- How does a consumer proposal consolidate my debt?
- What is the difference between bankruptcy and consumer proposal?
- What happens to my credit score after a proposal?
- How much does a consumer proposal cost?
- Can I use a consumer proposal for student loans?
- What is a non-profit credit counsellor (aka not for profit credit counsellors)?
- How do the 2009 changes to bankruptcy laws affect my debt solution?
- Can you file bankruptcy in Canada for student loans?
- Is there such a thing as free Ontario debt assistance, or government debt assistance?
- Do you provide debt consolidation loans?
- Credit Score vs Credit Rating
- Why does the government website seem to promote for a consumer to only use a Licensed Insolvency Trustee when looking file a consumer proposal or a bankruptcy?
How does a consumer proposal consolidate my debt?
A consumer proposal is a formal legal process in Canada, where a consumer debtor can make a proposal to creditors. The most common structure of a consumer proposal would be a single payment made to cover multiple debts, and for a fixed duration of time, not to exceed 60 months. Once the proposal is accepted by the creditors, payments are then made to the administrator of the consumer proposal. The administrator is licensed as one who is to operate for the general benefit of the creditors, and it is their job to investigate the affairs of the debtor. The payments by the debtor to fund the proposal are deposited into the administrators trust account. The administrator takes their cut which is a fee or a tariff set by the court. At the time of answering this question, the administrators fee is 20% of gross proceeds with no limit. The administrator then takes the remaining funds and disperses them on a prorated basis to the creditors of the proposal. The total dollar amount of the proposal would usually be for a lesser amount than was originally owed. There is no interest charged in a consumer proposal. Therefore, the consumer debtor should see a reduction in the principal debt and a savings of interest charged. Once the individual making the proposal completes their proposal payments, the remnant of the original debt owed is discharged as though it was never owed in the first place. In short the consolidation happens as all of the debt included in the proposal is paid by one payment, without interest, and dispersed to the creditors. – Ryan
What is the difference between bankruptcy and consumer proposal?
Great question. The short answer; a whole lot. First I would say, don’t fall for the uneducated advice of someone else, telling you that bankruptcy is quicker and cheaper than a consumer proposal. There are a lot of people out there who have been through bankruptcy, who would tell you quite the opposite. A bankruptcy can be very restrictive for the individual going bankrupt. Their income is monitored on a monthly basis. The reasons for the monitoring is because you are limited as to how much of your earnings you can keep while in bankruptcy. The limit is very low and not enough for someone to live on, at least not in our region. If you earn more money in a month because you had an opportunity to work overtime, well, between your income taxes paid and your bankruptcy payment, you will wonder if you actually worked overtime or if it were all just a bad dream. When you file a consumer proposal, you income is not monitored, it’s that simple. If you earn more, you keep it. When you file bankruptcy, all of your equitable assets vest with Licensed Insolvency Trustee – LIT, (previously known as Bankruptcy Trustee). In other words, they own your non-exempt goods. So, if you own a second vehicle, a snowmobile, RESP’s for your children’s education, or maybe you have have contributed to RRSP’s /RSP’s in the year prior to filing bankruptcy, have equity in your home, and the list goes on, then the trustee will collapse the investments or receive the assets from you, in order to sell them and disperse the funds to our creditors, after taking their cut of course. That doesn’t make the LIT a bad person, they simply have a role to play in the process which is one of court officer acting as a fiduciary to the general benefit of the creditors. The other option, so that you do not lose your assets, is one of repurchasing the assets (which you already paid for originally) back from the trustee. Now remember, you have to try and purchase theses items back while they the LIT is receiving a portion of your income, if you are earning more than the allowable limit. So by working more hours or by making more money to buy your goods back from the LIT, you are also increasing your surplus payments and making you bankruptcy more expensive. Do you have a headache yet? Throw into the mix that you will lose one or more of your income tax returns and you will wonder why bankruptcy didn’t provide the relief that you thought it would. Maybe at this point it would be time to seek out the individual who told you that you should just go bankrupt, and kindly tell them to stop giving people advice in this regard. I have also seen it where if a client did file bankruptcy the inheritance that they received, after the time they would have filed, could have been scooped up. You can’t be a director of a company while in bankruptcy and you cannot even begin to rebuild credit until you are discharged or released from your bankruptcy That brings us to a whole other topic, how long does it take to get your discharge or “walking papers”? That depends, is this your first time going bankrupt or have you filed for bankruptcy before? First time 9 or 21 months with a 7 year post discharge hit on your credit bureau. Second time 24 or 36 months with a 14 year post discharge hit on your credit bureau. Now, in comparison to a consumer proposal; your income is not monitored, your assets do not vest with the LIT, you get to keep your tax returns, you can be a director of a company, you can begin to rebuild credit immediately upon your proposal being approved, the proposal is removed from your credit bureau 3 years after completion. In some cases, if done with someone representing your best interests and working on your behalf, it is not uncommon that a consumer proposal may cost the consumer less than what it would cost to go bankrupt. Why? Well simply because the LIT doesn’t get to see as much of it and the creditors receive more of the money. The acceptance of your consumer proposal is not determined by the LIT, it is determined by the creditors who are generally receptive to proposals because it is better for them than if you went bankrupt. Therefore, the differences are vast, the two are miles apart. So if you don’t have an innate knowledge of the Bankruptcy and Insolvency Act, it can be quite difficult to discern your rights and what option is best for you, that is unless you have someone representing you and advocating on your behalf, who can show you all options and calmly walk you through the process, beginning with the end in mind. – Ryan
What happens to my credit score after a proposal?
