Understanding how to effectively manage one’s finances is an essential life skill. However, due to unforeseen circumstances, people in Alberta may find themselves in a predicament where they are unable to meet their financial obligations. In such situations, a consumer proposal can serve as a lifeboat. Predominantly used in Alberta, a consumer proposal is a legal process that allows indebted individuals to settle their debts. This short guide will delve into what a consumer proposal is, how it works, and its effects on personal finance.
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Understanding Consumer Proposals
A consumer proposal is a formal, legal procedure that is administered by a Licensed Insolvency Trustee (LIT). It is a binding agreement between an individual and their creditors that outlines a plan for the debtor to repay part of what they owe over a certain period, usually not exceeding five years.
To qualify for a consumer proposal in Alberta, you must:
- Be unable to meet your debt repayments on schedule
- Owe less than $250,000 (excluding secured debts like a mortgage)
- Have insufficient assets to settle your debt
Benefits and Drawbacks of a Consumer Proposal
Advantages of a Consumer Proposal
- Alternative to Bankruptcy: A consumer proposal can serve as a viable alternative to bankruptcy. It allows you to settle your debt without having to go through the often-stigmatized bankruptcy process.
- Creditor Protection: Upon the approval of a consumer proposal by your creditors, you benefit from creditor protection, which halts activities such as debt collection calls and wage garnishments.
- Reduced Monthly Payments: A consumer proposal allows you to only repay a portion of your debt, potentially reducing what you owe by as much as 70%.
- Fixed Payments: Your consumer proposal payments remain constant throughout the term unless you can pay it off sooner.
Disadvantages of a Consumer Proposal
- Not All Debt is Covered: Alberta consumer proposal applicants may discover that the consumer proposal does not cover all types of debts. A consumer proposal cannot eliminate student loans that are less than seven years old, court fines, and secured loans like car loans or mortgages.
- Length: A consumer proposal may take more time to finish compared to personal bankruptcy, resulting in a longer repayment period for your debt.
- Credit Rating: Your credit score will be impacted by a consumer proposal and it will be displayed as an R7 rating. This rating will be present on your credit report for three years after the proposal has been completed.
- Proposal Terms: You must adhere to the proposal terms and keep up with your payments, or your proposal terms will be terminated.
The Procedure for Filing a Consumer Proposal
The process of filing a consumer proposal involves several steps:
1. Find a Licensed Insolvency Trustee
Your first step would be to find a Licensed Insolvency Trustee (LIT) who will be responsible for guiding you through the entire process.
2. Undergo a Free Debt Assessment
The LIT will conduct a free debt assessment to understand your financial situation and determine the most suitable path forward.
3. Draft the Proposal
The LIT will work with you to craft a consumer proposal. This document will detail your income, assets, liabilities, and expenses, indicating what you can afford to pay.
4. Get Credit Approval
The LIT will submit the proposal to your creditors for approval. The creditors then have 45 days to either accept or reject the proposal.
5. File the Proposal with the Office of the Superintendent of Bankruptcy
Once accepted by your creditors, the LIT will file the proposal with the Office of the Superintendent of Bankruptcy (OSB).
6. Fulfill the Payment Plan
Upon filing, you commence your payments as per the plan. Payments are made through the LIT, who then pays each of your creditors.
7. Obtain a Release from Your Debts
Once you fulfill all the conditions of your proposal, you will be legally released from the debts included in the proposal.
Consumer Proposals and Your Credit
A consumer proposal will have a negative impact on your credit. It will be assigned an R7 credit rating, which is typically the lowest possible credit score. This information is usually removed from your records after a certain period, depending on your province of residence.
Frequently Asked Questions
Can a Consumer Proposal Be Modified?
Yes, if your financial situation deteriorates, you can contact your LIT to try and amend the agreement.
Can I File More than One Consumer Proposal?
Yes, but not for the same debts included in a prior proposal.
Can a Consumer Proposal Be Revived?
Yes, you need to act quickly to revive a consumer proposal. You have only 30 days after the annulment to fix the default.
Do I Have to Give Up Any Assets?
Fortunately, if you file for a consumer proposal, you do not need to give up any assets.
What Are the Costs?
The fees for your proposal are included in the monthly payments you make on the proposal.
What Happens If I Miss a Payment?
If you miss three monthly payments, your consumer proposal is automatically annulled.
What Happens If Creditors Reject the Proposal?
If the majority of your creditors reject a consumer proposal, you have a few options such as withdrawing the proposal and finding a different option for debt relief, working with your trustee to file for bankruptcy, or withdrawing your proposal and filing it at a later date.
In conclusion, a consumer proposal is an effective tool for managing overwhelming debt. However, it’s essential to fully understand the process, its implications, and alternatives before making a decision. Always seek the advice of a licensed professional when dealing with matters related to personal finance and debt.
