87 – Can You Cancel a Consumer Proposal?

Wayne Kay 00:00
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. Coming up in today’s show, can you cancel a Consumer Proposal? We’re going to discuss what a Consumer Proposal is, who can use one, and how it actually works. What are the voting times and the thresholds to actually pass a proposal? What does that look like? What if the creditors disagree with what you’re actually proposing? And what’s the difference between a withdrawal and an annulment when it comes to a Consumer Proposal? 

My guest today is Matthew Fader from Allan Marshall & Associates Licensed Insolvency Trustee with offices in Alberta, New Brunswick, Nova Scotia, Prince Edward Island and BC. Matt, thanks for being here on the show.

Matthew Fader 00:57
My pleasure, Wayne. Happy to be here.

Wayne Kay 00:59
Well, we’re going to be talking about the Consumer Proposals and canceling a Consumer Proposal. Why would anybody cancel a Consumer Proposal?

Matthew Fader 01:08
That’s a fairly good question, Wayne, in some respects. I guess running the assumption that people understand what a proposal is. But just so that you know, a proposal is a settlement offer made to your unsecured creditors administered by a Licensed Insolvency Trustee, such as somebody like myself or a qualified designate from the office of Superintendent Bankruptcy. 

It’s a formalized restructuring of debt, ultimately is how it works. So the reason why somebody would pull one back or would withdraw one, it could be based on the nature of debt. 

I’ve certainly run into it before where we found out, oh, no, there was a joint debtor on there, and as a result of that, it’s going to be survival against somebody’s mother or something like that who co-signed on the debt with them. I’ve had proposals sort of withdrawn or canceled because of that. 

I’ve also used them most recently – we did a proposal to the guy owed CRA a bunch of money. So we got the stay of proceedings into effect to protect him, but he hadn’t filed his income taxes in a few years. So we get the proposal in place, but then we use the time frame of the voting period of the proposal to get his taxes filed. 

In the filing of the income taxes, I think the amount that CRA had filed for GST went from like $12,000 down to like $900 because there were credits and things like that that he had that he was able to offset. For somebody like that, withdrawing a proposal makes sense.

Wayne Kay 03:02
And I just kind of wanted to start with because that’s the title of the show is Can You Cancel a Consumer Proposal? I wanted to know why. So let’s dive more deep into this because it actually sounds like it’s quite a complex way of doing things. First off, you kind of mentioned Consumer Proposal – you can’t pay any of the debts. Things are looking bad. It’s different from a Bankruptcy. A Consumer Proposal, what’s the simplest way of explaining it?

Matthew Fader 03:30
Like I said, it is a formalized debt settlement. It’s typically done in light of what happens when somebody would file an assignment in Bankruptcy. What myself and my wonderful proposal team would do is we would pretty much generate or craft an offer based on the debtor situation.

It’s very straightforward. If you do the math and you say, okay, if this person is going to file an assignment in Bankruptcy and they’re going to pay 15 grand into the Bankruptcy based on fees or assets or whatever. Then you go forward to the creditors and you say, well, rather than that, how about we do this proposal where I’ll pay 24 grand instead of the 15? So it then becomes a settlement offer. Oh, rather than paying $500 a month for 21 months under the Bankruptcy, it would be more than that because that would typically only be about 10 grand. But I’ll pay like $200 a month under a proposal.

So it becomes a formalized debt restructuring, a good alternative to a Bankruptcy because it does anchor the payments. Once the creditors have accepted it, it’s on the credit for three years after they’re done. 

Proposal has to be done within five years. So we typically make our offers over five years. But it becomes a very stable way with a good degree of predictability as far as what the monthly obligation is going to be for a prolonged period of time.

And it’s a good way to really just to clean up the debt. They’re actually probably about 85% to 90% of my filings currently are proposals because it is very much an easier way to sort of settle things up.

Wayne Kay 05:14
Why would a creditor say yes? I mean, they’re owed $10,000 and then you write up a proposal saying, okay, we’re going to give you $4,000, why do they say yes?

