Comparison Of Consumer Proposal With Other Debt Relief Solutions

The Top 4 Advantages of a Consumer Proposal Over Other Debt Relief Solutions

When a person in debt is trying to solve their money problems, they first have to make a choice of which debt solution they should use. We saw in a previous blog that there are different options available: debt consolidation loan, voluntary deposit (in Quebec), bankruptcy and Consumer Proposals.

The Consumer Proposal, which is the equivalent of a Chapter 13 bankruptcy procedure in the U.S., is the solution that has the most advantages. These include:

Your credit will be impacted for a shorter period of time. In comparison to a bankruptcy or voluntary deposit, a Consumer Proposal will only be on your credit record for three years.
You will be able to keep your otherwise seizable assets.
Your accepted proposal terms will not change. The agreement will remain the same, even if there are changes in your salary or revenues.
You will save more money. Compared to a debt consolidation loan or a voluntary deposit plan, you will achieve more savings in terms of the total amounts paid to creditors.

Consumer Proposal vs. Debt Management Plan

Generally, the reason people contact us at Hoyes Michalos is to see what their options are for dealing with their debts. They’re looking for debt relief so they can get a fresh start. However sometimes what prompts them to make a call is some type of creditor action: a collection call, a wage garnishment or threatened law suit. The type of debt relief option you choose depends on both the financial factors and the type of creditor protection you need.

Highlights:

Debt management plan for small debts but voluntary
Consumer proposal deals with all debt and is binding
Takeaways

Debt management plan for small debts but voluntary

Depending on your income and your budget the options for debt relief will vary. Most people we see are looking for some form of consolidation with one monthly payment that works within their budget. The path to this outcome has two proactive options: that is a debt management plan or a consumer proposal.

If your total debt is owed to a small number of creditors and is a relatively small in dollar value, then a debt management plan from a credit counsellor may be a good path to choose. These are voluntary plans. Creditors choose whether they want to participate or not. A debt management plan pools all your existing debts together with little or no interest charges. Usually a debt management plan runs for four years (take your debt and divide it by 48 months to get an estimate of your monthly payment). There are no additional fees or expenses for the service beyond your monthly debt management plan payment.

A debt management plan is a solution if you can afford to repay your debts, but just can’t afford the interest. This path is typically chosen if you can support repaying your debts and if your problem debts are generally no more than $10,000- $15,000 and consist of two or three credit cards. By making a deal with the one or two creditors you are having a problem paying, you can get these creditors to voluntarily stop any action they may be taking like sending your account to collections or garnishing your wages.

Consumer proposal deals with all debt and is binding

It is important to know however, that debt management plans are not legally binding contracts between you and your creditors. As noted earlier, they are entirely voluntary. If a creditor won’t participate, and if you need creditor protection, it is usually a time to look at a consumer proposal as a better solution. A consumer proposal is also something to consider if your debts are higher than $10,000 and your monthly payment under a debt management plan may be too high for you to afford.

Where a debt management plan is filed with a credit counsellor, a consumer proposal can only be filed through a Licensed Insolvency Trustee. This is because a proposal is a legal remedy through the Bankruptcy & Insolvency Act. This is what provides you with creditor protection in the form of a stay of proceedings that can stop wage garnishments, legal actions and collection calls.

A consumer proposal is a debt settlement solution for dealing with debt you can’t repay in full. Instead, you repay a portion of your debt over what’s typically a maximum period of five years (or 60 months). You can always increase your payments and pay your proposal off faster, you just cannot extend payments past the date set in your proposal.

This remedy is called a consumer proposal because you – the consumer – make your creditors an offer that they may either accept, amend or reject. Once you sign the paperwork for your consumer proposal, your creditor protection begins. Then your creditors have 45 days to consider your offer. If your proposal is accepted by more than half of all votes (each creditor gets one vote for every dollar they’re owed) the deal is approved and all of your creditors are forced to accept it (even those who didn’t vote or voted no). The proposal, once accepted, becomes a legally binding contract between you and your creditors.

Takeaways

The key difference between a debt management plan and a consumer proposal:

Consumer proposals are legally binding on your creditors, debt management plans are voluntary;
Filing a consumer proposal can stop your wage garnishment or other creditor actions while debt management plans do not;
Consumer proposals reduces the total amount of debt you repay while in a debt management plan you still must repay everything you owe;
The monthly payment in a consumer proposal is typically much less than that in a debt management plan (try our calculator to compare what your payments might be).

Debt Settlement vs. Consumer Proposal

In the debate against consumer proposal vs debt settlement, Canadians in debt must know arguments for both sides. Having a certain amount of debt is common. In fact, most Canadian adults have some form of debt.

Canadians carry an average debt load of $22,800 (excluding mortgages). This is somewhat of a hefty amount. But while some consumers may be able to manage their debt payments, others find it difficult.

Certain events can occur that can put consumers in severe debt. Further, irresponsible spending habits can bury consumers under mountains of debt. In these cases, it can be difficult to climb out of debt without some outside intervention.

Consumers can take steps on their own to ease their debt loads. Making more than minimum payments, paying down high-interest debt first, and limiting spending are some way to reduce debt.

But in many other cases, it may be impossible to pay down debt alone.

Luckily, certain programs are available for consumers who need help with their debt. Consumers who are suffering from debt issues might find debt settlement or consumer proposals useful.

But what are these programs? What’s the difference between debt settlement and consumer proposal? How are they similar? And most importantly, which one is best for you?

Consumer Proposal vs Debt Settlement – What kind of debt can you settle?

