77 – Consumer Proposals: Why Is It a Good Option for Some Debtors?

Wayne Kay 00:04
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay, and in today’s show we’re going to talk about Consumer Proposals, why it’s a good option for some debtors. What happens if you get a promotion when in a Consumer Proposal or your salary increases maybe $500 a month? What if you have extra money in a month and can afford to pay some of those extra funds towards the proposal? Is that allowed?

What about income tax debt? Is that included in the proposal? And what does it take to get a proposal approved by your creditors? And finally, we’re going to talk about inheritance of money or property while in a Consumer Proposal. 

My guest today, Glenn Steiner from Allan Marshall & Associates Licensed Insolvency Trustee with offices in Alberta, New Brunswick, Nova Scotia and Prince Edward Island. Glenn, thank you very much for being on the show today.

Glenn Steiner 01:01
Thanks for having me. Wayne.

Wayne Kay 01:03
This is the first time you and I are having a chit chat and I’m glad to have you here. And you’re in Edmonton today.

Glenn Steiner 01:08
That is correct.

Wayne Kay 01:09
So why don’t we dive into this. I’m looking forward to learning a lot more about Consumer Proposals. First off, let’s talk about what is a Consumer Proposal.

Glenn Steiner 01:19
Well, a Consumer Proposal is an offer to your creditors. It’s a voluntary program where the debtor says, I don’t want to do a Bankruptcy, I would like to do some sort of settlement. I can’t afford to pay all my debt, but I’d like to pay what I can afford based on my circumstances. 

So the creditors get an offer and once the offer is made, a person might owe $50,000 in total credit card debt, for example, for total debt, and the debtor can only afford a total of $500 a month. And so he offers $500 a month. The maximum duration for Consumer Proposal is 60 months or five years.

And so the debtor might offer $30,000 on the $50,000 that he owes. The creditors then have 45 days to consider that proposal. And in those 45 days, you get what they call a Stay of Proceedings. So if you have a wage garnishment that’s being threatened or maybe you’re even getting a wage garnishment happening, that will all stop. And the creditors get an opportunity to voice their opinion through voting.

After the voting is completed, you only need to have a majority of the creditors voting in favor, not unanimous consent. So if you had $50,000 of creditors and you had 26,000 that were voting in favour of your $500 proposal, your proposal would already be accepted because the majority of the creditors accepted your proposal.

Wayne Kay 03:01
Okay. So the main thing is though, you don’t have to pay all of it back and the creditor is saying, well, I’d rather get some rather than none.

Glenn Steiner 03:12
Absolutely, Wayne. The creditor is always looking to see what’s in their best interest and in a Bankruptcy, there might only be an offer of $0.10 on the dollar. We’re in a proposal, it might be $0.35 on the dollar – a lot better than a Bankruptcy. So usually creditors widely accept them.

Wayne Kay 03:35
Do you do more proposals, Consumer Proposals, than Bankruptcies?

Glenn Steiner 03:40
Absolutely. In Alberta, we certainly do.

Wayne Kay 03:43
They’ve been around for a while now. Is there another option to help people who get into some trouble?

Glenn Steiner 03:48
Yes, they’ve been around for many years. I think the mid 90s they’ve been around.

Wayne Kay 03:53
Okay. And so all of a sudden that person now has to pay. So their debt – is it wiped out at that point? The $50,000 is now gone?

Now what they have is a $500 a month debt, which equals $6,000. So we’re talking $30,000 at the end of five years. Is there interest on that or is that as the whole, that’s what you get?

Glenn Steiner 04:18
Oh, that’s an excellent question. The nice thing about a Consumer Proposal is as soon as you file a Consumer Proposal, you get that Stay of Proceeding, all interest stops and your total outlay.

If you offer $500 a month for 60 months and the creditors accept it, that’s all you will pay. At the end of that five years, when you have fully paid that $30,000, as a Licensed Insolvency Trustee, we would issue you a document called Certificate of Full Performance and that would prove that you’ve completed your obligation and the other $20,000 debt that didn’t get paid will be wiped out. You will now be debt free after you have that Certificate of Full Performance in your hands.

Wayne Kay 05:08
So this is really a great option because if they were in this financial situation where they had $50,000 of debt and they were trying to tackle it, we know the interest payments and everything else just keeps growing and it makes it really almost unconquerable for many families. So this is really a great option.

Now let’s look at this. You decide on the $500 a month and we’re going to use that because it’s really easy with math. But you continue working, everything still stays the same, right. You’re still making your house payments, your car payments, all the things that you may have, and you’re putting $500 per month in. 

But all of a sudden you end up getting a promotion. And so now you’re making more money. Can you put more money towards it or what happens in that case?

