How to Avoid Bankruptcy by Filing a Consumer Proposal

The following is a case study of a client who came to our office recently. She was seeking help with her financial situation. Amanda Murray (not her real name) initially considered bankruptcy as her only option. Her numerous debts were causing considerable stress and anxiety, and facing the stigma of bankruptcy was only worsening her emotional situation. However, after some closer examination of the details surrounding her financial problems, we agreed that a consumer proposal was a preferable option.

Business Case Background Information

It was a sudden and unexpected loss of employment at a crucial time that compounded Amanda’s already pressing financial problems. As a new graduate, she was struggling with a substantial but so far manageable post-secondary education debt totaling $30,000 on a student line of credit. She had been able to land an entry level position in her field after graduation, but a sudden economic downturn had compelled the company she worked for to scale back considerably. She was unexpectedly laid off and no longer able to fulfill her financial obligations. She used her various credit cards to live while she looked for alternative employment.

 

Issues and Problems

For the next few months, Amanda was compelled to use her credit cards to pay for basic essentials, daily necessities, and the inevitable costs that come with looking for work. Even after she found gainful employment again, she was not able to catch up with her debts. This included an amount owing on her income taxes, on top of everything else. Due to the sheer number of financial obligations, and subsequent calls and letters from aggressive collectors, Amanda had assumed that bankruptcy was her only option. Her debts were spread out across no less than three credit cards, coming to a total of $15,000, each with a crippling interest rate of close to 20%.

 

 

Solutions and Recommendations

 

Between credit cards, unpaid income taxes, and school loans, Amanda’s total debts came to $52,000.  As declaring bankruptcy would lead to her losing her self-esteem, what savings she had, and her vehicle, it was decided that a consumer proposal would be a better option.  A consumer proposal is the alternative to bankruptcy.  In a consumer proposal the debtor makes an offer to the creditors to pay off the debt interest free over a period of up to 5 years. All the debtor`s assets are protected and no legal action by creditors can be taken. So Amanda`s car and savings were protected and if she was asked in the future if she had ever filed for bankruptcy she could answer “No” Her consumer proposal allowed her to pay off the $52,000 debt with a single monthly payment of $325/month. A total saving of $32,500!

Amanda had the option of paying off her proposal faster by increasing the monthly payments or by paying a lump sum using a Phoenix loan (only available through 4 Pillars). This would speed up her credit building and her financial recovery. This option would not be available had she filed for bankruptcy.

 

Conclusion

            It is a common misconception that bankruptcy is often the only way to escape from accumulated debt. Most clients who arrive in our offices in financial distress, such as Amanda, are unaware that negotiating your debt and subsequent payment plans through a consumer proposal are even possibilities. By filing a consumer proposal Amanda avoided the stigma of bankruptcy while getting her personal finances under control, she protected her assets and she had the opportunity to accelerate her financial recovery by paying off the proposal early.

When dealing with debt the consumer proposal (administered through a trustee) if structured correctly is usually the most effective way to deal with the debt.  However, dealing with debt is only one piece of a successful debt restructuring plan and the two key areas that are often missed when creating a plan to manage debt are the pre-work (analyzing cash flow) and the post- work (implementing a comprehensive credit rebuilding plan and how to use any additional cash flow to meet their long term financial goals). These are ultimately the cornerstone of a solid debt restructuring plan and can be the difference between success and failure.

 

97% of people entering into a debt restructuring plan with 4 Pillars successfully complete the program and we believe this is the highest in the industry.