109 – Life After Filing a Consumer Proposal

Wayne Kay 00:04
Life after filing a Consumer Proposal. That’s our discussion today for the Debt Matters podcast, where we help Canadians find solutions to their debts with Licensed Insolvency tTrustees from across Canada. 

I’m Wayne Kay, and today we’re going to discuss how Consumer Proposals work. What are your responsibilities? How will your life improve by actually filing one of these? Are there some negative things we need to be aware of? And what happens after the Consumer Proposal is finished? 

To walk us through all these steps, my guest today, Daniel Maksymchak from LCTaylor Licensed Insolvency Trustee in Winnipeg, Manitoba. 

Welcome back to the show, Daniel.

Daniel Maksymchak 00:48
Hi, Wayne. Thanks for having me back.

Wayne Kay 00:50
It’s an interesting discussion because I was thinking about this. A lot of people get comfortable being uncomfortable in their misery of debt.

Daniel Maksymchak 01:03
Yes, people don’t know what they don’t know, as the saying goes. So if they’ve been in a situation with debt and they’ve been under the same circumstances for a period of time, they might assume that that’s normal. That everyone’s facing those challenges and that there’s really nothing that can be done about it. And it’s just a fact of life that they have to deal with. 

That’s not the case in many instances. So what we try and do is to get the word out that there are options out there and you don’t have to be content and think that you’re going to be in the same situation for the rest of your life. You might as well reach out, see what options there are to not be burdened by this debt forever. 

That’s why there’s legislation that exists to basically rescue people from that, so that they can still have a high quality of life regardless of what circumstances they might have had earlier in life.

Wayne Kay 01:50
When we talk about filing that Consumer Proposal, what does that look like? How does that work?

Daniel Maksymchak 01:58
A Consumer Proposal is basically an offer to your creditors to settle your debts. So you have debt, you have a certain amount of debt and it’s becoming unmanageable for you to make the payments. You’re starting to question how long, if ever, you’re going to be able to pay it off. 

What a Consumer Proposal does is it allows you to go to your creditors with an offer that’s more sustainable for you. So instead of paying an amount that’s based on what you owe, a Consumer Proposal is more based on what you can afford. The creditors realize that you’re facing this financial difficulty and that you could potentially reach your breaking point, which is essentially Bankruptcy, legally. And the creditors in that case often get very little. 

So what a Consumer Proposal does is it allows you to offer the creditors an amount that is more than they’d get in a Bankruptcy, but is still a manageable payment for you to make. And it starts that discussion as to how you can settle this debt for an amount that allows both parties, yourself and the creditors, to move forward and move past this relationship that’s going to end badly.

Wayne Kay 02:59
Canadians are hurting financially. The stats are out that our debt is growing. Our household debt is astronomical. 

But the cost of living is so expensive right now that I’m sure there’s a lot of people who are kind of thinking, what are my options? They may be getting the phone calls already from the bill collectors. I’m going to assume most people get to that point before they make that phone call to an LIT.

Daniel Maksymchak 03:29
Yes, I think so. I think that’s the primary driver of what causes people to call LITs. They think they’re carrying on with life. They think everything’s going alright. But then the collectors aren’t happy just because you’re happy with the payments you’re able to make. The collectors aren’t happy.

They start calling you demanding larger payments. And exactly as you said, the cost of living being what it is, you’re stretched so tight that you can’t make an extra payment, but the creditors want more anyways. That’s usually what drives people to call LITs and say, okay, well, they’re demanding more than I can pay. What options do I have here?

Wayne Kay 04:03
And the option is a Consumer Proposal. Is there a way that you can kind of explain the numbers to us – just roughly. I know everyone is different, but make math easy. If they owe $10,000, this is not a – let’s put all the debt together in one big barrel and then pay that off. It’s something different than that.