Okay, here is your quick answer. Your credit score will take a temporary hit. You can begin to rebuild credit immediately, but the rebuild has to be done with the guidance of a professional who actually knows what they are talking about. It is more than just getting a secured credit card. If you carry on with any credit products such as a car loan or mortgage after having a proposal filed, so long as you continue to make those payments on time, then those products will maintain a good rating of 1 (one) meaning and as agreed. Any credit products included in your proposal will rate as a 7 meaning that you are making payments to the creditor under an arrangement that they have agreed to. If anyone tells you that a proposal to creditors shows the same as a bankruptcy on your credit bureau, or that it shows as an R7, I will tell you right here and now, that person is not fully informed as to how all of this works. Maybe you should be getting a second opinion. Is that a bold statement? Not really. I say this because there is way too much misinformation out there. People who are not experts will often seem to hand out the wrong advice or information. Now, if you want a full and proper answer, if you actually care to understand this topic and are not just looking for a fast food answer, click here to read more.
This is a question that we are often asked of course. Before we answer the question, let’s step back and layout the landscape of a credit rating and it’s real value in someone’s life. First off, we have been taught and led to believe, that having a credit score is king in all things financial, and that in some way, a credit score is even tied to our individual self worth. Take that belief, and throw it out the window. Its bunk, trash, and it is this exact mentality or belief that has kept so many people absolutely laden with huge amounts of debt. I have said it for years, I would rather be cash rich and credit poor, than cash broke because I am spending all of my hard earned money servicing the interest on my debt in order to maintain a good credit score. Generally speaking, as a society, we are all to willing to sacrifice our lives servicing debt, in order to pay homage to the almighty credit score. I have had what seems to be endless people say to me over the years “I want to get out of debt, but I don’t want to ruin my credit rating”. A lot of people saying this to me, have been allowed to carry so much debt, that they never actually have the ability to pay the debt down. This means they would spend the rest of their lives just servicing debt, barring a windfall or inheritance. All of that being said, let’s get to how a consumer proposal affects your credit score. Remember, money lost to service debt is gone forever, you can never get that money back, but a temporary hit on your credit rating can be rebuilt, and quite quickly might I add. When you have a proposal filed to your creditors, with hired representation and are not self representing directly through a licensed insolvency trustee (LIT), you should be in a much better financial position right away. Your monthly cash flow should be improved immediately. By improving cash flow, you will feel the relief almost immediately. Your debt load should be significantly reduced depending on circumstances, and the interest will cease. At this point, a credit rating will be the last thing you are thinking about. You will likely sleep better at night, and enjoy your days more. That being said (now this is where most people do not get the guidance if they do not have someone working on their behalf and representing their best interest), you can immediately begin to rebuild credit right at the beginning of your proposal. While still in a proposal, it is not uncommon for our clients to obtain a good to very good credit score. Now remember here, there is more to a good credit rating than just a good credit score. Let’s say that you are not in a proposal, you make all of your minimum payments on your debt. You can have a very good credit score of say 725, yet a poor credit rating. By that I mean you could show a great payment history on your debt, but your percentage of available credit used, and your total debt service ratio TDSR, meaning how much of your income goes towards making your debt payments, these two items could be showing very poor. So although you have a good credit score, you may not be able to borrow another dime. Back to how a proposal affects your credit score: When you have a proposal to creditors filed, your credit score will decrease (depending on your current score) however your total debt service ratio will show better right away. The proposal shows up on your credit report as a record which remains on your credit report for 36 months after you make your last payment into the proposal. The rating of the proposal will only show up on the creditors who you have included in your proposal. So, if you keep a car loan or a mortgage, and continue to make on time payments on these items throughout the proposal, they will continue to show in good standing with a rating of a 1 (one) meaning paid as agreed. Any of the credit products included in your proposal, will have a rating of a 7, meaning that you are making payments to the creditor under an arrangement that they have agreed to. Rebuilding credit can begin immediately after your proposal is filed. Rebuilding has to be done methodically and with the guidance of a professional who understands how to do so as efficacious as possible. There is no sense in beginning to rebuild credit if you are going about it the wrong way, and there is a lot of bad advice out there on this topic. That’s why 4 Pillars clients are given the tools and guidance to rebuild credit properly. It is not a long uphill battle as it can be done very efficiently. That being said, we are not looking to produce repeat clients. Our goal is always to see our clients get out of debt, put savings in their bank, and begin to plan for the future… all at the same time. – Angela
How much does a consumer proposal cost?
