A consumer proposal helps thousands of Canadians reduce their debts, protect their assets and rebuild their credit. But like all debt solutions, there are advantages and disadvantages that you must consider.
This column lays out some consumer proposal pros and cons to help you decide.
Consumer proposal pros and cons
There’s no denying that a consumer proposal is a smart choice for any Canadian who wants to avoid bankruptcy.
It is a debt settlement program that allows you to eliminate debts but only repay what you can afford rather than the total amount due.
What’s more, the payments are affordable and interest-free, and you can keep your assets.
Let’s look at some of the benefits of a consumer proposal in further detail.
1. Reduce and eliminate your debt
A consumer proposal could reduce your total debt to what you can realistically afford. Then, after you make all your payments, your debts are eliminated.
As it’s a legally binding agreement with your creditors, your creditors forgive the remaining amount.
Try our consumer proposal payment calculator to determine how much you could save.
2. One fixed monthly payment
Through a consumer proposal, your unsecured debt is restructured into one affordable monthly payment for up to sixty months, making it one of the best debt consolidation methods.
No interest is applied to your payments; the amount will never increase, even if your income increases.
3. Stop creditor hassle immediately
The great thing about a consumer proposal is that you can stop all creditor action.
Once you file a consumer proposal, your unsecured creditors can’t take legal action against you, and any current legal action must stop. Interest on your debts is frozen, collection calls will stop, and wage garnishments will be lifted.
This protection is called a Stay of Proceedings, which is legally binding and applies to all your unsecured creditors. However, secured creditors can seize assets if you default on your payments.
4. Keep your assets
One of the most compelling benefits of a consumer proposal is that you won’t lose your assets.
By agreeing to set monthly payments in a consumer proposal, you can protect assets like the equity in your home, car and savings.
Unlike bankruptcy, where you lose tax refunds, a consumer proposal lets you keep them. This tax refund could help you while working your way out of debt.
Secured loans aren’t affected as long as you continue making payments to them.
5. Protect future income
A consumer proposal protects against future increases in income.
Once your proposal is accepted, you make a fixed monthly payment that never increases regardless of any change in your income.
This is the opposite of bankruptcy, which requires you to pay more into your bankruptcy if your income increases.
So, if you think that your income might increase further down the road, a consumer proposal is a better option than bankruptcy.
6. You only need a majority of creditors to accept
You only require creditors owning more than 50% of the total debt to agree to the consumer proposal process.
In short, you don’t need everyone to agree for a proposal to be approved. When this happens, it is legally binding for all your creditors.
7. A trustee will deal with your creditors
As your proposal administrators, they will guide you through the process and ensure your creditors are notified at each stage.
The first step on your journey is to consult a trustee, who will decide if a consumer proposal is suitable for you.
Then, your trustee will prepare a proposal for your creditors, detailing proposal terms, the amount you’ll pay back and a monthly payment schedule.
8. You do not have to declare bankruptcy
By filing a consumer proposal, you can avoid bankruptcy, a more drastic measure that should always be a last resort.
Creditors are happy because a consumer proposal requires you to offer more than they would receive in bankruptcy.
See more: Consumer proposal vs bankruptcy
9. Governed under federal legislation
A Licensed Insolvency Trustee is licensed by the Office of the Superintendent of Bankruptcy, which regulates and manages the Canadian bankruptcy and insolvency industry.
Disadvantages of a consumer proposal
Now, let’s look at the disadvantages of a consumer proposal.
1. It will affect your credit
Like most debt relief solutions, a consumer proposal does impact your credit rating.
When you file a consumer proposal, your credit score will take a hit nose dive, and you may find it difficult to obtain credit for a while.
Additionally, a record of your consumer proposal will appear in the public reports section of your credit report for at least six years from the date you filed.
However, you’ll find that if your credit is already negatively impacted due to missing or late payments, a consumer proposal won’t inflict much further damage.
Your credit won’t be damaged forever, and you’ll find that you can rebuild your credit faster after a consumer proposal because you have cleared your debts.
Good to know: a consumer proposal will cause less damage to your credit than bankruptcy.
2. You need disposable income
Like most debt solutions, a consumer proposal requires you to have some income left over after essential monthly bills to make a payment to your creditors.
Your proposal offer must offer creditors more than they would get if you were to declare bankruptcy. The monthly amount is affordable because the total repayment is paid over a longer period.
Your Licensed Insolvency Trustee will determine an amount that creditors will likely accept.
A major benefit of a consumer proposal is that you pay a lower monthly payment, potentially freeing up money you were paying towards your debts.
If you have no assets or a low income, filing for bankruptcy might be a better option.
3. A consumer proposal takes longer
A consumer proposal takes longer to complete than bankruptcy because you pay your creditors a lower amount over a longer period. But keep in mind that this is why your proposal payments are lower.
The good news is that if your financial situation improves, you can pay more to complete your proposal early.
4. You can only include unsecured debts
You can eliminate unsecured debts in a consumer proposal, such as credit card debts, loans, lines of credit and CRA debts.
If you’re looking to include secured loans, like a mortgage or car loan, you must continue to pay these debts if you want to keep the asset tied to the loan.
On the plus side, a consumer proposal consolidates your unsecured debt into an affordable monthly payment which could free up some funds to pay your secured debts.
If you cannot afford your secured debts, you can surrender the asset. You can include any shortfall you are liable for in your consumer proposal.
5. All of your creditors must be included
All applicable unsecured creditors must be included in a consumer proposal. You cannot choose or leave out creditors; you must include everything.
6. Not all student loans can be eliminated
You can eliminate student loan debt in a consumer proposal if you have been out of school for seven years or more.
If your student debt is less than seven years old, it won’t go away if you file a proposal.
You will still be responsible for paying the student loan debt after the consumer proposal ends, and interest will accrue on the debt during this time.
There are many advantages and disadvantages of a consumer proposal
Hopefully, this guide has given you a better understanding of the pros and cons of a consumer proposal.
In most cases, the advantages of a consumer proposal outweigh the disadvantages, but a Licensed Insolvency Trustee can advise further and offer tailored advice for your specific needs.
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