Avoid Bankruptcy through Consumer Proposals
Many Canadians have learned that they can avoid bankruptcy through consumer proposals.
In the past it has been fairly easy to file a bankruptcy. A first time bankrupt used to be able to qualify for an automatic discharge from bankruptcy after nine months. Last year the bankruptcy laws changed and this has made bankruptcy a less attractive option to deal with debt.
The bankruptcy laws now state that if an individual is assessed to have “surplus income” (income that exceeds what is permitted in bankruptcy) they will not be discharged in nine months, instead they could remain undischarged for up to twenty-one months. If this occurs, the bankrupt will then have to report income to their trustee and make payments in bankruptcy for the full twenty-one months. They will also have to pay the trustee fifty cents on the dollar for each “surplus” dollar that they earn.
This is one of many changes that have changed the way Canadians feel about bankruptcy. To avoid bankruptcy, many are now choosing consumer proposals. This is reflected in the bankruptcy statistics, which show a sharp decline of bankruptcies in Canada thereby leading to an increase in consumer proposal filings.
In a consumer proposal, a settlement is presented to your creditors. Your creditors then have 40 days to accept or reject the consumer proposal. If the majority of creditors accept your consumer proposal, it is bound. Upon receiving the notice of the filing of the consumer proposal, creditors who do not respond will be considered to have accepted the proposed settlement. Once the consumer proposal is accepted, you will pay the trustee a monthly payment for 3, 4 or 5 years, until the amount of the consumer proposal is paid in full. Three years from the date that your consumer proposal is paid in full it will be removed from your credit report.
A bankruptcy trustee will assess what your consumer proposal payment is based on your assets and income. For example, if you owed $25,000 in debt and it is determined that you could afford to pay $400 per/month, a trustee may suggest a proposal paid over 5 years bringing the total you would pay $24,000. Another trustee may recommend that you present a proposal that involves making a monthly payment of $400 over 4 years. This one year difference is the equivalent of a $4,800 savings. The trustee’s objective is to present a proposal that you can afford to pay monthly and that satisfies your creditors. Your trustee will determine how aggressive they want to be.
Trying to negotiate with a trustee in bankruptcy on your own will prove to be fruitless. Most will suggest that the terms they are offering is what you HAVE to pay based on their assessment of your finances. This may lead you to believe that what the bankruptcy trustee proposes is your only option.
A good financial advisor who knows many trustees in bankruptcy can help you structure your financial information. They will work with you to determine what a fair and affordable proposal is before you even speak with a bankruptcy trustee. They can also guide you through the process, which includes being present at all of your meetings with the trustee.