Consumer proposals jump 97.5% as Albertans maintain optimism in insolvency
Rather than declaring bankruptcy, more and more people are making offers to pay creditors less than they owe
More than 5,000 Albertans who can't pay their debts have filed for an insolvency measure known as a consumer proposal this year, far outstripping the 3,600 or so who filed for more traditional bankruptcies.
The move toward consumer proposals has been growing since insolvency laws changed in 2009 — but has spiked, in particular, so far in 2016.
The number filed between January and August in Alberta has jumped 97.5 per cent over the previous five-year average.
Traditional bankruptcies, meanwhile, are up just 3.1 per cent.
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Angela Lock, a licensed insolvency trustee with Grant Thornton LLP, said Albertans looking to deal with overwhelming debts are becoming more aware of the consumer proposal option, which can offer some financial advantages over declaring bankruptcy.
But, for many of her clients, she said a big part of the decision is psychological.
"It's not that big, bad b-word," Lock said.
"Technically speaking a proposal is better on a credit rating than a bankruptcy. But, practically speaking, when you're going to get loans from financial institutions in the future, the difference is very negligible. But people like it better from an emotional standpoint."
So, what is a consumer proposal, anyway?
Distinct from a bankruptcy, a consumer proposal is a legally binding process, administered through a trustee, in which debtors make an offer to creditors to pay back a percentage of what is owed to them or extend the length of time over which the money is paid back.
Creditors, as a group, choose to accept or reject the proposal. If there is disagreement, a vote is taken, and votes are weighted by the dollar amount that is owed.
"It's got to be sweet enough for the creditors to accept it, but it's got to be manageable, from a cash-flow point of view, for the individual," said Zaki Alam, a licensed insolvency trustee with MNP in Edmonton.
If the proposal is accepted, debtors must make the agreed-upon payments through the trustee, adhere to any other conditions in the proposal and attend two financial counselling sessions.
The advantage for debtors, as compared to a full-blown bankruptcy, is that they can keep many of their assets — provided they fulfil the terms of the proposal — and more easily rebuild their credit rating afterward.
The advantage for creditors is that they often end up getting back more of what is owed to them, albeit over a longer period of time.
Consumer proposals cannot exceed five years in length, and failure to fulfil the terms can result in legal action against a debtor.
This interactive graph shows the number of bankruptcies and consumer proposals filed in Alberta from January to August over the past six years:
Consumer proposals will affect your credit rating for three years after you fulfil the terms of the agreement, as compared to a first bankruptcy that sticks around for six years.
Second bankruptcies can impact your credit rating for as much as 14 years, making consumer proposals especially appealing for those who have already declared bankruptcy once.
"Ninety-per-cent-plus of people who have done a bankruptcy before will do a proposal as an alternative, because the rules for a bankruptcy for a second time are a lot more stringent," Alam said.
The consumer proposal route is also common for entrepreneurs who want to take another shot at building a successful business, he noted.
"In a proposal, you can still be a director of a business," Alam said. "In a bankruptcy, you can't."
Optimism fuels proposals
Filing a consumer proposal is often an act fuelled by creditors' optimism for the future, Lock said.
"They're saying, well, I can make a payment of something to my creditors over five years and, hopefully, in the next couple years, I will get a better-paying job, get a second job, or things will get better in our economy and then I can pay off the proposal sooner and it'll be off my credit rating sooner," she said.
"Whereas, in a bankruptcy, the more they make, the more they pay."
That aspect also makes proposals preferable to debtors who receive a sudden windfall while going through the insolvency process.
Unlike with a bankruptcy, the amount you pay through a consumer proposal doesn't change whether you find a new job, get a large tax return or receive a sizable inheritance.
"I even had one of my guys who won the lottery, who did a proposal, and all the money was his," said Alam.
Overall, Alam said he sees hope driving a lot of clients toward consumer proposals too.
"People are optimistic in Alberta and they always look to the future," he said.
"People think their circumstances will improve."
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