The best thing about a consumer proposal is that it allows you to resolve your debts without affecting your home, car, savings and other assets.
Asset protection helps to explain why 63,578 Canadians filed a consumer proposal in 2020. That’s nearly double the number of people who filed for bankruptcy.
In this column, you’ll learn how assets are treated in a consumer proposal and how to protect yours.
Understanding assets in a consumer proposal
A consumer proposal is a legally binding agreement that offers creditors more money than they would receive if you declared bankruptcy.
By agreeing to pay more towards your debts and following the terms of your proposal, you can keep your assets.
And although you pay more than you would in bankruptcy, you can spread out the payments for up to five years, making the payments affordable.
And here’s why: in 2009, the Canadian government amended BIA legislation to encourage people to restructure their debt using a consumer proposal rather than declare bankruptcy. The obvious benefit is that creditors can recoup more of the money owed to them.
If you are a homeowner looking for debt help, your home is usually the largest and most precious asset. And a car is often essential for work or transportation, especially in urban areas. Everything you own is important because you worked hard for it.
To ensure you don’t lose these assets, a consumer proposal protects everything you own as long as you offer your creditors more than they would receive if you declared bankruptcy. There are other benefits too.
Depending on your financial situation, you can reduce your debt to an amount you can afford, with the remaining amount forgiven by your creditors. Once filed, all collection activity stops, and interest is frozen.
It’s a debt settlement program governed by Canada’s Bankruptcy and Insolvency Act (BIA), supervised by the Office of the Superintendent of Bankruptcy and administered by a Licensed Insolvency Trustee.
Read on to learn how a consumer proposal can protect your home, car and other assets.
What assets can you keep in a consumer proposal?
In bankruptcy, there are asset exemptions, which means some assets are protected from seizure when you file. These vary by province, so you could lose some of them if you have significant assets.
But a consumer proposal is different. It protects all of your assets, such as:
- The equity in your home.
- Your vehicle.
- Savings, investments and pensions.
- Tax refunds.
- Any inheritance, windfall or lump sum received during your proposal.
Secured loans in a consumer proposal
Secured loans such as a mortgage or car loan aren’t included in a consumer proposal and are not affected as long as you:
- Make an acceptable offer to your creditors.
- Continue to make your loan payments on time.
- Follow the terms of your consumer proposal.
A consumer proposal and home equity
A consumer proposal is an attractive option for Canadian homeowners who want to resolve their debts.
If you have equity in your home, your Licensed Insolvency Trustee will advise on the amount to offer your creditors to ensure your consumer proposal is accepted.
Typically, this amount is equal to the equity in your home to ensure your creditors receive the same amount they would receive if you declared bankruptcy. However, some provinces have exemptions for home equity, which may reduce the total.
Then, as long as you make your mortgage payments and property taxes on time, your home remains safe.
Will a consumer proposal affect my mortgage?
A consumer proposal only affects unsecured debts. So, it does not impact your mortgage as long as you keep making monthly payments.
Your mortgage lender can’t use a consumer proposal to change the terms of your mortgage or foreclose on your home (unless payments are missed).
What’s more, by consolidating your unsecured debts under a consumer proposal, you should find it easier to keep up with your mortgage payments.
If you cannot afford your mortgage
If you cannot afford your mortgage, you might want to sell your home to help pay your consumer proposal.
Alternatively, you can hand the property back to the mortgage lender before you file, and any shortfall will then be added to your consumer proposal as an unsecured debt.
Will a consumer proposal affect my mortgage renewal?
If you have made all your mortgage payments, your lender will likely renew your mortgage if you file a consumer proposal.
Some people even use the re-mortgage process to pay off some or all of their consumer proposals. However, switching mortgage lenders or getting a better interest rate can be challenging.
A consumer proposal will affect your credit score, so some lenders may ask for a higher interest rate or refuse a re-mortgage application during this time.
That said, you are dealing with most of your debts in your proposal, so it should be easier to improve your credit afterwards and benefit from better terms further down the line.
Can I keep my car in a consumer proposal?
If you own your car, you can keep it in a consumer proposal. Likewise, you can keep a financed or leased vehicle as long as your loan payments are up to date.
This is possible by considering the vehicle’s value when making an offer to your creditors through a consumer proposal.
See also: Can I keep my car in a consumer proposal?
Tax refunds in a consumer proposal
Unlike bankruptcy, where you lose tax refunds, a consumer proposal lets you keep them. This tax refund could boost your cash flow while working your way out of debt.
