149 – A Guide to Consumer Proposals and Debt Relief

Wayne Kay 00:04
Consumer Proposals and debt relief. That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debts with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay and coming up to the show today, we’re going to talk about  the problems that people have that sees them going into debt? What do you do when you’re faced with growing debt and growing expenses?

You’re going to learn all about the Consumer Proposal, what’s key to making it work, and how do creditors decide if it is in their best interest to accept a Consumer Proposal.

This and more with my guest today, Leigh Taylor with LCTaylor Licensed Insolvency Trustee from Winnipeg, Manitoba. Hi, Leigh.

Leigh Taylor 00:48
Hi, Wayne. How are you doing?

Wayne Kay 00:49
Doing great. How are you doing?

Leigh Taylor 00:51
Just great.

Wayne Kay 00:52
Terrific. I always look forward to these shows because we get to learn and we get to help Canadians with their debt.

Today, our topic, as I did in the introduction, we’re going to be talking about a guide to Consumer Proposals and debt relief. Now, most people come to you because they obviously have a problem. What is the problem typically that you see?

Leigh Taylor 01:14
Well, there’s a lot of variation in the way people get to it. Usually they start off with behind on their bills. Credit card bills are building up with interest. And in this area, inflation, there’s always new charges on it as well.

Perhaps you’re a little uncomfortable with the growing debt and start to be concerned that you may not be able to catch up with the demands of your current job, your family commitments. A second job sometimes isn’t feasible. Maybe you’ve tried cutting back on your household expenses, but again, inflation keeps those expenses on the rise.

And you know that if you keep going down that path, you’re probably going to be facing Bankruptcy. That’s sort of a typical scenario for an awful lot of people in these areas.

Wayne Kay 01:59
Right. And then it comes to, they’re probably nodding when they’re listening, saying, yes, that’s exactly what happened. All of a sudden, just the cost of living just went so high and anything could happen.

I’ve seen, you’ve seen so many people come through your doors, you can’t even generalize on what happens to careers or jobs. It can be sickness. It can be anything, right?

Leigh Taylor 02:20
Yes. There’s an awful lot of things that could sort of put you behind eight ball and life is full of traumatic situations. Seems like one after another.

Wayne Kay 02:30
So when somebody is kind of faced with this growing debt and growing expenses situation, where do they start?

Leigh Taylor 02:44
Well, the first thing to do when you find yourself in a financial hole is to evaluate your situation in detail. You know the old saying, the first rule of getting up a hole and stop digging.

Well, this means that knowing where your money is going and planning your expenditures carefully, to do a detailed budget that shows what it costs you and your family to live each month is important and you have to be realistic about it when you’re doing it.

You might need to track your actual expenditure for a month or two in order to find out where the money’s going. An awful lot of your available money is going on little things you don’t think about, whether it’s buying a fancy coffee in the morning on the way to work or a newspaper or whatever. You add that up over the course of a month and be a big part of a budget.

So once you sort of determine what your basic costs are, what your basic budget is, you’ll get an idea of how much money is going to be left over to pay your bills. And you have to be sure to include money for emergencies and these sorts of things so that you can be confident that the money that you’re prepared to set aside is actually going to be available every month.

Once you’ve done that, you can do a long term budget for debt recovery. You take the total amount of your unsecured debt. That wouldn’t include things like your mortgage, your car payment, and you divide it by how much money you have available. That will give you an idea how long it’s going to take.

But you have to remember that interest will be accumulating on this. Just because you’re making a payment on your visa bill doesn’t mean they won’t add interest to it for the next month. So you have to take that into account as well. You have to keep ahead of interest costs.

You’ll see how long is it going to take to pay the debt off, whether it’s the next five or ten years, is that going to be doable? I mean, five years can be a long time in the average person’s life, and there’s an awful lot of unexpected things that can happen.

So, generally speaking, when we’re talking to people about budgeting, you can have long term goals, whether it’s buying a house or long term vacations. And these sorts you really can’t predict with a great deal of accuracy beyond maybe five years.

Wayne Kay 05:04
But doesn’t it seem like forever away to even be planning that far if you’re in this financial situation? And I love the idea that, you know, especially with all the online banking we do, everything should pretty much be there. So you sit down, you figure out what, where that money’s going. And I guess pretty quickly you can start circling, well, that is definitely just a want that I can cut out – it won’t make any difference to our lives if we’re not having whatever it is.

Maybe it’s the lunches that add up, surprisingly, and the coffees – because everybody’s been talking about that for so long, I’m kind of surprised that people don’t cut those things back first when they’re in financial trouble.

Leigh Taylor 05:46
Well, one of the basic problems is that nobody was ever taught how to do a proper budget and watch their finances when they’re in high school. We don’t teach that.

We expect people to learn or somehow develop those plans themselves. But oftentimes it’s too late. They get into too deep a hole to get out of that easily. So it doesn’t come naturally to people. And it’s the little things that count.

