If you routinely struggle to make bill payments and pay for emergency expenses, you may have turned to payday loans for help. A payday loan is a short-term loan offered through privately-owned lending firms. You can borrow up to $1,500, which you must pay back (along with a fee) when you receive your next paycheque, hence the name “payday loan.”
There’s nothing wrong with occasionally using payday loans when money is tight. However, relying on them for long-term financial aid can lead to disastrous debt problems.
Payday loans charge exceptionally high-interest rates. In Ontario, payday lenders can charge you $15 for every $100 they lend, which works out to an annual interest rate of over 390%. And that doesn’t include the steep late fees. As a result, payday loan debt can balloon quickly. Over time, repaying what you owe can prove challenging, if not impossible.
In this article, we’ll explain how a consumer proposal works and how it can help you escape the payday loan trap.
Can you include payday loans in a consumer proposal?
Yes, you can add payday loan debt to a consumer proposal. Consumer proposals deal strictly with unsecured creditors. And since a payday lender is an unsecured creditor, payday day loans qualify for inclusion.
An unsecured creditor is an individual or financial institution that lends money without requiring you to put up an asset as collateral. In other words, if you default on your loan, there’s no asset the creditor can seize to settle your debt.
How a consumer proposal works to reduce payday loan debt
A consumer proposal is a legally binding agreement between you and your unsecured creditors to repay a certain percentage of your debts. Depending on what your creditors are willing to accept, you could potentially eliminate up to 80% of your outstanding debts.
Under a consumer proposal, your remaining debts are combined, much like a debt consolidation loan. You’ll then repay the balance over five years through fixed monthly payments. You also have the option to make additional payments at your discretion to pay off the debt sooner.
Once you’ve paid off the total balance, and completed two mandatory financial counselling sessions, your proposal is complete, and you’re released from any further debt obligations to your total debts.
A Licensed Insolvency Trustee is the only professional who can file a consumer proposal for you in Canada. They’ll help you craft the agreement, submit the required paperwork to the court, notify creditors, arrange payments, and more. They’ll guide you through the consumer proposal process from beginning to end.
Note: To qualify for a consumer proposal, you must owe less than $250,000 (excluding the mortgage on your primary residence) in unsecured debts you cannot repay due to your financial circumstances. What if you owe more than $250,000? In that case, you can speak to a Licensed Insolvency Trustee about filing a Division 1 proposal or personal bankruptcy.
What are the benefits of filing a consumer proposal for payday loan debt?
When dealing with payday loans, a consumer proposal offers several advantages:
- Significant debt reduction. As mentioned, you can discharge a massive chunk of your payday loan. With a smaller balance to pay, your debt payment obligations will shrink considerably.
- Less need to borrow money. With just one low monthly payment to make, you’ll have more cash on hand to cover daily living costs or unexpected expenses. As a result, you’ll no longer need to take out payday loans or other forms of high-interest debt.
- Legal protection from creditors. Enrolling in a consumer proposal triggers a stay of proceedings, a court order that prevents creditors from taking legal action against you to recover unpaid debts. Your payday lenders won’t be able to garnish your wages, freeze your bank account, or file any lawsuit. You can safely ignore all payment requests without worrying about legal repercussions.
- No more collection calls. Are you being bombarded by collection calls from payday lenders? If so, you’ll be relieved to know that filing a consumer proposal requires them to stop immediately, courtesy of the stay of proceedings.
- No interest charges. No interest charges will ever accumulate on your balance, regardless of how much you must pay under your proposal. Given the exorbitant rates and fees that payday loans charge, this is a great weight lifted off your shoulders.
- No upfront fees. There are no upfront fees to pay to initiate a consumer proposal. While administrative fees are involved in a consumer proposal, these are accounted for in your monthly payment. There are no additional charges that you’re responsible for paying.
- No credit check. Has payday loan debt tarnished your credit score? If so, the good news is there is no minimum credit score requirement you have to meet to file a consumer proposal.
Can a debt consolidation loan help reduce payday loan debt?
If you lack the financial means to repay your payday loans, you could ease your burden by applying for a debt consolidation loan.
A debt consolidation loan combines multiple debts into a single debt. Under this arrangement, you’ll make one monthly payment at a lower interest rate. Considering the outrageous rates that payday loans charge, a debt consolidation loan can be a bargain. If you secure a favourable rate, hitting your payment deadlines will become much more manageable.
