A consumer proposal is a legislative tool that individuals can use to consolidate and reduce the amount of their debts without filing for bankruptcy.
For individuals, debt consolidation legislation is governed by the Bankruptcy and Insolvency Act (the “BIA”). Essentially, the BIA allows an individual who can’t manage their existing debt load to make a proposal to his/her creditors to pay back a certain portion of what they owe. The repayment plan must be completed within 5 years of filing the consumer proposal.
Ultimately, it is up to the creditors of the individual making the consumer proposal to approve the reduction of debt as well as the repayment plan. When considering whether to accept a consumer proposal, the rational creditor will compare the amount they are being offered in the consumer proposal to the amount that would be available to them if the individual were to file for bankruptcy as these are, generally, the only two options available to the individual to deal with their debt. Therefore, the terms of a consumer proposal should contemplate the return available to creditors if the individual were to file for bankruptcy and an offer to creditors should be more than this amount. If a consumer proposal is prepared properly, it can significantly increase the chance that it will be approved by the creditors.
Consumer proposals have risen in prominence over the last several years as a result of significant amendments made to the BIA in 2009. The purpose of the amendments was twofold: (1) encourage individuals in financial trouble to file a consumer proposal rather than filing bankruptcy; and, (2) increase the portion of consumer proposals which are ultimately approved by individuals’ creditors. These changes clearly illustrate the Canadian government’s desire to see individuals make a consumer proposal rather than file for bankruptcy. It appears that the 2009 amendments to the BIA have had the desired effect. In 2008 there were 25,179 consumer proposals filed in Canada. During 2013 this number increased to 49,454. This represents an increase of over 100%.
In summary, consumer proposal legislation has been designed to assist individuals in obtaining a financial fresh start. Further, recent amendments to the BIA emphasise the Canadian government’s preference to see individuals repay a portion of their debts rather than file for bankruptcy.
Insolvency statistics obtained from the Office of the Superintendent of Bankruptcy Canada
Author: Tom McElroy, CPA, CA, CBV, CIRP, LIT
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Albert Gelman Inc.’s corporate and consumer insolvency group has over 100 year of combined experience assisting individuals and businesses who are experiencing financial difficulty. Please feel free to call us to discuss your client’s financial situation.
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