I mean, if you have a cup of coffee on the way to work because you like your Starbucks or whatever, then you’re probably looking at four or $5. You do that 25 times. 25 workdays a month, you’re looking at $100 – $150 a month over the course of a year. $13 to $1,700. So it’s no small expenditure that could be a big, pretty big chunk of your budget over the course of the year. So it’s. It’s the little things that really do add up.

And most people don’t think about those sorts of things. They know how much they pay in rent. They know what their mortgage payment is or their car payment. They have a pretty good idea, maybe what they spend at a grocery store, because you may keep track of that, but it’s a whole bunch of little things that makes a big part of your available cash every month.

Wayne Kay 07:02
Right. And one thing I’ve noticed is I’ve just switched to this paying with my phone. I just literally tap my phone, but there’s no tally. I have to literally go in there to see how much is being put on my phone regularly. And then when I check it every couple of weeks, I don’t like it.

I kind of want to go back to the old, just go with a debit card for myself. So some of these technologies that we have that are made to make life easier can actually cause you to spend way more money than you expect.

Leigh Taylor 07:34
Well, that’s certainly true. And there is an old rule of thumb that old credit counselors used to use a long time ago when credit cards were coming out. And it’s really easy to pay with a credit card or now with your phone it’s even easier. And you don’t think of that as real money.

That sounds odd, but if you had to go into your wallet or your purse every time you wanted to buy something and pay cash, you get a real sense that this is really costing you real money, as opposed to you’re putting off the payment of it till the end of the month. I’m sure you’ll have enough money. I hope so. Spending cash is a really good way to hear yourself of frivolous expenditures, or at least make you think a little bit more about them before they’re gone.

Wayne Kay 08:21
So all of a sudden here’s a couple going through their situation, they do all the math and they realize the debts are growing. They don’t know what they’re going to be able to do. They don’t see a way out because they can’t work any more hours. They’ve got the children. What do you do at that point? Can you talk about some of the options?

Leigh Taylor 08:41
Well, you know, what we really want to focus on today was Consumer Proposal, and that’s a really handy tool that people have available to them.

Wayne Kay 08:51
Yes.

Leigh Taylor 08:52
Now, if you find that you’re too far in debt, you talk about five or ten years to pay off your bills. That’s getting a little far in debt and very, very difficult to get out of at that point. That’s when you should start thinking about something like a Consumer Proposal – a statutory option.

Statutory option means that it’s law. It comes under the Bankruptcy Insolvency Act in Canada. It allows you, through a Licensed Insolvency Trustee, we call them LITs for short, allows you to make an offer to pay your debts based on what you can afford, not on how much you owe.

You may be able to pay only a portion of the debt, sometimes as low as 10%, but the entire debt is eliminated with no interest accumulating. Now that’s really important. Creditors are given the opportunity to vote for or against the Consumer Proposal, but they generally accept Consumer Proposals because it will pay them more than what they’re likely to receive in a Bankruptcy. A Bankruptcy is sort of the logical option. If you can’t get a proposal together, then Bankruptcy seems like it’s next step. And once the Consumer Proposal is accepted by the majority of the creditors. It’s binding on all the creditors.

A Stay of Proceedings that’s a stop on any collection practices against it goes into place automatically. So the creditors can no longer take collection practice, like garnishing your wages or your assets or whatever.

Wayne Kay 10:22
Right.

Leigh Taylor 10:23
And when the proposal is completed, 100% of the unsecured debt is discharged. So none of the creditors can resume collection for the balance of the debt once a proposal.

Wayne Kay 10:33
So, okay, this seems too good to be true. We talked about Consumer Proposals, but if somebody’s listening to this for the first time, they’re tuning in, they’re saying, okay, so I have a debt of $30,000. This is almost impossible for me to pay off.

So what I could do is put a proposal together, and you may, the proposal may go to, to the person, the people who are owed the money and said, hey, we’ll give you $8,000 instead of $30,000. And oftentimes they might say, yes, that’s correct.

Leigh Taylor 11:06
Okay, now we try to base proposals on your ability to pay, not on the dollar amount.

Wayne Kay 11:10
Right. But I just wanted to put it down so that people understood kind of how it worked.

Leigh Taylor 11:16
Yes. So this is for people that can’t afford to pay that. I mean, if you had $200,000 equity in your house, you wouldn’t expect a creditor to settle for $0.50 on the dollar if they could sue you and get the whole thing by garnishing wages or selling your house.

Wayne Kay 11:35
Right.

Leigh Taylor 11:35
So it’s for people that are technically insolvent, meaning that they are below water on their debts.

Wayne Kay 11:41
Can you explain, like, what is key to making the Consumer Proposal work then?

Leigh Taylor 11:47
Well, I think there’s really two basic considerations. The first one is the Consumer Proposal has to allow for payments that are sustainable over the course of the proposal. Now, the maximum length for Consumer Proposals is five years. Can’t go beyond that. Most of the time we try for lesser periods of time because three years is more predictable than five.

