Consumer Proposal vs Debt Settlement: Differences
The differences between a consumer proposal and a ‘debt settlement’ are significant.
Knowing, and understanding the differences can save you thousands of dollars and months of unnecessary stress.
Consumer Proposals
Consumer proposals are legally binding agreements between debtors and their unsecured creditors, that are filed with the government and managed by federally licensed Trustees in Bankruptcy, such as David Sklar & Associates. All fees and procedures are set and overseen by the Bankruptcy and Insolvency Act and the Office of the Superintendent of Bankruptcy.
Creditors usually agree to a consumer proposal, because they will receive less if the debtor takes the next step and goes into bankruptcy.
If a majority of creditors (in terms of debt owed) approve a consumer proposal, then any creditors who voted against it, are required, by law, to honour the terms of the proposal.
In a consumer proposal, creditors agree to accept a reduced repayment of the debts that are owed to them, to stop all interest charges, and to stop all collection efforts. The debtors, agree to repay the creditors set amounts (usually in monthly payments), for a period of up to 5 years, and to attend credit counselling. The funds are paid into the trustee who holds them in a legal trust and distributes them to the creditors as agreed to in the proposal.
At the successful completion of the consumer proposal, the debtor is legally released from the debts covered in their proposal with a discharge.
Debt Settlements
The Ontario Ministry of Consumer Services has issued a Consumer Alert about Debt Settlement that advises caution and warns of such practices as misleading contracts, pressured sales, excessive fees, and perhaps most importantly – the failure to actually get the debts reduced.
Both Manitoba and Alberta have passed legislation to protect consumers from debt settlement companies.
The ‘debt settlement companies’ we are discussing are the unlicensed organizations who promise to negotiate a settlement with creditors, require a substantial upfront payment, and frequently leave their clients in far worse financial shape.
To be clear: the ‘debt settlements’ we are discussing are not the ‘debt management programs’ that are available through non-profit, licensed counsellors for solvent debtors.
Normally, a debt settlement company with tell their clients to stop paying their creditors, and send the money they would have paid, to the debt settlement company instead. Once the substantial settlement company’s fees have been paid up front, and significant funds have built up (a process that can literally take years) – the debt settlement company will then contact the creditors to see if they can cut a deal.
The pitch is, the credit companies will be so glad to get any money after such a long time without payment, they will be willing to settle.
The reality is, the credit companies will continue to call for their money and may take legal action. They are under no obligation to negotiate.
Use Caution – And Get All the Facts
If You Are in Serious Debt Trouble
If you live in the Toronto area and are in overwhelming debt, call the caring, licensed professionals at David Sklar & Associates at 416-498-9200 for a Free, confidential consultation. During your consultation, we will go over your financial situation, and discuss all of the options you have for getting out of debt and getting on with your life.
