save thousands of dollars eliminating one or more debts.
I have eliminated debt for as little as 15 cents on the dollar.
2. Debt settlement is a very simple debt relief option
It is possible to negotiate a settlement on your own.
You have the option of hiring a debt coach--someone such as myself--to assist you or you can hire a debt settlement service provider that will negotiate a settlement on your behalf.
3. Debt settlement is an incredibly flexible debt relief strategy
Debt settlement is a very flexible debt relief strategy.
If you have more than one creditor then you might decide to pay one creditor in full and attempt to negotiate settlements with your other creditors.
In contrast, if you make a consumer proposal you must include all of your unsecured creditors in your consumer proposal.
If you have more than one creditor you have the option of trying to settle one debt over the next couple of months and then attempt to settle a second debt a few months later.
This means that you can approach all your creditors and go bargain-hunting for the most generous settlement available.
If no attractive settlements are available you can simply wait a few months and try again.
If you employ the debt settlement strategy and debt situation deteriorates you can still meet with a Licensed Insolvency Trustee and canvass the merits of making a consumer proposal or filing for personal bankruptcy.
4. No need to forfeit the opportunity to take advantage of the expiry of a limitation period
One of the advantages of debt settlement is that you can adopt a two-track approach. Your goal is to negotiate a generous settlement and if you are unable to do so you wait for the expiry of the limitation period of your unpaid account at which point you can avoid paying a penny to your creditor.
In contrast, if you make a consumer proposal you must include all of your unsecured debts in your consumer proposal and you forfeit the opportunity to take advantage of the expiry of a limitation period.
PART FIVE: WHAT ARE THE DISADVANTAGES OF DEBT SETTLEMENT?
1. Your credit score will be lowered
One of the consequences of not making a payment to your creditor for six months is that your credit score will be reduced.
If you make a consumer proposal your credit score will also take a hit.
2. You will receive collection calls
If you do not make payments to your creditors then you should anticipate receiving collection calls.
Debt Coach Silverthorn has published a YouTube video titled "How to Avoid Collection Calls".
In contrast, if you make a consumer proposal it is illegal for your creditors, or their authorized collection agents, to make collection calls in connection with your unpaid accounts.
3. Your creditor might sue you
If you do not pay your creditor then your creditor might sue you.
In contrast, if you make a consumer proposal any lawsuits against you by your creditors will be terminated.
Debt Coach Silverthorn has published a YouTube video titled "Will My Creditor Sue Me?"
PART SIX: WHAT ARE THE ADVANTAGES OF A CONSUMER PROPOSAL?
1. Creditor Protection
A person making a consumer proposal is entitled to significant protection from their creditors.
Firstly, it is illegal for creditors, or their authorized collection agents, to make collection calls after an individual has made a consumer proposal.
Secondly, any lawsuits brought by a creditor against an individual making a consumer proposal are terminated by something known as a stay of proceedings.
2. Eliminating a significant portion of your debt
With a few exceptions, under a consumer proposal and individual has the opportunity to eliminate a substantial portion of their debt.
Many people making a consumer proposal will be able to pay somewhere between 30 percent to 50 percent of what they owe to their creditors by making equal monthly instalments over a period not to exceed five years.
A consumer proposal might not be an attractive debt relief option for an individual with significant equity in their home because this will mean he or she will repay more than 50 percent of what they owe to their creditors.
A consumer proposal might also not be attractive for an individual with large student loans in circumstances where he or she has not ceased attending school for seven years prior to making the consumer proposal.
PART SEVEN: WHAT ARE THE DISADVANTAGES OF A CONSUMER PROPOSAL?
1. Inflexible debt relief option
A consumer proposal is a very inflexible debt relief option.
It is governed by a significant number of rules and provisions under the federal Bankruptcy and Insolvency Act.
You cannot make a consumer proposal on your own.
You must do it through a Licensed Insolvency Trustee.
2. You must include all of your unsecured debt in your consumer proposal
One of the disadvantages of a consumer proposal is that you must include all of your unsecured debt in your consumer proposal.
You might have a debt such as an outstanding loan from your employer that you want to repay in full.
If you make a consumer proposal you must include all of your unsecured debts in your consumer proposal including your employer loan.
3. You will not be able to take advantage of the expiry of a limitation period
Individuals who make a consumer proposal invariably have more than one debt.
You might have several debts and the provincial limitation period might have expired--or will soon expire--on one or more of your debts.
If you make a consumer proposal then you must include all of your debts, including those debts where the provincial limitation period has expired, in your consumer proposal.
If you make a consumer proposal then you effectively forfeit the opportunity to take advantage of the expiry of a limitation period.
4. Might not be an attractive debt relief option for those with irregular incomes
If you make a consumer proposal then you will be making equal monthly instalment payments to the Licensed Insolvency Trustee over a period not to exceed five years.
A consumer proposal is automatically terminated if a person becomes 90 days behind making their monthly instalment payments.
Accordingly, a consumer proposal might not be an attractive option for those without a regular income.
This includes seasonal workers, self-commissioned salespeople, and persons with spotty employment histories.
5. Not an attractive debt relief option for those with substantial equity in their home
While it is common for individuals making a consumer proposal to repay somewhere between 30 to 50 percent of the amount owing to their creditors this percentage might increase substantially in situations where a person has significant equity in their home.
6. Might not be an attractive debt relief option for those with student loans
A consumer proposal might not be attractive for anyone with significant student loans where the person has not ceased attending school for at least seven years.
Under a consumer proposal student loans are not discharged or forgiven if a person has not ceased attending school for a minimum of seven years.
Our firm has published a YouTube video titled "Consumer Proposal VERSUS Debt Settlement"
In this YouTube video former collection agency lawyer and author Mark Silverthorn unpacks the availability of a consumer proposal and debt settlement as well as their respective advantages and disadvantages.
Choosing the optimal debt relief option involves an analysis of not only availability of debt relief options but also a person's unique debt situation.
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