However, this approach to payday loan debt relief has several drawbacks.
First, you’ll need to meet specific requirements to get approved for a debt consolidation loan. Banks and credit unions often require a form of collateral, whether an asset or co-signer, and they demand good credit scores. If you don’t meet these criteria, lenders may deny your application.
Second, there’s no opportunity to negotiate a debt settlement when consolidating payday loan debt—you’re still liable for the entire balance. The only financial benefit you get is a reduced interest rate. If you’re unable to repay your balance in full, consolidating your debt with a loan won’t do you much good.
Third, consolidating payday loans under a single debt may increase your risk of default if your monthly payment is too much to handle. In that case, your lender can repossess any asset you’ve pledged as collateral or pursue your co-signer for payment.
Can a credit counselling agency help lower your payday loan debt?
No. It’s unlikely that a credit counselling agency will strike a deal with your payday lenders that involves you paying less than what you owe.
Credit counselling organizations offer a debt relief option called a debt management plan (DMP). Under a DMP, a credit counsellor will consolidate your debts into a new payment plan that fits your budget. They’ll work with your payday lenders to reduce or eliminate your interest and fees. In addition, they’ll educate you on money management tips and strategies so that you can better manage your household’s finances and avoid future debt trouble.
While a DMP can be valuable for some people, you may need more financial relief if your debt problems are severe. In most cases, payday lenders will not agree to participate in a DMP in the first place. They’ll certainly not be willing to forgive any portion of the principal, so you’ll have to pay every dollar you owe.
Furthermore, payday lenders (or any other creditor) have no legal obligation to accept a DMP from a credit counselling agency. Even if they agree to waive late fees and lower the interest rate, they can back out of the deal anytime. No court order can enforce the terms under a DMP.
Can you include payday loans when filing for bankruptcy?
Yes, you can include payday loans in bankruptcy, an alternative to a consumer proposal in Canada.
Bankruptcy is a debt relief program reserved for those with the most crippling debt problems. Unlike a consumer proposal, filing for bankruptcy will eliminate 100% of your unsecured debts.
While bankruptcy will clear all of your payday loan debt, you must be comfortable with making some sacrifices if you choose this route:
- You may need to give up some of your assets, including a portion of your home equity.
- You may need to make additional payments (surplus income) while enrolled in bankruptcy if your income exceeds the threshold set by the Office of the Superintendent of Bankruptcy.
Personal bankruptcy is preferable to a consumer proposal if you own few assets and earn little or no income. In this scenario, the cost of your bankruptcy will be low. Alternatively, if you own numerous assets and take home a sizable paycheque, a consumer proposal will likely be a better option.
Other debts you can include in a consumer proposal besides payday loans
A consumer proposal isn’t just a solution for payday loans. It can help you consolidate and reduce other unsecured debts: credit card debt, personal loans, unpaid utility bills and taxes owed to the Canada Revenue Agency (CRA). You can also add government student loans to a consumer proposal, but only if it’s been at least seven years since you’ve ceased being a student (or five years if you apply for financial hardship).
You won’t be able to pick and choose which unsecured debts to include in your consumer proposal. By law, all unsecured debts must be a part of the agreement.
Some types of unsecured debt cannot be discharged through a consumer proposal. These include unpaid child support payments, court fines, or fraud-related debts.
The bottom line on consumer proposals and payday loans
A consumer proposal can be an effective long-term solution for escaping the payday loan debt cycle. While a debt consolidation can be helpful, it’ll only save you money on interest charges. Depending on how much you owe to payday lenders, it may not be enough to ease the financial strain on your household.
Under a consumer proposal, a substantial amount of payday loan debt you owe will be forgiven, leaving you with one low monthly payment. Not paying interest, late fees, or prepayment penalties is also life-changing—you can rest assured that your balance will shrink rather than grow with each payment you make.
If you live in Ontario and need help deciding whether a consumer proposal is the right solution for getting rid of your payday loan debt, contact David Sklar & Associates. During your consultation, one of our Licensed Insolvency Trustees Insolvency Trustees will assess your financial situation and determine the steps for getting you out of debt — even if they don’t involve our services.
We don’t want you to be stuck in the payday loan trap. We want to help you get out and put that financial trouble behind you. Book your free, no-obligation consultation today – you deserve a fresh start!