|What is it?
A debt settlement plan is designed to negotiate an agreement between you and your creditors to reduce the amount of debt you must repay.
A consumer proposal is an agreement you make with your creditors, pursuant to the Bankruptcy and Insolvency Act, to repay a portion of the debt owed and, in turn, a majority of creditors listed in the proposal agree to accept your offer. The offer then becomes binding on all creditors.
|Can it be accepted by some creditors and not others?
Yes. The company will need to contact and try to reach a separate agreement with each of your creditors. Any of your creditors can refuse the suggested settlement plan, and your debt with them would remain unchanged.
|No. If the majority of your creditors agree to your offer, the proposal becomes legally binding on all of the creditors in the proposal. The proposal does not need to be accepted by each creditor individually. |
|When does the negotiation with creditors occur in the process?
||Negotiations with creditors typically start several months after you have signed the contract with the company. Upon signing, the company will instruct you to stop making any payments (interest or principal) towards your debts and instead, you will make monthly payments to the debt settlement company to build up a lump sum payment in a holding account. Once they feel you have enough built up in the holding account to offer to the creditors, the company will then start to contact your creditors and try to settle each of your debts for a percentage of what you owe.
You will know early in the proposal process if your consumer proposal is accepted.
You and your trustee will start the process by reviewing your situation and determine what amount you can afford to re-pay over a maximum of five years. The proposal is prepared and filed by the Trustee.
The creditors listed in the proposal have the option of requesting a meeting to discuss the proposal, and determine whether they will accept it, within 45 days. In our experience, few proposals are rejected.
Once you receive confirmation the proposal is accepted, it is legally binding on all of your creditors and on completion of your proposal, the remaining debt is written off.
|What are the costs?
It depends. With some companies, the initial monthly payment you make goes directly to them as “administrative fees”. Other companies request a lump sum fee upfront. While the amount of these fees varies, the average is usually $1,500 but we have also heard there can be fees in excess of $3,000. There is no schedule of costs and you will have to find out on your own.
|Your Trustee’s fees are set by the government, and are based on a percentage of the amount that you pay to your creditors in the proposal. In a consumer proposal, there are no upfront fees or additional administrative costs and fully disclosed.|
|Will my creditors and the collection agencies stop calling?
||No. Debt settlement companies have no legal ability to stop collection activity. Because the company does not negotiate the settlement upfront and you are not making any payments to your creditors, creditors can still take legal action by garnishing your wages and collection agencies can still call.
Yes. A stay of proceedings (think about getting your dog to sit and “stay”) is in effect when you start the process. Your debts and interest charges are frozen until a decision is made about the acceptance of the proposal. This prevents your creditors from pursuing collections activities against you, such as court action or wage garnishments.
|What debts can be included?
Unsecured debts such credit cards, department store cards, payday loans or other loans that are not secured by a lien on an asset (such as home equity line of credit or a car loan) can be included.
It is not possible to include secured debt in a debt settlement.
Unsecured debts such credit cards, department store cards, income tax debt, payday loans or other loans that are not secured against an asset (such as home equity line of credit or a car loan) are included.
It is not possible to include secured debt in a consumer proposal unless you decide to surrender the secured asset.
|What happens to the interest charges?
Because the debt settlement is not negotiated until the end of your plan, interest charges do not stop and will continue to accumulate each month. This means your debt level will continue to increase over the course of your plan.
|Because a consumer proposal is a binding legal process that is based on the amount you owe at the date of filing, interest charges are stopped when the proposal is filed and your debt level is frozen at the amounts you owe on that date.|
|What is the affect on my credit rating?
||Your credit rating will continue to deteriorate while you are in a debt settlement plan since you are not making regular payments to your creditors. The effect of a debt settlement plan on your credit rating is often the same as that for a consumer proposal.
When your proposal is completed you will receive a credit rating of R7 for a period of up to three years. After the completion of your proposal, and in some instances before it is even completed, BDO can provide resources to help you re-establish and repair your credit profile.