Rule change makes it easier to control debt

There hasn’t been a lot of positive financial news lately; so advisors with clients who have lost a business or a job, or are dealing with other serious money challenges should know that a valuable debt solution became more widely available last month.

People struggling to resolve debt have a number of options, including consolidation loans, debt management plans, proposals or bankruptcy. Debt consolidation loans enable people to combine and pay-off multiple higher-interest debts. They can be helpful when someone is paying high interest rates on several accounts and has the ability to repay these debts, but wants reduced monthly payments. The downside – defaulting on loan payments risks losing assets assigned as security.

Debt-management plans are another common solution. They typically involve contracting with a financial counsellor who negotiates with individual creditors to reduce interest and fees and/or extend the amount of time required to repay debts. The client makes a single monthly payment at an agreed interest rate to the counsellor who in turn pays creditors. The downside is that creditors have no obligation to agree to debt management plans, and since the fees are not regulated, they can vary widely.

Recent Options

When long-anticipated amendments to the Bankruptcy and Insolvency Act came into force last month, they included a particularly helpful change that increases accessibility to consumer proposals as an alternative to bankruptcy. (Bankruptcy is generally the least favoured debt solution because those going through the process must surrender many of their assets.)

Consumer proposals, on the other hand, offer a number of important advantages over bankruptcy or other solutions. A proposal is a legally binding agreement arranged with a trustee in bankruptcy who negotiates with creditors to repay only a portion of the debt owed. This agreement offers clients significant payment flexibility including lump sum, monthly and/or balloon payments for periods ranging from a few months up to five years. Once a proposal is accepted by the majority of creditors and approved by the court, the client makes payments to the trustee, who then pays creditors.

A proposal is best suited to those who owe $20,000 or more of unsecured debt and have the ability to repay a portion of this debt but need time. It’s also a good solution for those who have collectors pursuing them, garnishments registered against their wages or other legal proceedings filed against them because when the trustee files the proposal, unsecured creditors must stop any legal actions including phone calls and garnishments. Any interest owed on outstanding debts also immediately stops.

Provided the client participating in the proposal didn’t pledge any assets as security against a loan, another valuable advantage of proposals is that the client can retain most assets, including a home, vehicles and personal effects.

Prior to September 18, people had to have less than $75,000 in unsecured debt to file a consumer proposal. Now, to encourage consumers to file proposals and not opt for bankruptcy, the maximum filing threshold has been raised to $250,000 – excluding debts secured by the individual’s principal residence.

The Next Level

If someone owes more, he or she can opt for a Division 1 proposal, but the process is more complex. While creditors have 45 days to consider a consumer proposal, time pressures are more intense. A meeting of creditors must be held within 21 days, and, while a simple majority of creditors is required to accept a consumer proposal, a Division 1 proposal requires a 50% plus one majority in the number of creditors, and a two-thirds majority in dollar value.

And, if a Division 1 proposal is rejected, the debtor is automatically bankrupt. This does not occur for a consumer proposal.

The new amendments also allow defaulted consumer proposals to be automatically revived after 45 days. This reduces the likelihood a consumer proposal would be annulled if the debtor runs into short-term cash flow difficulties.