David Sklar & Associates Inc.

Consumer Proposal & Bankruptcy Trustees
Serving the Greater Toronto Area

Consumer Proposal – What’s in it for Creditors?

A question that we get asked a lot is ‘Why do creditors accept consumer proposals?’

Before we go into the answer – we need to explain a bit about consumer proposals.

A consumer proposal is a formal, legal offer made by an insolvent debtor (the person who owes the debt) to their unsecured creditors. It is usually for substantially less than the total amount owing, is normally paid monthly, and cannot last for more than 5 years. The majority of unsecured creditors (in terms of dollars) must agree to the proposal for it to become binding on all of the unsecured creditors.

Insolvent Debtor

An insolvent debtor has total debts greater than $1,000 and they

• are unable to pay their debts as they become due,


• or have stopped paying their debts altogether, and/or


• have debts that are greater than their assets.

Whether or not a person is insolvent must be determined by a licensed Bankruptcy Trustee. By law, only licensed Bankruptcy Trustees are allowed to file and administer consumer proposals, division I proposals and bankruptcies.

Consumer Proposal vs Bankruptcy

By being insolvent, a debtor usually qualifies to file for either bankruptcy or a proposal. If their total debt (less the mortgage on their prime residence) is less than $250,000 they may be eligible for a consumer proposal – if it is more than $250,000 they may be eligible for a division I proposal.

There are a number of factors that come into the decision process between a bankruptcy and a proposal. While a proposal enables individuals to keep their assets, it requires them to have enough income or bankruptcy exempt assets (such as RRSPs) to complete the payments agreed to in the proposal. A bankruptcy normally requires the surrender of all non-exempt assets. However, it enables first-time bankrupts to be released from their unsecured debts in as few as 9 months (21 months if they have surplus income).

Unsecured Creditors

Unsecured creditors are individuals and businesses who have lent money without having gotten liens or guarantees against specific property. For example, credit cards are unsecured debt, while a home mortgage is a secured debt. If a person fails to pay their mortgage, the company holding the mortgage has the right to seize the home and sell it to recover its investment. However, if a person fails to pay their credit cards, the companies holding the credit card debt do not have the right to seize specific property and may have to go to court to get payment.

Note: There are types of unsecured debt that cannot be released through a proposal or bankruptcy – they include child support, alimony, some student loans, court imposed fines, and fraudulent debt.

So, why do creditors accept consumer proposals?

The answer is enlightened self interest. When negotiating a proposal, the insolvent debtor almost always has to offer more money than the unsecured creditor would receive if the insolvent went into bankruptcy.

Considering a Consumer Proposal?

If you are considering a consumer proposal, and live in the Greater Toronto Area, call the Licensed Debt Professionals™ at David Sklar & Associates for a free, confidential meeting. We will review your financial situation in detail, explore all of your options and help you to make the best choice for your needs. Call 416-498-9200 to book a free appointment at any one of our six convenient locations.