Savings and investments in a consumer proposal
The best part of a consumer proposal is that you can keep your savings and investments, such as:
- Registered Retirement Savings Plans (RRSPs)*
- Registered Pension Plans (RPPs)
- Registered Retirement Income Funds (RRIFs)
- Locked-In Retirement Accounts (LIRAs)
- Any pension plans.
* The value of contributions in the past year might be considered when calculating an offer for your creditors.
While others are protected as long as you include their value in your consumer proposal offer:
- Registered Education Savings Plans (RESPs)
- Tax-Free Savings Accounts (TFSAs)
When you proceed with a consumer proposal, you must offer more to your creditors than they would get if you filed for bankruptcy. Essentially you are compromising with your creditors and saying:
“If you let me keep my assets, I will pay you a fixed amount of money over a longer period of time.”
You can protect assets like your home, car, and savings, but the offer must satisfy your creditors based on the value of your assets.
Here’s an example:
You have $20,000 in debt and offer an $8,000 repayment in a consumer proposal.
Since you have an RESP worth $10,000, your proposal will be rejected as the offer to your creditors isn’t more than what they would receive if you declared bankruptcy (In most provinces, an RESP can be seized in bankruptcy).
You would need to offer more than $10,000 in your consumer proposal.
Every situation is different, and some provinces treat assets differently, so consult a Licensed Insolvency Trustee for guidance.
When meeting with a trustee, you must disclose all your debts and assets, including any savings and investments.
RRSPs in a consumer proposal
Your RRSP (Registered Retirement Savings Plan) is protected with a consumer proposal.
However, depending on where you live in Canada, your trustee may include the value of contributions made in the past year when calculating a consumer proposal offer to your creditors. This includes contributions by you and your employer.
If your RRSP is attached to a life insurance policy, the entire amount is exempt from seizure, including contributions you have contributed in the last twelve months. But there’s one catch: the beneficiary must be a spouse, child, grandchild or parent.
Seek advice from a Licensed Insolvency Trustee to determine how a consumer proposal will affect your RRSP and other savings such as RESPs, TFSAs and insurance policies.
RPPs in a consumer proposal
A Registered Pension Plan (RPP) is an arrangement by an employer or a union to provide pensions to retired employees in periodic payments.
You can keep your Registered Pension Plan in a consumer proposal, and your account will be protected.
DPSPs in a consumer proposal
If you file a consumer proposal, you can protect a DPSP (Deferred Profit Sharing Plan). In some provinces, contributions made in the last 12 months are considered an asset when making an offer to your creditors.
RRIFs in a consumer proposal
The good news is your RRIF (Registered Retirement Income Fund) is protected in a consumer proposal.
LIRAs in a consumer proposal
If you’ve ever changed jobs and been part of a pension plan, you may have converted your pension to a Locked-In Retirement Account (LIRA).
You can keep your Locked-In Retirement Accounts (LIRA) in a consumer proposal, and your account will be fully protected.
RESPs in a consumer proposal
A Registered Education Savings Plan (RESP) lets you save for a child’s education after high school.
Parents contribute to the account over time, and the government will also contribute. Therefore, it is understandable that you want to protect these savings for your child’s future.
In a consumer proposal, you must ensure that the value of the RESP is included in your offer to creditors so that they will receive more than they would if you filed for bankruptcy.
TFSAs in a consumer proposal
A Tax-Free Savings Account (TFSA) is a tax-advantaged account that lets Canadians save their money without paying any tax on contributions or income earned in the account.
TFSAs are not exempt in a consumer proposal. Still, you may be able to keep your TFSA investments in a consumer proposal by including the value in your consumer proposal offer.
We recommend getting advice from a Licensed Insolvency Trustee to ensure your TFSA is protected if you file.
Pension plans in a consumer proposal
Most pension plans are protected in a consumer proposal. Arrange a free consultation with a Licensed Insolvency Trustee to find out more.
Why do I get to keep my assets in a consumer proposal?
You choose which assets to keep because a consumer proposal offer is always higher than your assets’ value.
Creditors are happy because they receive more than they would in a bankruptcy, and because the total cost is spread over a longer period, the payments are affordable.
In bankruptcy, the payment term is shorter and a worse deal for creditors, which is why you must surrender some assets.
A consumer proposal is a great way to protect your home and other assets while paying a low fixed monthly payment to resolve your debts.
A consumer proposal can protect assets such as your home, car and RRSP. To learn more about assets in a consumer proposal, the next step is to talk to a Licensed Insolvency Trustee.
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