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| Debt consolidation combines multiple debts into one new loan, while a consumer proposal is a legal settlement offer filed through a Licensed Insolvency Trustee. Consolidation may help if you qualify for a low rate and can repay the full debt. A consumer proposal may help if full repayment is not realistic. |
They are very different solutions
Consumer proposals and debt consolidation are often compared because both can create one monthly payment. But they work very differently.
Debt consolidation is a loan. A consumer proposal is a legal debt settlement process administered by a Licensed Insolvency Trustee. Explore the full range of debt relief options.
How debt consolidation works
Debt consolidation combines multiple debts into one new loan. You use the new loan to pay off credit cards, lines of credit or other debts. Then you make one payment to the new lender.
This can be helpful if the new interest rate is lower and the payment fits your budget. See the Financial Consumer Agency of Canada page on debt consolidation.
The risk with debt consolidation
Consolidation does not reduce the amount you owe unless the lender or creditor has agreed to a settlement, which is not how a normal consolidation loan works. You still repay the full debt, plus interest.
Another risk is that the paid-off credit cards become available again. If you use them, you may end up with the consolidation loan plus new credit card debt.
How a consumer proposal works
A consumer proposal is filed through a Licensed Insolvency Trustee. You make an offer to your unsecured creditors based on what you can afford and what creditors may accept. Official information is available from the Office of the Superintendent of Bankruptcy on consumer proposals.
The proposal may allow you to repay less than the full amount owed. Interest stops on included unsecured debts. You make one payment through the trustee.
Creditor protection comparison
Debt consolidation does not stop collection action from creditors that are not paid or that are not part of the loan. It also does not stop lawsuits or wage garnishment on its own.
A consumer proposal can stop most unsecured creditor collection action once filed. This is a major difference for people already behind on payments. See the Office of the Superintendent of Bankruptcy page on creditors contacting you after filing a bankruptcy or proposal.
Credit score comparison
Both options can affect credit in different ways. A consolidation loan may have less negative impact if approved and paid on time. However, missed payments before or after consolidation can still hurt credit.
A consumer proposal is reported on your credit report for a specific period, but it may create a clearer path to rebuild if your debt is otherwise unaffordable. Information about how long details stay on your credit report is available from the Financial Consumer Agency of Canada.
Qualification comparison
Consolidation depends heavily on credit score, income, debt ratio and lender approval. If your credit is poor, you may not qualify for a good rate.
A consumer proposal is not a loan application. It is based on your overall financial situation and whether creditors accept the offer.
Which option may fit you
Consolidation may fit if you have good credit, stable income, a lower interest rate and discipline not to reuse credit.
A consumer proposal may fit if your credit is already damaged, debt is too high, payments are unaffordable, interest is growing or creditors are taking action. Other options such as credit counselling or bankruptcy may also need to be compared.
The main takeaway
Debt consolidation moves debt into one loan. A consumer proposal can legally settle unsecured debt. If you are not sure which option is safer, speak with a Licensed Insolvency Trustee before applying for another loan.
Frequently asked questions
Is a consumer proposal the same as consolidation?
No. Consolidation is a loan. A consumer proposal is a legal process through a trustee.
Which option reduces debt?
A consumer proposal may reduce unsecured debt. Consolidation usually repays the full debt with interest.
Which option stops collection calls?
A consumer proposal can stop most unsecured collection action once filed. Consolidation does not provide the same legal protection.
Speak with a Licensed Insolvency Trustee
Speak with David Sklar & Associates for a confidential review of your debt, income, assets and monthly budget. A Licensed Insolvency Trustee can explain your options and help you choose a realistic next step. Book a free consultation today.