You can’t settle all debts with this type of program, including secured debt. This includes debts such as mortgages, car loan, and title loans. A secured debt is a loan backed by collateral.

You can settle most unsecured debts. These include:

Credit cards
Unsecured personal loans
Student loans
Payday loans
Medical bills

Debt Consolidation vs. Consumer Proposal: What’s the Difference?

Debt consolidation is a popular way to reduce debt. We explain the basics and show you how debt consolidation is different than consumer proposals.

Our clients always ask us: what’s the difference between debt consolidation and consumer proposals? When should you choose one over the other? What are the disadvantages of consumer proposals?

Today, I’ll explain how these two debt reduction methods work in Canada. By the end of the article, you’ll know why you might choose debt consolidation versus going the consumer proposal route.

This information is based on my 20+ years in financial services and what I’ve learned helping restructure debt for families across Canada.

Debt consolidation vs. consumer proposals

A consumer proposal is essentially an offer you make to all of your unsecured creditors. You usually agree to a single, fixed monthly payment.

You can use a consumer proposal to reduce your debt, making an offer to your creditors. Canadians often choose to use consumer proposals as it means that you’ll only need to pay back a portion of your overall debt.

A consumer proposal is helpful, as you will often only have to pay down a portion of your debt.

So how is a consumer proposal different than debt consolidation?

As we explain in our simple guide to debt consolidation, debt consolidation involves taking out one big loan to pay off many small loans.

Debt consolidation is really about increasing your leverage with the primary goal of lowering your interest rate.

For example, if you go to a bank and want to borrow $5,000 on a credit card, you’ll be offered a high-interest rate. But if you want to borrow a large sum of money secured against your home—for example, mortgages—you get a much lower interest rate.

Debt consolidation involves the same principle—you are borrowing one big lump sum of money to pay back your smaller loans with higher interest rates. This helps you get out of debt much faster as your new loan will have a much lower interest rate.

When should you choose debt consolidation?

If you can afford the payments and have good enough credit to get a debt consolidation loan, then a debt consolidation loan might be better than a consumer proposal.

Debt consolidation usually has no negative impact on your credit rating, unlike a consumer proposal. And you are still paying back your original debt—you’ve just chosen a smarter route with fewer interest payments.

When should you choose a consumer proposal?

A consumer proposal might be a better option than debt consolidation if you are in the following situations:

Your credit is already severely damaged.
You can’t afford the new proposed payment with a consolidation loan.
You can’t consolidate all your debt.
You’re struggling to pay your bills on time.
You have creditors calling you and debts in collection.
Your wages are being garnished.
You have had creditor liens placed on your home.
You’re behind on one or more mortgage payments or falling behind on car loan, credit card, or line of credit payments.
You owe a lot of money to Revenue Canada (the CRA) and they are aggressively trying to collect from you.
You have recently experienced a business failure and creditors are trying to collect from you.

Is a Consumer Proposal the Same as a Bankruptcy?

A consumer proposal is not the same as a bankruptcy, but it does impact your credit score for three years after you’ve completed your payment period. The impact is not as great as it would be if you filed for bankruptcy, however. The fact that you repay a portion of your unsecured debts instead of having them discharged in a bankruptcy is considered more favorable to your creditworthiness.

Is a Consumer Proposal Better than Bankruptcy?

For many debtors, a consumer proposal is a better option than filing for bankruptcy. If you meet the requirements for filing a consumer proposal, which includes having a stable monthly income, it can be better. The costs may be lower than bankruptcy depending on the amount of debt you are carrying. The best way to determine the right option for you is to speak to a Licensed Bankruptcy Trustee.

Credit Counselling vs Consumer Proposal – Which Should You Choose?

If you are looking to get out of debt with the help of a professional, you may be considering the pros and cons of credit counselling vs a consumer proposal.

Credit counselling offers a consolidation program called a debt management plan (DMP). To qualify, you must be able to afford to repay you debts in full within five years. A DMP is a voluntary repayment program arranged through a not-for-profit credit counsellor.

Credit counselling is generally best for individuals who:

Carry small debts totaling less than $10,000 or up to $20,000 if they have enough income to support repayment plus additional up to 10% – 15% credit counselling fees; or
Have too much equity in their home to be eligible to file a consumer proposal but cannot qualify for a second mortgage or debt consolidation loan; and
Can afford to repay 100% of their debts but need a break on interest costs;

A consumer proposal is a government regulated debt settlement program filed with a Licensed Insolvency Trustee. You make an offer to repay less than you owe and can spread those payments over five years.

Consumer proposals are best for those who:

Cannot afford to repay 100% of their debts;
Want to repay a portion of their debts based on what their budget will support;
Have large unsecured debt balances, tax debts, student debt, multiple payday loans;
Want to avoid bankruptcy

Both programs will affect your credit. Both appear as an R7 and note will show you are in a program to repay your debts.

Both a consumer proposal and credit counselling begin with a free initial debt assessment. The primary difference is that a credit counsellor will review your budget to determine if you can repay 100% of your debts, the primary requirement of a debt management plan. A licensed insolvency trustee will review your finances to determine how much you can afford to repay and what you may be able to offer your creditors, and will review all of your options.

Regardless of which you choose, be sure to work with a qualified, experienced, reputable advisor. Consumer proposals can only be filed with a Licensed Insolvency Trustee. Since they are government programs, you should always talk to a LIT about how they work. If considering credit counselling, be sure to contact a not-for-profit credit counselling agency. It may even be wise to seek two opinions to ensure you are making the right choice.