Matthew Fader 05:28
Typically because the Bankruptcy would give them less. So when you look and you say one of the easier numbers to work with is $15,000 and I’m going to talk in really general amounts because it’s not quite as balanced as I make it sound. An example – say, you owe $30,000 in unsecured debt, and we do the math on your Bankruptcy and let’s say between your income and the assets that you have, you’re going to have to pay $15,000 into a Bankruptcy. So I say, okay, Wayne, for you to file for Bankruptcy is going to cost 15 grand because you have like $10,000 in equity in your house and you have surplus income of $5,000. So 15 grand. Boom.

Now, Wayne, I’m going to let you in on a little secret here. This guy here, he has to eat. So I certainly have fees that have to get paid. But you as a debtor in a Bankruptcy, you don’t pay me. My fees would come out of that $15,000 that I would say this is a Bankruptcy amount and ballpark. It’s all tariff based.

So anybody, creditors know, Trustees know, debtors know, everyone who knows is going to say, well, because it’s set up in how a Trustee gets paid. Trustees fees are calculated, but by the time fees are paid, taxes are paid and everything like that in a Bankruptcy, you might say, well, there’s only $5,000 left to be dispersed for the creditors by the time you’ve been through everything that’s associated in running a Bankruptcy file. 

So because of that you could say, okay, well, creditors, you owe 30 grand, but in this Bankruptcy there’s only going to be about $5,000 to be disbursed. So when you look at a proposal and you say, okay, well, how about I do the same thing and in a proposal and typically you want to do a proposal for more than you say –  well, why would I offer 15 grand in a proposal when the Bankruptcy is going to pay them 15 grand? So in this scenario I could say, well, I’d probably be able to do the work for half the price under a proposal.

By the time fees are paid, taxes paid, everything like that’s associated, you may only have 5 grand in fees. So there would be 10 grand in the pot available to the creditors. So the creditors are always looking at the bottom line to say after all the expenses are paid, what is available to us in a Bankruptcy versus proposal? So that tends to be how we get them to sway or vote in favor of it. I mean, people are always voting with their wallets, right?

And banks are no different. I’m going to let you know another secret there, Wayne. Banks, they’re out there to try and make some money, right? So we would like to think that as we put good proposals in front of the creditors that might say, okay, well, here’s a 10 or 15 cent return in a Bankruptcy. So here’s a 25 or 30 cent on the dollar return in a proposal that the creditors would gravitate towards that offer, that is getting them more money.

Wayne Kay 08:26
Do they ever come back to you and say, well, we’re hoping we get a little more?

Matthew Fader 08:29
A little all the time.

Wayne Kay 08:30
Okay, so it’s a negotiation, all right?

Matthew Fader 08:33
Very much so. The voting is actually very simple. So what happens when somebody files a Consumer Proposal is they sign the papers, we send the documents out, and the creditors have this window of time, 45 days, where we send notices out to them.

And I’d say, oh, I have Wayne here, and he filed a proposal and effective whatever day. How much money did he owe you? It’s called a proof of claim form that we would send out to the creditors and the creditors would fill it out and they’d come back and I say, Wayne owed ten grand. They come back and say, well, you really owed $10,348.19. So they would come back with the exact dollar amount.

But what happens in a proposal is they come back with that dollar amount, but typically they will file what’s called a voting letter with that proposal and they’ll say, are they for the proposal? Are they against the proposal? Are they against the proposal and want to have a meeting of the creditors? 

So what happens is, at the end of 45 days, because all the timelines are prescribed, it’s all based on legislation that tells us everything is neatly prescribed. Everyone knows the rules. It’s the levelest playing field you’re going to get between the debtor and the creditor because there’s a very defined rulebook.

Wayne Kay 09:54
Okay, perfect.

Matthew Fader 09:56
There are defined timelines. Everything is laid out to say, this is the process with no surprises, no delays, no nothing. So what happens 45 days after you filed that proposal?

We take a look and we say, okay, do we have to have a meeting of the creditors? So we go through all this paperwork, all this paperwork that’s come back, and the rules say that if creditors representing an aggregate of 25% or more of the total liabilities request it, then we have to have a meeting of creditors. Because where we actually count the votes is at the meeting of creditors.

So if I get to day 45 and I don’t have to have a meeting of creditors under Consumer Proposal, that is called deemed approval. We have deemed credit approval. Nobody said no and requested that we count the votes.

So therefore, the proposal is deemed to be approved. 15 days later, you have court approval, which is a deemed court approval. Very rarely that we’d actually go to court for those. So by day 61, we have a passed proposal, and that’s getting it passed. Now, to your question, do creditors ever say no?

