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So what exactly is a consumer proposal?

In Canada, a consumer proposal is considered "the safer" alternative to bankruptcy. In the simplest of terms, a consumer proposal (CP) is a legal debt settlement plan that a Licensed Insolvency Trustee files on your behalf to protect you from your creditors (this includes the government for income tax debt). It allow you to repay a portion of your debts based on what you can afford to pay while at the same time providing a reasonable payment to your creditors.

During the proposal you are paying back a portion of your total debts – on monthly basis, over an agreed amount of time (usually three to five years).

The interest on your debts are frozen, and your creditors have no legal right to continue to try and collect or harass you or repossess your assets.  All collection efforts are stopped once the proposal is filed.

Sounds like a great solution, right? For many Canadians it is.

That being the case, you still have to decide for yourself if filing a consumer proposal makes sense for you. These 7 questions will help you reflect and make an informed decision regarding your debts.

1. Do you have a stable source of income?

A consumer proposal is meant to ease your debt burden.  A successful proposal typically requires a fairly steady income (from employment, pension, business, etc.) that will support your ability to make the monthly payments.  While circumstances may force you to skip a payment here or there, you ultimately must complete the agreed upon proposal terms.  If a proposal is not not completed, your legal creditor protection ends and your creditors will again have the legal right to pursue you for payment.

Part of the discussion with a Licensed Insolvency Trustee will be the assessment of your ability to successfully complete a proposal.

2. Are you planning on buying a home, or applying for a loan any time soon?

Upon the filing of a consumer proposal the credit bureaus are notified.  This can cause an issue if you are intending to purchase a home or apply for other types of loans or financing (such as vehicle financing).  This is something to discuss with your Licensed Insolvency Trustee as it could impact the timing of when you may consider filing a consumer proposal.

3. Are you behind on monthly payments?

In other words, are your debt problems snowballing? For instance, have you been skipping your credit card payments and it’s becoming more difficult to service your loans? If so, it is a sign of financial strain and a proposal may be what you need to get your finances under control again.  The monthly payment in a consumer proposal is almost always lower than the total minimum payments you are currently making to service your current debt.

4. How much debt do you have?

To help decide whether filing a consumer proposal is a good decision, total up all your debts and weigh them against your income. Generally, you do not want to file a proposal if your loans are not that burdensome. While a proposal is a good way to “avoid” high interest and harassment from creditors, it also places a black mark on your credit history. For this reason, it is not recommended to file a proposal if your debts are less then $10,000.

Another thing to consider is what type of debt do you have. A consumer proposal can only help with unsecured debt, such as credit cards, loans, department store cards, and government income tax debt. If your loans are guaranteed by some form of collateral, filing a proposal may not be the best option.

5. Are your debts only in your name?

If yes, it means you’re the only person liable for the debts and your proposal will not have any negative impact on your partner, friend or relative.

If not, and your partner, friend or relative is a co-signer or a guarantor, they are liable for the debt as well. In this case, your creditors have the right to pursue legal action against them for collection. In this case you may consider filing a joint consumer proposal if both of you are struggling financially.  But, if you’d rather not negatively affect your co-signers, then a consumer proposal may not be a viable option.

6. How is your credit rating?

Or, what is your “R rating”? Are you rated R1 (pays a debt in 30 days), R2 (pays in 30-60 days), R3 (pays in 60-90 days)? If your credit score has already started to deteriorate it means that it’s unlikely to improve unless dramatic measures are taken. If you don’t see a potential for financial “”windfall” in the near term, like an inheritance or additional income, it may be better to file a proposal before things get worse.

7. Do you see a realistic way out of debt if you don’t file a consumer proposal?

Remaining positive and optimistic in the face of obvious financial challenges can help us remain strong and not give up on life. However, we must be realistic about our options on paying down our debts. If you need to win a lottery to pay off your debts, it’s a sign that it’s getting out of control and action needs to be taken.

Yes, a consumer proposal has its downsides, with the obvious one being that it places the R7 mark on your credit history – which hinders your borrowing power for the next few years. But, it also puts an end to compounding interest, constant worries about where that next payment is going to come from and frees you up from living paycheck to paycheck.