Canadians who cannot keep up with debt payments usually resort to credit counseling, debt settlement arrangements or bankruptcy. In recent years another option became available and quickly gained in popularity – a consumer proposal. Despite the popularity and its many benefits, consumer proposals aren’t for everyone. This article is going to address some drawbacks you should watch out for if you’re considering a consumer proposal as a debt relief option.
First, let’s clear up the definitions:
Credit counseling: This is the advice offered by a non-profit organization that touches on education and a debt repayment plan. With credit counselling you create a repayment plan that completely pays off your debt with interest, over a prolonged period of time.
A debt settlement: This is a type of repayment agreement that is negotiated by an attorney or experienced financial consultant aimed at getting you to pay off only a portion of the debt, usually in one lump sum payment.
Bankruptcy: In bankruptcy, you are expected to surrender all the assets you own (above a certain threshold) to a Licensed Insolvency Trustee who will divide the proceeds among your creditors.
Consumer Proposal: A consumer proposal is also completed with a licensed trustee. A consumer proposal, as a repayment plan, must be agreed approved by your creditors. With this plan, you’re required to repay only a portion of the debt you owe. According to Canadian law, 5 years is the maximum repayment period for a consumer proposal.
Top 3 Disadvantages of a Consumer Proposal
Negative credit record
A proposal will reflect on your credit report for 3 years after you complete your payments. This means if you take the full 5 years to pay it off it will stay on your credit file for 8 years. Bankruptcy on the other hand (if discharged in nine months) stays on your record for 6 years, the whole process totaling 6 years and 9 months. Basically, the note of the bankruptcy will come off your credit file one year and 3 months sooner than a consumer proposal.
Requires a reasonably steady income
Another potential drawback is that to be eligible for a consumer proposal you must show an ability to complete the agreed upon monthly payments. If you miss three payments your proposal may be canceled and your creditors can again start pursuing you for your debts.
Pay off more debt
While the consumer proposal stops future interest charges, you still generally pay back between 30% and 70% of the total debt owing to creditors. So in some cases, based on your income level and total debt, it makes sense to file bankruptcy for a complete debt write off.
So should you file for bankruptcy instead of a Consumer Proposal? Well, not so fast…
Despite the just mentioned disadvantages, in most cases the consumer proposal option is still “the lesser evil”. It allows debtors to keep their assets, like a home or vehicle. It puts a stop to the interest charges, collection calls and garnishments. It is less damaging to ones reputation in cases where financial health of the individual is a prerequisite to maintaining employment (like a banker, real estate agent or insurance broker). And most importantly, it is a fairly quick process, 45-60 days to get everything finalized vs a minimum 9 month in cases of bankruptcy and even longer for credit counselling and debt settlements.
Here’s the full list of benefits:
- You can negotiate to pay back only a portion of the debt you owe. When creating a proposal to your creditors, you can work with your Administrator/Trustee to negotiate payment terms to repay less than what you owe. Creditors will usually agree if the proposal provides a greater return than what they would receive if you filed for bankruptcy.
- Pay in 60 monthly installments. You can negotiate to pay off the new (settled) amount over 24, 36, 48 and 60 months.
- Your monthly payment never increases. Even if your income increases or you come into money after filing a Consumer Proposal your monthly payment is set and will not increase.
- Immediate stoppage of interest charges.
- Collection calls from creditors stop.
- All legal actions and claims against you are stopped. If your creditors have filed lawsuits or made legal claims or actions, all these activities will be stopped.
- You can retain/keep all of your assets.
- Less damaging than filing for bankruptcy, allows you to solve debt problems without going bankrupt.
- Comes off your credit report in a shorter amount of time if the repayment term is 48 months or less.
As you can see from above, despite some disadvantages, a consumer proposal is an exceptional program for individuals, families and business owners who are facing financial hardship and need a practical solution to their debt problems. If that sounds like you, click below to schedule your Free, No-obligation phone consultation with a Consumer Proposal Administrator.