The Misunderstood Truths About Consumer Proposal And Trustees
What is a Consumer Proposal?
Often called “Soft Bankruptcy,” Consumer Proposal allows a consumer-like yourself, to offer a debt repayment plan to their creditors, i.e. banks, loan companies, etc… This legal process is administered by the Office of the Superintendent of Bankruptcy under the Bankruptcy and Insolvency Act of Canada. (In case you were wondering.)
This repayment plan typically spans 5 years and the payments must be made each month. These monthly payments are divided up amongst all the unsecured creditors (and the Trustee too).
In order for the Consumer Proposal to first be accepted, it is subject to a tally of votes. Each creditor (i.e. bank) is given one vote for every dollar owed by the consumer (that’s you). If the majority of creditors vote in favor of accepting your proposed payment plan…then it’s approved. The process is more complex than that, but we will stop there for now.
What are Insolvency Trustees?
While undergoing a Consumer Proposal, the Trustee acts as a neutral third-party mediator between the consumer (that’s you) on one side and the opposing creditors (i.e. banks) on the other. The Trustee is obligated to make the creditors as a whole and compensated as possible, while also making sure the consumer (You) won’t default on payments.
It goes without saying that Trustees have an equal responsibility to the creditors (banks), as they do to you, the consumer. Trustees are paid $1500, plus twenty percent (20%) off the top of what you, the consumer, pay to the creditors. (Keep this in mind when reading the next section below).
What’s the problem with this?
Before we really get into it, you must know that not all consumer proposals should be a full repayment of the debt. Yes, you may only be obligated to pay a small portion of the total debt, i.e. 20%. However, you may also be told by the Trustee to pay 100% – 120% of your total debt. (That’s where GEM Debt Law comes in, to determine the right debt solution for you and if there’s a better alternative instead of Consumer Proposal…but more about that later.)
Since Trustees are paid a percentage of the consumer’s payments to creditors; mathematically, the Trustee makes a higher fee when the debtor pays more to creditors. Stated again, the Trustee gets paid more when you, the consumer, pay more to the creditors. There’s a human factor at play here, as the Trustee’s career gets more lucrative, the more each consumer, like yourself, must pay to creditors.
Remember, Trustees have an equal responsibility to the creditor (i.e. the bank) as they do to the consumer (you), so they cannot favor your interests over the creditor.
Trustees are therefore not obligated (or financially motivated) to push for the biggest debt reductions. Also, Trustees could disclose everything you tell them to your creditors, so be careful what you say. There’s no client-lawyer confidentiality when you speak to a Trustee and no going back on your word. Moreover, there’s less incentive for Trustees to advocate for you to pay less. They must still consider the creditor’s position, to make the bank as a whole as possible and therefore, minimize the bank’s losses too.
In fact, there’s technically no opposition to your creditors and nobody to push for lower payment terms. Just you and only you, versus all of your creditors. You have to ask yourself, do you know enough about how this complex process really works, to achieve the best possible outcome? You only get one shot in such legal proceedings. You could be on the hook for 120% of your total debt. We get a lot of clients who dropped out of their consumer proposal because they were obligated to pay at least 80% of their debt balances. They eventually could not afford the monthly proposal payments down the road, in year 2…or year 5.
If another alternative to resolve your debt is out there, the Trustee will typically only suggest a DIY Do-It-Yourself approach. In other words, talk to your creditors and the collectors by yourself. If you say the wrong thing, this can prompt litigation and garnishment, or creditors may outright refuse to settle. Not to mention, you must endure months of endless phone calls, confronting collectors, and receiving threatening letters from law firms.
We can make the collector calls stop and negotiate with the creditors for you, as well as represent you in Court if necessary. Just call GEM Debt Law for a free consultation. We can determine if you should be in a Consumer Proposal in the first place. Other debt solutions may suit you much better. Our incentive is to save you as much money as possible and to protect only your interests, not the creditors.