Daniel Maksymchak 04:28
Yes, it can be. As I said earlier, it really comes down to what the creditors would get from you if you were forced to file for Bankruptcy. That’s a worst case scenario for you. It’s a worst case scenario for the creditors in terms of it’s going to be the least amount that they’re going to get back towards their debt. 

Basically what it is, is you’re putting all your cards on the table through an LIT saying, look, if I went bankrupt, I have this much in assets, I earn this much money per month. So you would get, according to the Bankruptcy legislation – let’s say the person owes $25,000 in a Bankruptcy, they would get $5,000.

So what you can do is if you go to the creditors and you offer a settlement that’s more than $5,000, mathematically, that’s attractive to the creditors because it’s more than they would get if you went bankrupt. If you can go and you can offer what you can afford to pay and it works out to more than they’d get in a Bankruptcy, then the creditors are interested in that because it helps to maximize their return to an amount that’s larger than what they would get in a Bankruptcy. 

It’s hard to give a hard number just if you owe $10,000. I’m not going to say every Consumer Proposal for $3,000 would work, because if you had a house with $50,000 of equity, of course the creditors aren’t going to take a small settlement when you have enough to pay off the debt. If you were to refinance your house, let’s say, right, or if you’re earning $10,000 a month, the creditors aren’t going to take a certain percentage of money towards payments because they know you can afford more.

So it comes down to how much you can afford to repay. And that’s the basis that the creditors use to evaluate whether the proposal that you’re offering is reasonable. A fair attempt to pay back what you can afford to pay back of the debt that you borrowed.

Wayne Kay 06:09
So when people file a Consumer Proposal, how does their life change?

Daniel Maksymchak 06:16
They’ve realized that there is really no other alternative, right? I mean, if you think of Bankruptcy as a last resort, a Consumer Proposal is essentially a second last resort. It’s a legislated option to allow people to settle their debts for an amount that they can afford as opposed to what they owe, so that they can move forward in life. 

But once they file the Consumer Proposal, the main responsibilities are just making the payments you’ve agreed to. So you’ve offered your creditors a payment for an agreed upon amount of money over – a Consumer Proposal can be up to five years. The creditors have accepted that offer.

Now you have a deal. The deal is if you pay the payments that you have agreed to make, at the end of those payments, the creditors will consider that full and final settlement of your debt and whatever’s left owing on that debt will be released. So in order to hold up your end of the deal, you have to make the payments that you promised or agreed to make. 

The way that the legislation is written is that if you miss three payments, so if at any time you’re three payments behind in a proposal, the proposal is in default and the deal is off.

So you’ve gone to this effort, you’ve negotiated a proposal, you’ve made the payments up until that point in time, and then you miss three payments, then the deal is off and you’re more or less back to square one.

Wayne Kay 07:27
Right.

Daniel Maksymchak 07:27
So when you go into a proposal, the most important responsibility is to make the payments you’ve agreed to. There’s also a requirement.

The federal government requires that anyone who files a Consumer Proposal attend two financial counseling sessions where curriculum that’s set by the government is covered. And it’s all done in an idea to improve your financial knowledge going forward, so that if there was anything avoidable in the situation that caused you to have to file the Consumer Proposal, that it can be avoided down the road so that you don’t end up having to file a second Consumer Proposal.

Wayne Kay 08:00
Hypothetically, if you are married and going through this together – are you tied to each other when it comes to something like this, a Consumer Proposal?

Daniel Maksymchak 08:09
No, it doesn’t have to be that way. Legally, people have their own debts and they have their own income, and that’s how the legislation treats it. 

But there are times where people co sign a debt for each other. And in those cases, if there’s a lot of joint debt, it is possible to file what’s called a joint Consumer Proposal, where two people file a proposal together and agree jointly to pay a certain amount of money back towards the debts. But that’s not a requirement. Someone can file a Consumer Proposal on their own.

And what that’ll do. it will settle their responsibility for those debts. So if your spouse or someone else did co sign it, the creditor can still pursue that co signer on their own. But you yourself have settled your responsibility for that debt for a certain amount of time, a certain amount of money.

