What happens if your income changes after filing for a Consumer Proposal?

A Consumer Proposal can be a good alternative to Bankruptcy for people struggling with debt. Consumer Proposals require some repayment but won’t impact your credit rating as much and will also allow you to keep more assets. But if your income decreases or increases — how will that affect your Consumer Proposal moving forward?

What is a Consumer Proposal?

A Consumer Proposal is the only federally regulated debt settlement process available to insolvent Canadians. It is a legal arrangement between debtors and their unsecured creditors to consolidate their debt into a single, affordable, interest-free payment plan. This payment can be made as a lump sum or monthly over a period of up to five years.

Among the available debt relief options, a Consumer Proposal is often the most affordable as payments are based on an individual’s monthly income and expenses. The proposal protects assets and places an immediate stay of proceedings on current and future collections, court judgments, and garnishees. There is no penalty for paying a Consumer Proposal off early, and it is not uncommon to see debts reduced by half or even up to 80 percent in some cases.

Who can file a Consumer Proposal?

A Consumer Proposal may be filed by an individual who is bankrupt or insolvent and whose debts, excluding debts secured against the individual’s principal residence, do not exceed $250,000. Consumer Proposals must be filed through a Licensed Insolvency Trustee who will support you through the process.

What happens after filing a Consumer Proposal?

Upon filing the Consumer Proposal, a stay of proceedings comes into effect immediately and prevents unsecured creditors from seeking repayment of debt outside of the proposal process.

As the debtor, you begin making the agreed payments through your Licensed Insolvency Trustee over the agreed term. As part of the proposal, you must also attend two mandatory financial counselling sessions throughout the term as part of a requirement for completion.

What are your options if your income decreases after your Consumer Proposal has been accepted?

The first step is to reach out to your Licensed Insolvency Trustee to review your options. The earlier you reach out to your Trustee, the more time they will have to work with you to find a solution. The Bankruptcy and Insolvency Act permits you to defer a maximum of two payments. If your proposal falls three payments behind, it will be deemed annulled. When a Consumer Proposal is deemed annulled, it means it is no longer in force and your creditors can resume collection action.

You will have some choices on how to strategize around your decreased income.

• If you expect your income to increase in two months, you could choose to defer two month’s payments and then continue making your payments again. But at some point, you will need to catch up on the two missed payments.

• If you expect your income to decrease for longer than two months, you may choose to miss three payments and allow your proposal to default. Your creditors’ collection rights will return and you may need to consider Bankruptcy to deal with your debts.

• If you expect your income to decrease for longer than two months, but you feel you can manage a lower payment, there is the option of filing an amended Consumer Proposal.

Amendment to an existing Consumer Proposal

In extraordinary situations, an existing Consumer Proposal can be amended to a reduced monthly payment if there is a material change in your financial circumstances. If an amended Proposal is filed, the creditors get to vote on whether they agree to the amended Proposal or not. Your Licensed Insolvency Trustee will need to calculate and file your amended Consumer Proposal and you will need to provide documentation to allow your Trustee to verify the change in your financial situation.

Once your Trustee submits to your creditors, it will be up to them to accept the amended payment terms. If your creditors do accept the terms, you will be unable to return to the original Consumer Proposal. If your creditors do not accept the amended terms, your proposal is considered failed. When a proposal fails, your creditors reclaim their rights for the amount of your debts, less any amounts they may have already received from the Consumer Proposal payments so far.

You may look to filing a Bankruptcy to resolve these debts but another Consumer Proposal on these debts cannot be filed without court approval.

What are my options if my income increases after my Consumer Proposal has been accepted?

Once your proposal is accepted, your repayment terms are fixed for the life of the proposal. The monthly payment that is accepted will remain the same even if your income goes up. This is one of the big advantages of a Consumer Proposal over Bankruptcy. In Bankruptcy, if your income increases it can cause your monthly payment to increase and could even extend the length of your Bankruptcy.

However, once your Consumer Proposal has been accepted by your creditors, your income could increase, you could receive a bonus, you could win the lottery, or receive an inheritance — and there would be no required change to the terms of your proposal. Once accepted by your creditors and the court, your unsecured creditors are not entitled to any increases in your income or assets.

Reach out to your Licensed Insolvency Trustee

If you are considering a Consumer Proposal — or if you’re already in a proposal and find yourself having difficulty keeping up with the monthly payments — your first step is to meet with your Licensed Insolvency Trustee. Your Trustee will review your options to help you achieve a fresh start. Your financial circumstances can change during your proposal and you have support to help you navigate your way through the options on your way to full financial freedom.