Your consumer proposal can have a fairy tale ending

2022-04-06   minute read

Augustine Kwok

Consumer Proposal

Debt Solutions

Let’s say you’re part of a family where both you and your spouse are employed in well paid, professional jobs. Net annual household income is approximately $120,000 or approximately $10,000 per month. The family — you, your spouse, and your 2 children — live well but seem to be just scraping by.

spouses signing documents

The monthly rent is approximately $2,500 per month, you and your spouse drive 2 new vehicles where the interest rates are very close to 0 percent but the financing costs are approximately $350 every 2 weeks per vehicle, or approximately $758.33 per month per vehicle. The new vehicles were you and your spouse’s self-reward for completing the education and training required to obtain your professional jobs!

However, you and your spouse are also dealing with debts, approximately $100,000 in unsecured (credit cards and lines of credit) debt. The reason these debts were incurred was because in order to be educated/trained for your professional jobs, one spouse had to take time off from working so that he/she could become qualified. As a result, the household income was reduced, and the credit card and lines of credit accounts were used to meet the monthly household expenses. Also, because this was a long process, over 3-4 years, combined between you and your spouse, the credit facilities were maxed out. The cost to service (make minimum payments) the debts cost approximately $1,400 per month.

Despite all the income you and spouse are earning, you are not making any progress in lowering your debt obligations. You are finding that every dollar earned was used to pay for living expenses, food, cell phone bills, car insurance, the annual family vacation to Florida, and to make the minimum monthly payments on the debts. Despite you and your spouse’s best efforts, you are not able to pay much more than the minimum payments and the balances outstanding have remained the same on the credit cards and lines of credit.

You and your spouse both wish to some day own a home, but you know that the current situation is making saving for a down payment impossible and you both know that it will be very difficult to be eligible for a mortgage to purchase a home when you have debts and no money for a down payment. You decide that a consolidation loan from a bank will help with the situation, as it may help you on a path to being debt free.

After a few visits to various banks, both you and your spouse are tired and discouraged because while the banks are very happy to extend the consolidation loan, the payment terms are approximately $2,100 per month for five years! You are already not able to save any money to pay down your debt as is. It’s not likely that you and your spouse can find another $700 each month to be able to afford the consolidation loan.

While doing research online, you come across how a Licensed Insolvency Trustee (LIT) might be able to help with regards to your financial situation. You are quite intimidated by the complexity of the consumer proposal or the bankruptcy but knowing that the initial consultation is obligation-free, confidential, and free of charge, you decide to make an appointment with MNP Ltd.

At the appointment, the LIT takes the time to listen to you and your spouse’s financial situation, and what happened to cause you to incur the debt. The LIT then asks many questions to obtain a full picture of your current financial situation. Next, the Trustee, in a fair and non-judgemental manner, explains the various options available to you and your spouse, how those options will work and the costs and benefits of each option.

The options discussed are quite comprehensive; make no changes, and keep doing what you’re currently doing (which you haven’t found as a viable way to pay down the debt), a commercial solution such as a consolidation loan (which you already know you cannot afford), consumer proposal, and bankruptcy. Having the LIT explain the costs and benefits of all the options is very helpful as the LIT, a third party, was able to confirm your observations.

The LIT suggests that the consumer proposal is probably the best method to address the current debt situation and proposes a term of $1,000 per month for 60 months for a total of $60,000 — a fair deal. It’s a fair deal to you because it’s made of monthly payments that you and your spouse can afford. And it’s a fair deal to the creditors; you and your spouse are offering the creditors more money than what they will receive in a hypothetical bankruptcy.

While this is very attractive because of the cash-flow improvement, you are reducing your debt level by 50 percent (and the interests are frozen!), the negative impact on our credit history, however, stopped you from making the decision to file the consumer proposal on the spot. You’re afraid that you might never be eligible for a mortgage with the consumer proposal on your credit record.

In sending you home to consider further, the LIT provides a booklet published by the Office of the Superintendent of Bankruptcy which has information regarding consumer proposals and bankruptcy. It helps reinforce the information provided by the LIT. Also, the LIT provides the contact information to a Mortgage Brokerage so that you can independently confirm that while it will take time to rebuild your credit, successfully completing a consumer proposal will not make you ineligible for a mortgage.

While you and your spouse are pondering whether to go ahead with a consumer proposal, the pros (a fixed monthly payment and legal, interest-free settlement of the debt), and the cons (impact on credit history and lack of access to credit facilities if the need arises during the consumer proposal due to unexpected expenses) weighed heavily on your mind. You and your spouse decide to wait and see if there are other solutions which might become available.

As the months pass, it grows increasingly frustrating despite you and your family’s best efforts. Each month, even though you are making payments greater than the minimum payments required by the credit facilities, you often have to use the same credit facilities to pay for regular living expenses. Thus, you are not making any progress in paying down the amounts outstanding. It grows even more frustrating when you think that if you and your spouse were in a consumer proposal, the monthly payments you’re making would be paid into the consumer proposal and it would serve a purpose as opposed to making payments to the creditors to pay for interest but not the principal of the debt.

After much consideration and in hindsight, much delay, you and your spouse decide to go ahead and start the consumer proposal with MNP Ltd.

During the appointment to sign the documents, the LIT reviews what you and your spouse need to do to complete the consumer proposal successfully — how, if possible, you can make larger payments thus accelerating the completion date of the consumer proposal. Also, that you cannot fall 3 months in arrears with the payments as that will cause the consumer proposal to be annulled.

The consumer proposal was deemed acceptable by the creditors, without a meeting of creditors required to be called, and was approved by the court. Such a relief!

As part of the consumer proposal, there are 2 mandatory credit counselling sessions. During these sessions, you and your spouse review the financial education modules provided by the Office of the Superintendent of Bankruptcy and you both sit down with a Qualified Insolvency Counsellor. The material covered is very practical, such as how to track expenses and budgeting, setting financial goals, even how a credit score is constituted.

In applying what you learn, you and your spouse diligently track all expenses and make regular check ups to ensure the spending is compliant with those expected in the budget. You even took the opportunity to teach your children how to develop good financial habits. Over time, you and your spouse are able to save up an emergency fund and make larger monthly payments towards the consumer proposal in an effort to successfully complete the proposal before the 60 month term.

Now that you and your spouse are making solid progress in the consumer proposal, you can take some time to dream about being able to own a home one day. In fact, you have already started to put a plan together where once the consumer proposal is successfully completed, you will take steps to rebuild your credit records, and the money that was going toward the consumer proposal would be set aside so save up funds for a down payment. It all feels so realistic and feasible!

Are you in a similar situation as this family was at the beginning of the blog, struggling to making the minimum payments or struggling to whittle down the principal outstanding, yet you dream of owning a home one day, or have other dreams which seem very far away given your current financial situation? Working with an LIT can help you put together a plan which will get you out of debt so that you can, one day, fulfill the dreams.

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