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Settle for less?

October 21, 2020

Sure, you can settle for less but why would you?  We have recently been hearing from colleagues in the insolvency industry about very low proposal payments.  In fact, we have been hearing about people making payments as low as $50.00 per month on Consumer Proposals.  Creditors have not been voting against these offerings, so they have been obtaining creditor approval.

In some instances, these proposals may confer a benefit to the creditors and the debtors.  In some cases, they are of questionable benefit, so, let’s talk about how proposals work and the pros and cons of filing this type of proposal.

Where does the money go?

I am going to oversimplify the distribution of money paid under a proposal just to provide a basic understanding of fees and payments to creditors.  The fees payable to Licensed Insolvency Trustees (“LIT”) are set out in Rule 129 of the Bankruptcy & Insolvency Act so if you want to see a more detailed breakdown follow the link.

Essentially the first $2,000 paid into the proposal goes to the LIT for various fees and HST.  After that the LIT will capture 20% of the money available for distribution to creditors, plus HST.  Assuming the debtor were to pay $50 per month for a term of 60 months the total paid into the proposal would be $3,000 and using that basic formula the LIT would receive $2,226 as fees, the Superintendent of Bankruptcy would be entitled to a 5% levy ($38.70) before the creditors get paid, leaving $735.30 to be shared among the creditors.

Who would settle for less?

When you think about it, the creditors are being asked to share $735.30 among themselves over a term of five years.  So, if there were $5,000 worth of debts split equally among five creditors each creditor would receive $147.06 over the course of the proposal.  Or an amount equal to about $2.45 per month. 

Large institutional creditors do not want to spend time and money chasing after small delinquent accounts.  It really does cost more to collect the money than is received, yet closing off, or writing off accounts, is a necessary part of the accounting cycle.  The answer to the question is the creditors aren’t doing it for the money, they are doing it for the benefit of closing out the account.  When the paltry dividend is finally received it may be attributed to the administrative function of recording the payment rather than the settlement, per se, of the debt.

If not the creditors, who benefits?

There is a benefit for the creditors, albeit not directly financial.  Obviously, there is a benefit to the debtor in that they are able to bring about a final resolution to past due debts they could not afford to repay.  LITs benefit from the revenue generated by these proposals.  Settling for less is not always simply about money.

Settle for less of just go bankrupt?

Most of the time the options are that simple, either file a proposal or file a bankruptcy.  If a, no asset, bankruptcy filing costs less than $2,000 and can be finished in 9 months instead of the 60 months of payments for a proposal, why file a proposal?   That’s a really good question and worth contemplating.

A proposal impacts a credit report for three years after completion, a bankruptcy remains on a credit report for 6 years after completion.  So, a proposal that takes five years to complete impacts a credit report for slightly longer than a nine-month bankruptcy.

Religion or personal mores are factors in deciding to file a proposal as opposed to a bankruptcy.  Other factors might include second or time bankruptcy filings – a second or third bankruptcy filing stays on a credit report for fourteen years following discharge and the fees may be about the same as filing a $50 per month proposal.

Finally, as already discussed, creditors are often happy to get closure to uncollectable accounts. Call the office for more infromation at 519-646-2222