How Consumer Proposals and Bankruptcies Settle Debt
When you find yourself in serious debt trouble you need to understand your options to deal with the debt and how the processes work. If you debt is over $10,000 often you can find yourself in a situation where you need to consider a consumer proposal or bankruptcy. It is important to understand how these processes work so you can make the best decision for your situation.
Consumer proposal: Technically this is the simpler process. The consumer proposal is effectively a new binding agreement with your creditors. It allows you to make one monthly payment a zero interest which is then distributed to your creditors. How exactly do you determine what the payment will be and how do the creditors agree to this you ask? Well, the proposal amount will depend on a variety of factors including your income, assets and ability to pay. There is a large variance in what this offer could be even in the same situation so it is best to seek advice from someone who represents you to be sure you are getting the best resolution. That offer is then submitted to the creditors where they have 45 days to vote on accepting your offer. The majority of the money rules so once 51% of the money has voted in favour of the proposal it can pass. 4 Pillars has a great deal of experience in helping structure proposals and our settlements can be anywhere from 12% and up on the original debt amount. I recently settled a debt of $89,891 for just $17,100 which is just 19% of the original debt amount. If the creditors decline the proposal this generally means they want more money. In these instances it is very important to have someone representing you to agree to the new settlement amount.
Bankruptcy: the bankruptcy is a more complicated process and has some very strict guidelines which must be adhered to. The bankruptcy will have two fundamental elements: 1) Assets and 2) Income. Let’s cover the assets first: For the most part your basic assets such as clothes, furniture and other household belongings are exempt. (Exempt effectively means they have no value to your creditors.) You can own a car with a value up to $6600. Now if there is a loan on your vehicle you would take the value of the vehicle subtract the loan amount and then you have the net value of the vehicle, as long as that amount is below the $6600 threshold the vehicle would still be exempt. For investments many are not exempt such as RESP’s, GIC’s, stocks/bonds etc. As non-exempt assets that means the value of the assets have to be paid by you to the “estate” or you surrender the assets to be liquidated and the proceeds are given to your creditors. RRSP’s are exempt with the exception of the last 12 months of contributions. Again the non-exempt portion goes to your creditors. In the case of a home this is where it gets a bit tricky. The value of the house must be determined as fair market value. As such we need to determine the “realizable value” which would take into consideration the selling costs. If there is no equity after selling costs then the house can be kept. However a lien will be registered against it until you are discharged from the bankruptcy so selling or re-financing during bankruptcy would not be advisable as any proceeds would go to the estate first for distribution to your creditors. If there is equity in the house then that equity value has to be paid into the estate or the house is sold and the proceeds go to your creditors. They are many other considerations on the asset side and again it is strongly recommended that you seek the advice of a professional working on your behalf to sort through the details.
The income side is a bit easier to sift through. Based on family size there is an amount of money you can earn every month before the creditors are entitled to any of your earnings. However, if your income exceeds the monthly allowance then the creditors are entitled to 50% the overage. So for example if you are a single individual with earnings of $3089/mth net, the directive indicates you are “allowed” to earn $2089 which means you have $1000 surplus ($3089-$2089=$1000). Your creditors are entitled to 50% of your surplus meaning you would be required to pay $500/mth ($1000/2=$500) for 21 months (automatic because you have surplus). So the income cost of bankruptcy would be $10,500 in this scenario. If there aren’t any assets then that would be the total cost of bankruptcy no matter the debt amount. So if this person owed $40,000 they could extinguish the debt with the bankruptcy cost of $10,500. However should their income increase during the 21 months of bankruptcy so would the cost. In addition the individual would also lose their income tax refund for two years as this goes to the estate.
Obviously bankruptcy can be a confusing option. However, if the assets are negligible and the income is low the actual cost of bankruptcy can be relatively low and perhaps an effect method to eliminate excessive debt. However, if you have significant assets and a good income the cost of bankruptcy could be excessive and the consumer proposal may be a better option. Again it is highly recommended that you seek unbiased advice to learn the pros and cons of each process for your particular situation. Keep in mind that while a trustee in bankruptcy is certainly well versed in the processes and rules they are also looking out for the best interests of the creditors. They get paid from the proceeds of the bankruptcy or proposal as well so from a business perspective the more you pay in those processes the more money they make.
4 Pillars consultants educate you and work 100% on your behalf. They help prepare you for which ever process is your best solution and help ensure the cost is going to be as low as possible.
A bankruptcy can reduce your debt but is dependent on your assets and income for the actual cost of the bankruptcy. A consumer proposal reduces your debt by negotiating a new settlement amount with your creditors and ensuring zero interest throughout the process. Both can be very effective ways to deal with your debt but to ensure the best solution and best settlement consult with someone looking out for your best interests. You can reach me at 905-243-8765 or www.goodbyedebt.ca.