I think the answer needs to be started with; how much will it cost you if you don’t file a consumer proposal? Or; how much will a consumer proposal save you? Or maybe; how much will a consumer proposal cost, if you don’t have the right team and representation in your corner? Okay, so you can see that the question raises other questions which need to be considered. However, for the purpose of this FAQ, I will answer briefly. Everyone in the debt relief or debt help industry gets paid somehow. There is no free lunch. If you have spoken to me before or have attended any of my seminars, you may have likely heard me say that before. I might be kind of a broken record, but when it’s true it’s true. If the person or company doing the work receives a piece of the pie (or dollars) that you are paying into your proposal, or if they receive funding from the creditors, that person or company does not represent you nor your best interest as they are unable to. Our 4 Pillars service fee is paid directly by our client, is absolutely transparent, and is a fixed amount. This allows our client to see clearly the path to debt freedom. There is no guesswork with us. We are not incentivized by higher payments to the creditors and we do not take direction from the creditors. We are bought and paid for by our clients. Even with our nominal fee, the great majority of our clients improve their monthly cash immediately upon becoming a valued client, thus providing stress relief right out of the gate. Not often do our clients see our fee as a burden. In fact it is not uncommon for clients to say to us “Really, that’s all your fee is going to be for doing all of this work?” The answer is yes and it’s not too good to be true. In an industry where so many have made a lot of money off the stressed out and vulnerable debtor, isn’t it time that the debtor doesn’t get fleeced when genuinely looking for solutions to solve their debt? – Angela
Can I use a consumer proposal for student loans?
Yes and no. In order for your student loan to be discharged with your consumer proposal (and with a bankruptcy for that matter), your period study end date PSED, meaning the last day you were in school, needs to be a minimum of 7 years prior to the date of filing your proposal. You may also have multiple PSED’s if you went back to school later and used a second student loan. This could mean that your first student loan qualifies to be discharged with a proposal but the second loan doesn’t, so you would see some benefit in this situation. Further to that, if your student loan does not qualify and is non-dischargeable, your student loan account can still be listed in your proposal and this can help somewhat. By that I mean, your student loan account will still receive a part of the proceeds from your proposal, helping to pay down the loan, while the remaining consumer and tax debt will be discharged. – Angela
What is a non-profit credit counsellor (aka not for profit credit counsellors)?
A credit counsellor is a company or organization that receives funding from your creditors. Their role is that of attempting a basic consolidation of debts. There may still be interest incurred on the debts, and they often have a fee. So, the consumer still ends up paying back more than they owe, yet still receives the same rating on their credit bureau as a consumer proposal. The challenges with this program are a few. 1. The creditors are not obligated to partake. Some may opt in, and some may opt out. 2. There is no legal protection for the debtor. Meaning that creditors could still pursue the debtor. 3. The plan provide doesn’t usually improve cash flow all that much. This tends to be a problem, seeing as people do not usually seek a solution to their debt challenges until their cash flow is greatly restricted due to servicing their debts. And finally, the impact on your credit rating is the same as a consumer proposal. – Ryan
How do the 2009 changes to bankruptcy laws affect my debt solution?
That is a great question. The answer could be exhaustive, but I will keep it short. An individual who files a first time bankruptcy in Canada would be in bankruptcy for 9 months, but for many it is actually 21 months where income will be monitored monthly. The reason for the income monitoring is so that the Licensed Insolvency Trustees (LITs) can determine the portion of the bankrupt’s income that should be paid into the bankrupt’s estate. In other words, the more you make, the more they take. Well, technically the more you are required to pay. In saying that, if you do not make your bankruptcy payments, the bankruptcy trustee has the lawful right to garnish your wages and oppose your discharge or, “release” from bankruptcy. If someone were to file a second time bankruptcy in Canada, the minimum time frame they would be bankrupt would be 24 months, and many would be in bankruptcy for 36 months. The same requirement of income monitoring applies for a second time bankrupt. What is more, is that a second time bankruptcy in Canada will remain on an individual’s credit bureau for 14 years after discharge. 16-17 years respectively. There are numerous other changes as well. But in short, the changes to the Bankruptcy and Insolvency Act (BIA) which took effect in September 2009 has made bankruptcy, in most cases, much more expensive and quite extensive for the individual going bankrupt. – Ryan
Can you file bankruptcy in Canada for student loans?
