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Consumer Proposal

A legally binding agreement negotiated with creditors through a Licensed Insolvency Trustee (LIT)

What is a Consumer Proposal?

A consumer proposal is a legally binding agreement negotiated with creditors through a Licensed Insolvency Trustee (LIT). The proposal outlines how an individual or business is to repay its debt to creditors.

 

Consumer Proposal

 

Quick Summary:

  • A consumer proposal is a legally binding agreement negotiated with creditors through a Licensed Insolvency Trustee (LIT).
  • It is an alternative to declaring bankruptcy.
  • Advantages of a consumer proposal include: (1) the ability to retain assets and possessions, (2) creditor protection, (3) the repayment amount may be less than the initial amount of debts due, (4) interest on the debt is frozen, and (5) the individual or business enjoys a longer timeframe to resolve debts.

 

Understanding a Consumer Proposal

A consumer proposal is initiated when an individual or business lacks the capacity to repay its debt. In other words, it is initiated when an individual or business is insolvent. It is an alternative to declaring bankruptcy. For example, an individual may incur a debt of $100,000 due tomorrow but is unable to repay it.

 

Consumer Proposal - How It Works

 

In Canada, to initiate a consumer proposal, one must reach out to a Licensed Insolvency Trustee (LIT) – federally regulated professionals who provide consultation services to parties with debt problems. The Licensed Insolvency Trustee then drafts a consumer proposal outlining how the individual or business is to repay their debts to creditors. Once a proposal is drafted, it is sent to creditors to approve or reject.

Continuing with the example above, the proposal may outline that an individual is to pay $1,500 monthly for a period of five years. The payment is collected by the Licensed Insolvency Trustee, who distributes the cash to creditors on behalf of the individual.

If the creditors reject the proposal, the individual must consider changing the proposal or consider other options (such as declaring bankruptcy).

 

Example of a Consumer Proposal

Consider a business with a current ratio of 0.50 – $500,000 in short-term liabilities, $100,000 in cash, $100,000 in inventories, and $50,000 in accounts receivable. Additionally, the company owns long-term assets consisting of equipment worth $400,000. If the business is unable to repay its liabilities, the creditors would be able to liquidate its equipment. If the company were to liquidate the business, it would lose its operating assets and be unable to continue operations.

The business reaches out to a LIT, who drafts a consumer proposal with the following terms: $8,500 monthly payments over a period of five years. The proposal is then sent to the creditor, who approves it. To this end, the company can avoid having to sell its equipment to settle its debts by submitting a consumer proposal.

 

Advantages of a Consumer Proposal

  1. The ability to retain assets and possessions;
  2. Creditor protection (wage garnishment or lawsuits by creditors are absolved);
  3. The repayment amount may be less than the initial amount of debts due;
  4. Interest on the debt is frozen; and
  5. The individual or business enjoys a longer timeframe to resolve its debts.

 

Disadvantages

  1. Credit rating is adversely affected and stays on an individual’s credit score for three years after the consumer proposal is completed, i.e., if it takes five years for the proposal to be satisfied, the credit rating would be negatively affected for eight years;
  2. The individual or business must honor the terms and conditions laid out in the consumer proposal; and
  3. It requires a lot of time and effort to initiate a consumer proposal.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Best Personal Finance Software
  • Credit Event
  • Debt Restructuring
  • Insolvency