I realize that regular readers likely have no need to ever do a consumer proposal. Why would they? This blog’s audience is primarily prosperous people, not folks who are drowning in debt.
But I’m still going to talk about consumer proposals today for a couple of reasons. One, I want everyone to know these things exist and they’re incredibly useful. And two, I want every bank, mortgage company, and loans for dirtbags shareholder to realize just how terrifying they are from a lender’s perspective.
Nobody knows they exist
The really interesting thing about consumer proposals is how the PF-o-sphere knows nothing about them.
Seriously. It’s bananas. There are a million how to pay off debt articles out there. They all contain the same old predictable advice. Did you know that saving money in other parts of your life can be used to pay down debt? How about paying the credit card with the highest interest rate first? Or if you’re really in a pinch, you can even use a balance transfer to temporarily pay a very low interest rate.
Yeah, I know. Real groundbreaking stuff.
Most PF bloggers want nothing to do with bankruptcy because a) it destroys someone’s credit and 2) bailing out on your debts is not a very honorable thing to do. We can debate point 2 all day long, but anti-bankruptcy folks don’t realize that it’s really not that hard to live without credit in 2017. If you play your cards right, destroying your credit can be nothing but a minor convenience.
What is a consumer proposal?
Now let’s talk about consumer proposals, which are basically like bankruptcy without the repercussions.
Here’s how they work. You go to a Licensed Insolvency Trustee (LIT) and tell them that you’re struggling under debt. They’ll go through your situation and create a proposal to take to your lenders.
This document will propose one of two things. The borrower will either ask to settle the debt for a fraction of what’s currently owed (which is common) or they’ll ask for more time to pay back the total amount (far less common). It may also ask for other arrangements like waiving interest charges or certain late penalties.
The LIT then submits the document to your creditors. The creditors have a number of options. One (or more) can call a meeting to discuss the proposal — called a meeting of creditors — if they’re not happy with it. Note that only creditors who are owed 25% of the total amount (or more) can decide to call a meeting. The guy holding 5% of the total debt is out of luck, even if he REALLY wants to call you a terrible person face-to-face.
A meeting of creditors almost never happens, which leaves us with two realistic scenarios. Each lender can decide whether they accept or deny the consumer proposal. If lenders representing more than 50% of the dollar value owing decide to accept it, it’s done. It doesn’t matter how vehemently the other 49% oppose it. It’s a done deal.
Note that if the proposal is ignored for 45 days then it’s deemed to be accepted.
If it is accepted, then the LIT handles all the payments to forward onto the lenders. The borrower is also required to attend two financial counselling sessions, which I’m pretty sure consists of Robin Williams telling you “it’s not your fault” about twelve times.
The reality of consumer proposals
Think about a consumer proposal for a second here. A debtor is basically going to his creditors and saying I’m close to declaring bankruptcy but I’d like to make a deal with you. Here’s an offer for 15 cents on the dollar for what I owe.
If you were the creditor, what would you say? That’s what I thought.
You’d be nuts to say no if the debt is unsecured. You know the next step is bankruptcy. At least this way you’d get something.
Secured debt is a little trickier, but not entirely so. If somebody owed $15,000 on a $10,000 car, it makes no sense to let him default and take the car back. Negotiating would be the best move in that situation. I would at a minimum look to defer payments for a little while or cut back on the guy’s interest.
You can probably guess what happens in the real world when an unsecured creditor gets one of these. It’s immediately accepted. It’s a whole lot better than bankruptcy.
A consumer proposal scam?
This is where things get a little conspiracy theory-y. What’s stopping someone from using their good credit to get $50,000 in credit card room, charge it all up, and then going through the consumer proposal process?
In theory, nothing. In fact, if somebody played it right, they could come through the whole process far richer than when they started.
Here’s what you do. Say you charged $50,000 in purchases on your credit cards. You can then sell that stuff for $30,000. So you do so, making sure to keep the money hidden in an envelope somewhere. You stop paying the minimum payments on the credit cards, claiming you need all your money for food, shelter, etc.
After being harassed by creditors for a few months, you go and do a consumer proposal. You ask to pay back $7,500 of the $50,000 owing. They accept and you arrange a payment plan for a few years at a very low interest rate.
And that’s about it. You’ve just made yourself $20,000+ and all it really cost you was damaged credit. It really is that easy.
Let’s wrap it up
Lenders are terrified of consumer proposals, and it’s easy to see why. They’re a fantastic deal for people who are struggling. You don’t even need to be that far behind on your payments, either, meaning it’s entirely possible to basically scam your creditors using one.
More Canadians should be made aware of consumer proposals. I can imagine a lot of people being outraged about how easy they are. I can also imagine a lot of people who could really use one but they’re unsure the process exists.