Glenn Steiner 05:55
Oh, excellent question. So how that would work is if you did get a promotion and you have the ability to pay more off. We encourage that.

So let’s suppose an individual doubles his salary and he can afford to pay $1,000 a month towards his proposal. Every time they pay extra money, it’s taking literally the $30,000 that you’re offering. It’s like an interest free loan, in a sense. And if you pay $1,000 a month, your principal balance at that time will come down by that thousand dollars.

And so if you do get a promotion, unlike a Bankruptcy – Bankruptcy is the more money you make, the more you have to pay back to your creditors in a proposal. Your proposal is fixed. Creditors cannot come back later on and say, well, hold on here, you’re making more money now, we want you to pay more money now. The proposal has been cemented and the proposal will stay the same amount, $500 for the duration, whether the guy gets double the salary or triple the salary.

But on the same token, if the debtor took a reduction in hours, then also he has to pay the full $500. So if you can afford to pay $1,000 and you did that for say, six months, you just paid $6,000 over that six months, and you really only had to pay $3,000 and therefore you would have a bunch of leeway. 

You could take a payment holiday and not miss any payments. Right now you’re going to be six months ahead of the schedule and the individual, if they missed a couple of payments, it would just go against your surplus, that’s all.

Wayne Kay 07:48
Okay, so you’re just basically looking at paying this off as soon as you can. So if some extra money does come in, you can put an extra couple of $100 in if you so want, and there’s no penalties or anything like that.

Glenn Steiner 08:02
That’s correct.

Wayne Kay 08:04
What about tax debt? Is that allowed in Consumer Proposals? Because we’ve seen a lot of strange things happen over the last three years and there’s been some new things that have happened in taxes where people are getting hit with more that they didn’t realize –  all of a sudden they were on CERB payments and just couldn’t get caught up. And we know how life, how life gets in the way.

So what about tax debt? Is that allowed to be within that Consumer Proposal?

Glenn Steiner 08:34
A tax debt is a debt that is distinguishable upon the successful completion of a proposal. Only debts that don’t get wiped out in a Consumer Proposal are debts found under Section 178 of the Bankruptcy Insolvency Act. So things like child support, alimony, student loan debt if you haven’t been out of school for seven years.

But tax debt, generally speaking, yes, it gets wiped out in your Bankruptcy. And we always want to talk about secured debt as well for the listeners that have secured debt in a proposal. 

If you have a secured debt, your proposal is generally made to the unsecured creditors. So you might have in my example earlier, you have $50,000 of credit card debt. Well, you might have had a $20,000 secured debt to bank ABC, and as long as you keep making the payments on your card to ABC, it’s business as usual.

But if you don’t make the payments on the card to ABC, they can come and seize that card because it’s a security agreement between you and your creditors and you didn’t live up to your end of the bargain by making the payment. So I just wanted to make that clear.

Wayne Kay 09:55
So cars and debt like that are not allowed into the Consumer Proposal?

Glenn Steiner 10:02
Well, they can be. Let’s suppose you have a situation where the person owes $50,000 in credit card debt and they have a $20,000 vehicle payment but the spouse lost their job and this debt is on me, for example.

So I want to file a Consumer Proposal. And I was looking at the whole family picture and I said, you know what, I can’t afford this car anymore. If I want to get rid of that car in the proposal, I can. So I simply write it into the terms and conditions of the proposal that we’re going to get rid of the car, we’re going to stop making the payments on the car. The secured creditor can come and take it.

And if that secured creditor was owed $20,000 and they end up selling that car for $14,000, there’s a $6,000 shortfall in the sale of that car. Bank ABC could not come back and sue this person for the $6,000 shortfall because that would be covered in the proposal.

Wayne Kay 11:11
Got you. And of course, I think for more specifics, just in case somebody does have questions, they can always contact you for more information. We’re going to give that at the end of this podcast for sure.

Now something I’d like to know as well is how do you go about getting a Consumer Proposal approved? What does that look like for that person who’s coming in, they owe $50,000. What do you do?

Glenn Steiner 11:40
Well, what I do is I sit down with them and go over all of their income, all of their assets and all of their liabilities. The golden rule of a Consumer Proposal is that you have to offer more to your creditors than they would get in a Bankruptcy.

So for example, there are certain assets that are exempt if you go and do a Bankruptcy and there are certain assets that are fair game for creditors. If a person doesn’t have any luxury items like a travel trailer or snowmobile or ATV, all they have is their car that’s worth $5,000 because that’s considered exempt. In Alberta, you can keep a car to the value of $5,000. 

So you don’t have any assets, but you have fairly good income. We do a calculation based on what you would have to pay in a Bankruptcy. And as I said, the golden rule in a proposal is it has to be better than a Bankruptcy.