Yes and no. As in the case of a consumer proposal, your period study end date PSED, meaning the last day you were in school, needs to be a minimum of 7 years prior to the date of filing your bankruptcy. You may also have multiple PSED’s if you went back to school later and used a second student loan. This could mean that your first student loan qualifies to be discharged with a bankruptcy but the second loan doesn’t, so you would still see some benefit in this situation. The problem that I have come across numerous times, is that an individual was advised to file a bankruptcy or a proposal to creditors, within months of their PSED hitting the 7 year mark. Proper advice would be to wait the 6 or 7 months, and then file for bankruptcy or a consumer proposal. During this 6-7 months, an action plan should be put in place to assist with the debt and creditor challenges that would soon go away once the insolvency is filed. – Ryan
Is there such a thing as free Ontario debt assistance, or government debt assistance?
ABSOLUTELY NOT! Run from anyone who is telling you that they have a government program, or that they offer assistance through the government, or that their fees are covered by the government. And then make a report to consumer affairs in order to save the next person from being conned. – Angela
Do you provide debt consolidation loans?
No we do not. We will review your situation and let you know if we think that a consolidation loan would be in your best interest, what the cost of the loan would be, and who would be your best option to apply for the loan through (as you do not want to shop for credit because it will hurt your opportunity to get approved). We would also show you options outside of a consolidation loan so that you can make a fully informed decision as to what makes financial sense for you. That is the point of our free consultation. It allows you to review all options without a lender sitting in front of you who only make money if they create debt on you. – Ryan
Credit Score vs Credit Rating
A credit score is overrated. You could have a great credit score, but not be able to borrow any more money because your overall rating is not that great. I’ve met with clients who have an excellent credit score, and earn a great income, but the bank cannot lend them anymore debt because their debt service ratio is upside down. Debt service ratio meaning how much of your monthly income goes towards servicing your debt. Percentage of credit used is also another determiner of whether or not a lender will allow you to take on new debt with them. If all of your credit products are over 70% of the credit limit, you may be looked at as someone who uses credit to survive and therefore determined to be a risk, thus not get approved even though you have a great credit score. – Ryan
Why does the government website seem to promote for a consumer to only use a Licensed Insolvency Trustee when looking file a consumer proposal or a bankruptcy?
That is a great question and one that I have heard a few times now. You should ask the government this question. A Licensed Insolvency Trustee represents the creditors, is an officer of the court, and is the only person licensed in Canada to administer bankruptcy proceedings as well as file a consumer proposal. They are to investigate the affairs of the debtor and required to work to the general benefit of the creditors. In other words, as a trustee, their fiduciary responsibility is to the creditors, not to the consumer. Per legaline.ca, the trustees statutory duty actually prevents them from acting as an advocate for the debtor when making a consumer proposal. None of this makes the trustee a bad person, however, they do not have a dual role of both creditor and debtor representation, otherwise they would be in a conflicting position. It is for this reason that a licensed insolvency trustee and a practicing lawyer, cannot be one in the same in Canada. A licensed insolvency trustee’s fiduciary responsibility to the creditors and a lawyer’s obligation to attorney client privilege, simply conflict. This is why the Canadian Debtors Association was formed. To try and bring greater transparency to this industry for debtors so they are not confused when looking for solutions to their debt challenges. From the CDA’s website: “In Canada, Debtors who face economic hardship and insurmountable debt have no voice to advocate solely on their behalf. There is no officially recognized group, profession or process that places the needs of the Debtor first, foremost, and above all else. Debtors have had no one that they could call their own, to help them resolve their debt situation. And, no one that would support them unconditionally. This is a big problem. And, it’s just plain wrong. The Canadian Debtors Association was formed to fix this problem. The Canadian Debtors Association strongly believes that Debtors deserve and must have their very own advocate that works solely for them”.
So, all of that being said, I don’t have a full answer for you, other than this is just how its been for decades, and quite frankly is why 4 Pillars exists, and why an organization like the CDA exists. We believe in the rights of those who are crushed by the burden of debt. They deserve their own voice. – Angela