If the payments are too difficult or can’t be kept up, you may default at some point and the proposal will no longer be in effect, and Bankruptcy is probably likely at that point in time.

The other basic consideration is the creditors. We need at least a majority of them to vote in favor of the proposal, and they can either accept or reject proposals, but you have to satisfy them. That is the best option for the creditor. And usually that means that you’ll be paying them more than what they receive in a Bankruptcy. That means that if you have secured assets that have a significant equity in them, on a house or whatever, then the value of that equity will have to be taken into account.

Wayne Kay 12:52
When designing the proposal, it’s about the payment then. So you would then set it up and say, okay, we’re going to be doing a payment of $700 a month for four years, and that’s what they would get. And at that point, there’s no interest on that either. That’s just what they are agreeing to, correct?

Leigh Taylor 13:13
Yes.

Wayne Kay 13:14
Okay.

Leigh Taylor 13:16
When we set up and design a proposal, we’re trying to keep it as simple as possible so that everybody understands it. You understand what your commitment is, but the creditors also don’t need some sort of program to analyze it.

Wayne Kay 13:29
So do Consumer Proposals usually get accepted by the creditors?

Leigh Taylor 13:34
Well, of course, it depends on the Consumer Proposal and the individual, because every one of them is separate and unique to the given circumstances.

Wayne Kay 13:42
Yes.

Leigh Taylor 13:43
If you’re paying an amount every month that’s reasonable in light of your income and your circumstances, then the creditors can’t expect more than that. And if you pay it for a reasonable period of time, then chances are you’re going to be doing better than they would in a Bankruptcy. A Bankruptcy can take as little as nine months, so it’s in their best interest at that point in time.

And I think you’ll find most creditors, certainly the major creditors, you know, the Visas, Mastercard, Canadian Tires, etcetera, would rather vote for a proposal than push it through to Bankruptcy. They think that people are doing the best that they can when they file a proposal, and that’s what they like to see. So all things being equal, they will accept a proposal more often.

Wayne Kay 14:31
Can you organize your own proposal as a debtor?

Leigh Taylor 14:37
Well, yes, you can. Now, the proposals Consumer Proposal, we’re talking about, you know, capital c, capital p, Consumer Proposal under the Bankruptcy act has all sorts of rules attached to it, and it’s designed for most people. If you’ve only got one or two creditors, there’s nothing stopping you from going to those creditors and saying, look, this is my situation. This is as much as I can afford to pay.

I don’t want to default on this and have, you have to get a judgment, all this sort of stuff. So how about if I can pay you x number of dollars a month for so many months, will they accept it? Oftentimes they will.

You’re not giving yourself the same protection as you would with a formal proposal because one creditor may accept it and one doesn’t. That doesn’t do you a lot of good because the other one might be suing you and garnishing your wages.

Wayne Kay 15:31
Right.

Leigh Taylor 15:32
The formal proposal stops them from taking any kind of collection practices.

Wayne Kay 15:36
Right. So that’s the important part.

Leigh Taylor 15:38
Yes. Informal proposals – not everybody can do that. Depending upon the creditors. Not many creditors will do it because they can’t depend on the validity of the information that you give them.

Wayne Kay 15:51
Right. Absolutely. I see distrust on both sides. I’m thinking this is definitely something you want to deal with an LIT to put together for you because it’s just way more secure. And you know that when you’re done with the debt, you’re literally, you’re done with the debt. There’s not going to be some surprises at the end which, doing it on your own – I’m sure there’s a lot of surprises that could go sideways.

Leigh Taylor 16:17
Well, yes. And then you have to be careful if you’re dealing with other people other than LITs. There are credit counseling and debt arrangement companies all over the place, particularly on the Internet, based down in Ohio, someplace that will take a lot of money from you.

Wayne Kay 16:33
Right. And not solve the problem.

Leigh Taylor 16:34
You’re far better off understanding what it is you’re getting into. And the LIT will explain that to you and what all the rules are and you can depend on it because lits are licensed by the federal government, they have to pass the necessary education experience criteria in order to do it. So you know, you know what you’re getting with an LIT.

Wayne Kay 16:55
Right. Great information. I hope this helps out a lot of people. Do you have some final thoughts you want to share with us?

Leigh Taylor 17:01
Well, other than Consumer Proposals can be a very effective way of eliminating the debt. It puts you in control of your situation, reduces the amount that you have to pay, eliminates interest and gets you back to realistically planning your future. So it doesn’t work for everybody, so talk to somebody about it. But it is an excellent way to get back here.

Wayne Kay 17:22
Terrific. Leigh, always a pleasure. Thanks very much for being on the show.

Leigh Taylor 17:26
Well, thank you, Wayne.

Wayne Kay 17:27
Well, once again, my guest today is Leigh Taylor. You can learn more or schedule a free consultation with LCTaylor Licensed Insolvency Trustee through the website lctaylor.com.

And that’s it for another 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.