Yes, absolutely. And when they say no, they fill in their little sheet, they say no, and they request a meeting. Then we have a meeting, and then at the meeting, we count the votes. Now, to pass a proposal, what you need is you need a simple majority. You think of every dollar you owe as being a vote, so you need 50%, plus we say $1.

But really it’s one penny, right? Whatever it is that says we get just over that 50%. And if you can get just over that 50%, then your proposal passes and it then becomes binding on all your creditors. So even though the other 49% said no, we think this proposal sucks and we don’t want to have anything to do with it. Majority rules.

If we can get that majority, then the proposal passes. So you’ll have times where I might say, oh, well, I’ve got 40% in favor, I’ve got 60% against. So now I have to go into negotiations. These guys said they don’t want $250 a month, but they’ll take $350. So I would go back to the debtor and say, are you cool with that? Because if you are, we can amend the proposal and we are good to go. And if not, there is room for some negotiation there.

Wayne Kay 12:17
Okay, continue on.

Matthew Fader 12:19
And then that’s about it. We just have a meeting and then it passes on the same timeline.

Wayne Kay 12:24
Right. All of a sudden, you’re going through all this process, and at some point, all of a sudden, miraculously, there’s going to be money. I guess that would be the reason why somebody would then cancel it.

Or you said you find out that another person is co-signed on this, or it may affect them in some way, so you’ll stop it. But do you have until the 61st day or how long do you have to say, okay, hold on, we got to put on the brakes, we’re going to come up with another plan.

Matthew Fader 12:58
As far as a withdrawal of a Consumer Proposal, you have up until the date of court approval. So, yes, you’re right. At any point from that day one to that court approval day, with a deemed credit approval at day 45 and then deemed court approval at day 60, you have any point right up until that deemed court approval day to withdraw the proposal. 

And as you sort of alluded to, sure, there’s a number of reasons why. I won the lottery or uncle Ted kicked off or the tax debt wasn’t as bad as I thought, or I worked out other arrangements. There’s all kinds of crazy things that can happen in people’s lives that sometimes change from one day to the next to say, my life has completely been flipped upside down.

Sometimes that happens in a positive way and they can withdraw the proposal. Now, the other thing that you have to understand about a proposal is that you’re making an offer. So, Wayne, you do a proposal, and let’s say just for fun, you’re offering to pay your creditors $250 a month. You say, I’ll pay $250 a month for five years. That’s 60 months.

That would be 15 grand. So that’s your offer. I’m going to pay 15 grand to settle up on my debt. Now, the rules of the proposal say your proposal can never get to a point where you fall a total of three months payments, the equivalent of three months payments behind. So on a $250 a month proposal, you could never get to a point where you fall 3 months behind on your proposal.

That’s when a default in the performance of the proposal would happen and at which point the proposal would be deemed nulled, which would mean you’re now no longer under that right. So, I mean, it’s not just a matter of saying, hey, I’ll file this proposal and I promise to pay. Well, yeah, you got to pay it. And if you don’t, then these are the consequences.

Now, it needs to be sort of made clear, right, to say on this $250 a month sort of scenario. Say you were two months behind on your proposal, so $500, and then, I don’t know, you file your income taxes or something like that, and you came in, you’re like, well, here’s $1,250. You give me $1,250, right? I’m going to take from you. Well, thanks, Wayne. I’d take $500 from that $1,250 and I’d put that on those two months you’re behind.

So you’re not behind anymore, right? Those two payments have been made, but now I have a remaining $750 left over, which I then apply towards the next three months. So in that example, you’ve gone from being two payments behind to now being three ahead. 

And since the default occurs when you fall a total of three months payments behind where you should be, since you would actually be three months ahead of where you should be, it would kind of take, like six missed payments, if you know what I mean. Because you’d have to miss the three or ahead to get to current and then fall three behind after that. 

So there’s wiggle room there as far as the payments are concerned. But the rules are very clear to say if you’re in a proposal and you want to get out of it, there’s really three ways to do it. Withdraw prior to the court approval day, annul it through failure to make your payments, or, of course, if you file an assignment in Bankruptcy at any point during the proposal. That will kill the proposal, and you will now be bankrupt.

