An alternative to bankruptcy
Bankruptcies are down and consumer proposals are on the rise as people with financial woes embrace alternative ways to deal with crippling debt.
"The percentage of people filing proposals is up dramatically," says Doug Hoyes, a bankruptcy trustee and cofounder of Cambridge, Ont.-based Hoyes, Michalos & Associates.
Consumer bankruptcies decreased 19.5 per cent while consumer proposals increased 22.4 per cent in the 12-month period ending November 30, 2010, according to the Office of the Superintendent of Bankruptcy Canada. These latest figures reflect response to legislative amendments.
Changes brought forth in September 2009 to Canada's Bankruptcy and Insolvency Act (BIA) encouraged restructuring as an alternative to bankruptcy. Notably, the new rules increased the amount of debts allowed in consumer proposals to $250,000 from $75,000 (excluding debts secured by one's principal mortgage).
Michel Cimpaye, a spokesperson for Industry Canada, says the prior indebtedness ceiling of $75,000 "was too low and forced many self-employed individuals and higher-income debtors to make a more costly and more complicated commercial proposal... The higher costs associated with a commercial proposal translate to a reduced recovery for creditors."
Overall, the amendments were designed to make consumer proposals accessible to more people. "Debtors who may not have considered any of the past options under the BIA as appropriate to them may now be seeing the consumer proposal as a valid solution," says Cimpaye.
When to consider a consumer proposal
Experts agree too many people wait until the crisis point to address financial problems. By then, they're behind in payments, fielding phone calls and letters from collection agencies and dealing with wage garnishments.
At this point, people used to see bankruptcy as their only option. With the new rules, however, no matter how bad your financial situation, it's rarely too late to attempt a proposal if you have the means to pay a portion of your debts.
Benefits of a consumer proposal
"Even if you're six months behind in your bills, a proposal is still a viable option," says Hoyes. "For a lot of people it's definitely a better solution."
The benefits include:
- Interest is frozen on the date you file
- You negotiate to repay only a portion of your total debts
- You hold on to assets, such as your home
- Creditors are restricted from taking legal action against you
- Wage garnishments stop