Wayne Kay 08:52
I’m thinking of my situation. I think the credit cards well, we both have the same credit cards with the same kind of accounts, but I guess one would be the primary. So the primary would be responsible for the repayment as opposed to the secondary card.

Daniel Maksymchak 09:11
These are two cards that bill onto the same bill.

Wayne Kay 09:14
Yes.

Daniel Maksymchak 09:15
So in those cases, it varies from card to card. But a lot of credit cards, from my understanding, have it written in the agreement for the secondary card holder that by using that card, you’re accepting responsibility for the account.

So if in your case, yourself and the secondary card holder were both charging the card, had both used the card and there was a bill, then you decided to go ahead to file a Consumer Proposal. What the creditors got from the proposal would go against the debts, but the remainder would still be expected to be paid by the secondary cardholder.

Wayne Kay 09:50
Okay. These are the things that you go through when people do the initial consultation with you, when they reach out. I mean, they’re tired of being stressed.

The physical terror that you feel when you’re in this situation, I don’t know if it’s terror, but you’re feeling pretty bad, you’re not sleeping often. There’s a lot of stress involved, a lot of times that goes away with that initial consultation.

Daniel Maksymchak 10:20
Yes, it sure does. I mean, that’s one of the most common things we hear as we’re wrapping up the initial consultation and people are either preparing to file their proposal or they’re going home to talk about it with their spouse or however they want to proceed. 

As that conversation is winding up, the most common thing that we hear is, well, that’s a relief. I feel a lot better leaving than I did coming in, because I know that I have options and that I’m looking at a path that can get me out of this situation that I thought maybe I’d never get out of, right?

Wayne Kay 10:48
Yes, absolutely. Are there some negative aspects to filing a Consumer Proposal?

Daniel Maksymchak 10:53
There are. Your credit report is based on the records of repayment that you have with the various people that you borrowed money from over your life.
Because you’re settling your debt for an amount that’s usually not the full amount that you owe, and it doesn’t include the regular accumulation of interest and that sort of thing. 

Those creditors that you’re offering the proposal to are going to report to the credit bureaus. The credit reports that they’ve been entered into this Consumer Proposal and that they’ve had to accept an amount that doesn’t include full repayment with interest. So that goes on your credit score. And that is kind of a warning or a flag to other people who are going to review your credit score when they’re deciding whether or not to lend you money.

They’re going to see that, well, this bank lent the money and they have been entered into the Consumer Proposal and that’s a negative thing for their credit score at that point in time. But in the long run, if you weren’t able to pay those debts, then you’re looking at things like defaults collections, those kinds of things that could stay on for a longer period of time. 

Whereas a Consumer Proposal, it stays on your credit report for six years after it’s signed or three years after it’s paid out, whichever is sooner. So at least that kind of draws a line under that unfortunate situation in your life and you can move forward without having that potentially clinging onto your credit score for a long time, depending on what happens with that debt.

Wayne Kay 12:15
So while you’re in it, your credit score is not going to be very good, but you can rebuild it. Correct?

Daniel Maksymchak 12:20
Yes. As soon as the proposal is filed, that kind of draws a line under those debts that you had. And then going forward, you can start even while you’re still in the proposal, you can start to rebuild your credit and put some positive things on it to offset some of the negative things that are on there because you filed the proposal. And then eventually, as I said, the proposal will drop off the consumer credit report and then hopefully all that’s left will be the positive things that you’ve done to rebuild your credit post filing.

Wayne Kay 12:46
When you file that Consumer Proposal, at that point, are you still able to apply for any other credit, or no?

Daniel Maksymchak 12:56
There’s nothing barring you from applying. And then, of course, the people evaluating you for that credit will see that you’re in the proposal and take that into account when deciding whether or not to lend you the money and at what rate. 