So that’s the other alternative. We have people that do that too. Sometimes things change where they say, oh, I lost my job. And now this proposal that once upon a time the offer was viable, has ceased to be viable, what do I do? And we have options to deal with that too.

Can we amend the proposal? Do we send a letter out to the creditors explaining the changes and try and mess around with the payments a little bit? Because at that point the scenario has changed, right? We’re always making that offer based on what would happen if you filed for Bankruptcy. And whether you or your listeners know this or know this or not, the length of time and the fee of a Bankruptcy is also determined based on your income.

When I have somebody with big income and they say, I want to file for Bankruptcy, well, the Bankruptcy is an awesome bunch of money, but if all of a sudden they’ve lost their job and they said, well, I don’t have that same income, I said, well, let’s change that Bankruptcy scenario. So that would then possibly change what I would have offered in the proposal. 

So there are reasons why you could say you would annul your proposal or you would withdraw it. There’s not a definite list that we can sort of go through. Say these are concrete ones, it’s not as common to withdraw as it would be to have people annul – and like I said, annulment will typically just happen through failure to make the payments. They find themselves three months behind and then their proposal gets annulled again. If that happens, we do have ways to fix it. There’s automatic revivals, there’s court revivals.

Wayne Kay 18:16
But it must be more difficult for you, though. You’re in a worse situation, I would assume.

Matthew Fader 18:23
Yes and no. I’ve had the opportunity to work for several different places. I have never seen a group of people who can handle, and this is not encouraging to anybody out there. If you’re my debtor and you’re hearing my voice, don’t annul your proposal. But I have so much confidence in seeing what my staff, my proposal manager and the people that she is working under her to do. What you and I look at and we say is complicated and they do it so easily, which is great.

That’s what you want. That’s what I want in back end staff, is to say that I rely on them with everything and they have yet to disappoint me. So that’s a little plug for wonderful employees.

Wayne Kay 19:17
For your team at We Can Help.

Matthew Fader 19:21
That’s right. You’re going to find out.

Wayne Kay 19:25
Well, I was thinking as you were explaining this, I was thinking well, for anybody who’s in bad financial situation, all of this that you were talking about just feels like these moving dart boards –  that there’s no way I’m going to understand it or somebody who’s in debt is going to understand it. That’s why we come to you because you have members of your team who love moving dartboards. This is what they live for.

They keep everything organized. They know exactly there’s nothing coming up that’s really going to surprise them. So I think that is a great way to wrap up this conversation. Any final words that you want to share regarding the Consumer Proposal and the canceling of the Consumer Proposal?

Matthew Fader 20:07
Well, yes, we always want to make sure that when people are getting involved into this, that they’ve done the research, they’ve been properly informed. We should never get into this with the intention of saying it’s going to be tanked at some point in the future. 

There’s like one rare exception where I can say you would go in and you would file sort of a holding proposal just to buy time. And it’s not something I’m going to talk about on the air because it’s not something I tend to tell people they can do until it actually becomes something that they need to do. But, yes, it’s all about making sure that you’re properly informed.

And that’s why I always recommend that people do speak to somebody like myself who’s, who’s licensed. There’s lots of people out there that have lots of opinions on debt, and I hear it constantly. Well, my next door neighbor told me this and my brother did this and this is what happened. And I’m always going to say, go to the expert, right? 

It’s tax time when we’re recording this. I don’t do my own taxes because my accountant went to school to learn how to do that, Wayne. I don’t even like getting a shave because there’s people out there that go to school that learn how to shave people. And I’m like, I’ve just been doing this trial and error for like 35 years. I don’t know what I’m doing. I’m just faking it, right?

And it’s the same thing with my next door neighbor. The plumber told me that I should file a proposal rather than a Bankruptcy. I’m like, well, just because I eat a lot of brand doesn’t make me qualified to give you plumbing advice, right. So stick to the experts.

Wayne Kay 21:57
I love it. Absolutely. That is great advice, Matt. We always have some good laughs. Thank you very much for being on the show, as always.

Matthew Fader 22:04
Well, I do my best, Wayne. Thanks for having me.

Wayne Kay 22:08
My guest today, Matt Fader. You can learn more or schedule that free consultation with Allan Marshall & Associates Licensed Insolvency Trustee at wecanhelp.ca. That’s the website www.wecanhelp.ca. 

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