When Does a Full Payout Proposal Make Sense?

2022-08-10   minute read

Caryl Newbery-Mitchell

Debt Solutions

When you take on debt, the ideal scenario is always to pay it off in full, one way or another. Sometimes that goal becomes out of reach, which is why alternatives like bankruptcy and consumer proposals exist.

While some forms of consumer proposals require you to pay back only part of your outstanding debts, this is not the case with all of them.

Downtown Toronto city skyline at twilight in Ontario Canada

What is a Full Payout Proposal?

A full payout proposal requires the full amount of your debt to be paid, plus interest. This means your debt will not be settled for a lesser amount as usually would happen in a proposal, but instead allows you to work out an agreement with your creditors, through a Licensed Insolvency Trustee (LIT). If approved, this agreement would stop any collection activities, allow you to keep your home, and to make one monthly payment to deal with your debt.

The terms of the proposal usually require a monthly payment and a “balloon payment” that must be paid prior to the completion of the proposal. If you own real property, most full payout proposals will also require that if your property is sold before the proposal is completed, that the proceeds of sale must be used to pay off the proposal. Your LIT may also put a caution or other notification on title to the property to ensure the proceeds of sale are paid to the proposal.

A full payout proposal is usually only considered once all other avenues such as refinancing, help from friends/family, consolidation loans, etc. have been investigated.

When does it make sense to use a full payout proposal.

If you own assets that are worth more than your liabilities, but you’re still insolvent (meaning you are generally not able to make your debt payments as they come due), this may be an option worth considering.

Take the GTA for example, where our firm’s LITs have seen many examples where a full payout proposal was the best solution for an individual. The most common example is a person who owns a piece of real estate in the area. The equity in the property (which is the value of the house less the mortgages registered against it) is more than the amount of unsecured debt they have. This is not uncommon in the GTA where we have seen drastic increases in the value of homes.

However, due to low income, loss of employment, or other factors, they are unable to service their unsecured debts and/or are unable to refinance their property to pay off their unsecured debts. One might think the easiest solution would be to simply sell their property and pay off all of their debts instantly. But for several different reasons that may not be practical.

For instance, they still need a place to live, and sometimes the monthly mortgage payment is less than rent would be. Or perhaps the house is specially suited to the special needs of an owner with disabilities. Or they just want a few more years in the property before selling. In these types of circumstances, a full payout proposal may offer the most practical solution to their financial difficulty.

How We Can Help

Your debt solution is built with your unique situation in mind. The trained professionals at MNP Debt will always carefully review your circumstances to make sure you land on the best option. Whether you’re in the GTA or anywhere across Canada, our local advisors are only a call away.

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