There are products out there that exist for people who are in Consumer Proposals. You can get a secured credit card.

There are certain lenders who will, say, finance a vehicle for you even if you’re in a Consumer Proposal. But it’s going to be at a higher rate of interest in the case of the vehicle loan because they’re going to see you at least immediately as a higher risk. The secured credit card lenders are going to want a deposit where you give them, say, $1,000 if you have it. They give you a card with a $1,000 credit limit, and you can charge that card up to $1,000 and pay the bill off every month, which reports to the credit bureau and improves your credit score. But it’s done at no risk to the lender because they have your deposit, and if you don’t pay it, they just keep their deposit and move on. That’s why they’re willing to do it even if you’re still in the proposal.

Wayne Kay 13:54
Okay, but these are the things that you tackled probably during that financial education part of the proposal.

Daniel Maksymchak 14:01
Yes, exactly. A significant component of the counseling sessions are how to rebuild your credit post filing so that you can improve and thrive financially going forward.

Wayne Kay 14:13
So after the proposal is finished, what are some of the long lasting impacts? Because I’m sure a lot of people stress about that.

Daniel Maksymchak 14:22
Yes, probably after the proposal is done, you’ve paid what you were required to pay, there’s that matter of the Consumer Proposal staying on your credit report for a bit longer after that, as I said. But probably the longest lasting impact is, you’re debt free now.

Wayne Kay 14:37
Right.

Daniel Maksymchak 14:37
So your debt has been dealt with through that proposal. You’ve been making a payment of a certain amount each month, and then your time’s up. You’ve paid out what’s required in the proposal. And now that payment that you were paying into the proposal is now money that you can use for something else.

Wayne Kay 14:53
Right.

Daniel Maksymchak 14:53
You can use it for savings. You can use it for investing, retirement, whatever you want, basically, because you’re not paying it into the proposal anymore. So you go from having, at this time of filing the proposal, a lot of debt, significant monthly commitments. You file the proposal for usually a lesser amount than you’re paying each month than you were on the initial debt.

And then eventually, once the proposal is paid out, that payment is zero. So cash flow wise, it usually frees up a lot of excess money each month for most people, compared to what they were dealing with before. That allows them to be much stronger financially going forward.

Wayne Kay 15:29
And I would imagine that feeling when you get out of debt is the greatest feeling in the world.

Daniel Maksymchak 15:35
Yes. That’s why people are usually so thrilled. The first step is to get that proposal negotiated, and then once they have that deal in place, they know exactly what they’ve got to do to get out of that debt. 

They have to make X number of payments for a certain number of months or years, and once that payment is done, they’re done. So there’s no worry about future interest rates changing, there’s no fear of the banks changing the terms later on, as long as you make the payments that you’ve agreed to. Once that final payment is done, your unsecured debt is going to be dealt with at that point.

Wayne Kay 16:05
Right. Final words of advice here regarding these proposals?

Daniel Maksymchak 16:10
Yes, I think to take it back to what we talked about at the beginning, where people think that this situation is normal, there’s nothing that they can do about it. 

My word of advice would be if you think that the situation is bad and there’s no escape, chances are that’s not normal. And there are solutions that you can seek out that will help with that situation. So definitely reach out to an LIT, find out what your options are. It doesn’t always involve a Consumer Proposal or a Bankruptcy.

In a lot of cases, we advise that there are other options that can be explored before it comes to that. And the sooner that you catch those things, the more options will be on the table for you. And the earlier you look at it, the better hope you are of recovering from that with the minimal impact on your future.

Wayne Kay 16:55
Yes, absolutely terrific advice. Always a pleasure having you on, Daniel. Have a great one. Thanks very much.

Daniel Maksymchak 17:00
You as well. Thank you.

Wayne Kay 17:01
My guest, Daniel Maksymchak. You can learn more or schedule that free consultation with LCTaylor Licensed Insolvency Trustee by going to LCTaylor.com. 

And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.