What do I do if my income changes after filing a Consumer Proposal?

A Consumer Proposal can be a good alternative to Bankruptcy for people struggling with overwhelming debt. Consumer Proposals require some repayment but won’t impact your credit rating as much as a Bankruptcy and will also allow you to keep more of your assets. But if your income increases or decreases, 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. 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 and places an immediate stay of proceedings on current and future collections, court judgements, and wage garnishes. 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 (LIT) 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 that prevents unsecured creditors from seeking repayment of debt outside of the proposal process.

As the debtor, you begin making the agreed payments through your LIT over the agreed term. As part of the requirement for completing the proposal, you must also attend two mandatory financial counselling sessions throughout the term.

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

The first step is to reach out to your LIT to review your options. The earlier you reach out, the more time they will have to work on a solution.

The Bankruptcy and Insolvency Act allows 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 do have some choices when it comes to what to do next about your decreased income:

• If you expect your income to increase in two months, you could choose to defer payments for two months and then continue making your payments. You will, however, need to catch up on those two missed payments.
• If you expect your income to decrease for more 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 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 if filed, the creditors get to vote on whether they agree with the proposed changes or not. Your LIT will need to calculate and file the amended proposal, and you will need to give them documentation to verify the change in your financial situation.

Once your LIT 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. If that happens, your creditors reclaim their rights to your debts, less any amounts they may have already received from your payments so far.

Another Consumer Proposal on these debts cannot be filed without court approval. In this case, you may want to ask your LIT about filing Bankruptcy instead. 

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 biggest 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, there will 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 a Licensed Insolvency Trustee

If you are considering a Consumer Proposal – or if you’re already in a proposal and find yourself having difficulties keeping up with the monthly payments – your first step if you meet with your LIT. Your trustee will review your options and help you find the best path forward to achieve your fresh financial start.

Your circumstances can change during your proposal, and you have support to navigate your way through the options on your way to full financial freedom.