Wayne Kay 12:42
And so you then fill out the forms and you send it out to each of the creditors individually?

Glenn Steiner 12:48
Yes. So what we do is what they call a creditors package and we send out to all of the creditors who the individual has identified. We would send notice that the person has filed a Consumer Proposal.

They’re offering $500 a month for 60 months a total of $30,000 on the $50,000 debt. Creditors then have the 45 days they file with us what they call a proof of claim. A creditor has to prove to me that you indeed are owing this money to that creditor. We then admit the claim they have a boat and they get a dollar of boats for each dollar they are owed.

Wayne Kay 13:28
Okay, got you. It’s interesting that they have to prove that they are owed the money.

Glenn Steiner 13:34
Exactly, yes.

Wayne Kay 13:36
Does it ever happen that they can’t?

Glenn Steiner 13:40
You know, there have been occasions where they’ve totally lost the file. They can’t file the claim, and because they’ve lost and they haven’t been able to prove their claim to me, they do not participate in receiving any of that $30,000 that comes to the creditors at the end of the day.

Wayne Kay 13:57
Wow, that would be an awkward conversation for whoever misplaced that paperwork, wouldn’t it?

Glenn Steiner 14:03
Yes, that’s for sure.

Wayne Kay 14:05
Here’s another one. What if all of a sudden you end up inheriting some money or some property while you’re in a Consumer Proposal? Can you just pay the whole thing off in one shot?

Glenn Steiner 14:19
Absolutely. So in a Consumer Proposal, there is a mandatory requirement that you do two financial counseling sessions. And the rules are different in a Consumer Proposal versus a Bankruptcy. If somebody inherits money while they’re in a Bankruptcy or inherits a car or something, that has to go to the trustee in Bankruptcy. 

But in a proposal, if you inherit 10,000 $20,000 from Aunt Molly because she passed away, that’s your money. The rules are different in a Consumer Proposal. And yes, Wayne, you could just pay that proposal off and you’re now debt free.

Wayne Kay 14:58
And then that’s when you fill out that certificate.

Glenn Steiner 15:02
That’s right. We fill out that Certificate of Full Performance, which then gets sent to the debtor.

We advise all of the creditors that the proposal has been fully performed. We give them a full accounting at the end of the administration that the debtor is paid, the proposal off. It’s $30,000, it’s entirely and creditors get a portion of their debt. The bigger the piece of pie that they had in the debt, the more money they will get from us in the Consumer Proposal, what we call dividends.

Wayne Kay 15:32
Okay. And then you said there’s two counseling sessions that go along with these. Are you offering advice at that point on how not to get into this situation again, or what does that look like? Briefly?

Glenn Steiner 15:46
What a great question. That’s exactly what we’re trying to do is provide some financial education.

Some people have unfortunately, in schools, we don’t teach young people enough about money and credit. And credit is such a vicious cycle. If you ever get into payday loans and those kinds of things, you have crazy interest rates. 

What we talk about in the financial counseling sessions is how to budget the importance of tracking your expenses. I don’t know how many times in my life as a Licensed Insolvency Trustee. I’ll hear people say, I have no idea where all my money went, but the month sure came up quick and I’m broke. Right?

Wayne Kay 16:29
Yes. That’s a common thing that we hear on the show all the time. And that’s the thing you’ve got to start tracking is where is every dollar going?

And it will actually surprise you oftentimes on how you can start putting that money back into your pocket instead of in some of these strange places that we, for some reason, spend money.

 Glenn, this has been great, wonderful information. Any final words here regarding Consumer Proposals?

Glenn Steiner 16:59
I think Consumer Proposals are a great option for individuals. It’s not for everybody.

It’s for people who do have a higher income. But I’ve seen people do a Consumer Proposal and they only made $2,000. It really comes down to what is your desire? Do you really want to avoid a Bankruptcy? It’s a good option.

And if people are not sure if that’s a good fit, we literally go through the calculations. Here’s what you would pay if you did a Bankruptcy. Here’s what you can offer your creditors that would be reasonable and hopefully you get a deal and you don’t have to pay back your creditors in full.

Wayne Kay 17:41
And the best part is it can be a free consultation through the website. Wecanhelp.ca.

Glen, a pleasure. I’ll have you back on the show for sure and we’ll talk more.

Glenn Steiner 17:53
Okay, sounds good. Thanks a lot for today.

Wayne Kay 17:55
Well, thanks again to my guest, Glenn Steiner. If you want to learn more or schedule a free consultation with Allan Marshall & Associates Licensed Insolvency Trustee, you can go to www.wecanhelp.ca. 

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