One of the advantages of filing a consumer proposal to deal with unaffordable debts is the stability of payments: you pay the same amount every month for the full length of the proposal, which lasts five years. However, you’re also allowed to pay it off sooner, becoming debt-free ahead of schedule.
In this guide, we’ll show you how to pay off a consumer proposal early and the benefits of doing so. We’ll also explain what to consider before going ahead with this decision, as taking your time to work through a proposal is sometimes the better option.
What You Gain by Paying Off a Consumer Proposal Early
Below are some common reasons why paying off your consumer proposal as soon as possible can work to your advantage.
Repair your credit faster
Getting a head start in repairing your credit is one of the most practical reasons to repay your proposal early.
When you first enroll in a consumer proposal, credit bureaus add an R7 credit rating to your credit report, the second lowest one you can get in Canada. This rating stays on your credit history for three years after your finish your proposal (or six years after your filing date, whichever comes sooner).
Given that a proposal can last up to five years, you’ll face challenges in obtaining credit for a considerable time. Lenders may offer you smaller amounts and higher interest rates, or they might reject your application until your credit sore improves.
So the sooner you pay off your proposal, the sooner you’ll see a rebound in your credit score. Your credit-building efforts will pay off in a much bigger way and increase your chances of getting loans in the future.
Get access to credit sooner
The faster you can complete your proposal, the sooner you’ll be able to borrow money again at favourable rates and terms. So, if you anticipate needing financing in the near future, it may be worthwhile to pay off your proposal early.
Good credit is especially crucial for certain loans, such as mortgages. For example, it takes about 2 years to get a CMHC-insured mortgage in Canada after completing bankruptcy or a consumer proposal.
Avoid the risk of missing proposal payments
By paying off your proposal as soon as possible, you avoid the risk of missing payments during the typical five-year repayment period.
Why is this important? The reason is that if you missfall behind 3 payments at the end of a month, your proposal is automatically cancelled. That means your original unsecured debts will return, and you’ll lose all the benefits of a consumer proposal, including legal protection from creditors.
Enhance financial flexibility
Completing your proposal sooner will leave you with one less payment obligation in your monthly budget. That means you’ll have more money to do with as you please. You can boost your TFSA investments, afford a more luxurious vacation, begin a home renovation project you’ve put off, save for a down payment on a home, and more.
Best options for paying off your consumer proposal early
Here are some ways you can speed up the consumer proposal repayment process.
Make extra payments
A consumer proposal typically requires you to make monthly payments over five years. However, you can increase the payment frequency to help you pay off the balance faster.
For example, instead of monthly payments, you can switch to bi-weekly payments, which will add an extra monthly payment per year. This is a common trick people use to pay off their mortgage faster. By using it, you’ll complete your proposal in 4 years 7 months instead of 5 years.
Make higher payments
Another way to speed up the repayment process is to increase the size of your payments. Adding even an extra $20 or $30 could make a huge difference. However, you should only agree to this option when you’re positive that it won’t negatively affect your budget.
One of the biggest advantages of a consumer proposal is that your payments don’t automatically go up when you make more money, an issue that can occur under bankruptcy. So, you can use a pay raise from work, an inheritance, or income from a second job to help pay down your proposal faster.
Make a lump sum payment
You can speed up the process by giving your trustee a lump sum to whittle down your total proposal balance and shorten your repayment plan. People sometimes turn to this option when they’ve received a large tax refund, a bonus from work or a surprise inheritance.
Again, you should only try this option when you’re positive that it won’t negatively affect your budget or your ability to make payments down the line.
Sell an asset
This is an effective solution if you’re already planning on selling the asset. For instance, maybe you want to downsize from a house to a rental apartment because you’re finding mortgage payments and other house-related responsibilities too challenging to manage. Or perhaps you want to sell your vehicle because it’s more convenient for you to commute by public transit.
Remember: Paying down your consumer proposal faster shouldn’t be your primary motivation for selling an asset. It should be a perk that comes with the sale.
Options for paying off a consumer proposal you should reconsider
Withdrawing money from your RRSP
If you don’t have spare cash lying around, you may be tempted to withdraw money from your RRSP to apply against your proposal. Withdrawing from your RRSP to pay off debt, even if it’s a consumer proposal, is usually not worth doing.
In the short run, your withdrawal will be taxed in the current year, or your employer could stop matching your contributions if the money is from a company RRSP plan. This defeats the purpose of an RRSP, which is to contribute funds regularly to grow your savings while shielding gains from taxes. By sacrificing significant growth in your investments to pay off your proposal, you risk being left with less money than you need to fund your retirement.
Taking out a loan
Some applicants consider taking out loans to pay down their consumer proposal early. This presents several problems. First, lenders will likely offer you high-interest loans because your credit score has dropped considerably since you’re in the midst of an insolvency proceeding.
Second, you are taking on more unsecured debt to recover from your debt problems, potentially undermining your debt recovery. It’ll cost you more, since the loan charges interest, whereas your proposal doesn’t.
There are circumstances where this approach is a good idea, but it is best to speak with your Licensed Insolvency Trustee before making any final decisions.
Are there any drawbacks to paying off a consumer proposal early?
Yes, rushing to pay off your consumer proposal isn’t always a smart move. Here are some reasons to reconsider paying off your balance as soon as possible.
Increased financial strain
The whole point of a consumer proposal is to ease the financial pressure of high-interest debts on your household. Since a proposal wipes out a significant portion of your debts, you’ll be left with a smaller monthly payment, leaving you with more money to pay household bills, your mortgage, save for retirement, etc.
However, by increasing your payment frequency or making sporadic payments, you’ll have less money left for your living expenses and other financial commitments. As a result, you may have to make some tough adjustments in your lifestyle, spending habits, and goals.
Not worth the credit score improvement
Finishing your consumer proposal ahead of schedule will may result in it being removed from your credit report early, and by extension, result in faster credit recovery.
However, the positive credit effect isn’t particularly significant, and it doesn’t occur instantly. Your proposal will still remain on your credit report for up to three years after completion, which will limit your borrowing opportunities.
Plus, you can start revitalizing your credit while working through your proposal—you don’t have to wait to complete it. Here are some ways to do that:
- Staycurrent with your mortgage payments and other secured debts
- Use a secured credit card or credit-building loan
- Pay your household bills on time
- Use a prepaid debit card and revamping your budget to free up more cash instead of taking on new debt
What to consider before paying off your consumer proposal early
Before applying more money to your consumer proposal, ask yourself the following questions:
- Can I afford to make the extra payments without sacrificing my living expenses or defaulting on my proposal?
- Can I avoid borrowing to fund the extra proposal payments?
- Am I going to need to borrow money in the near future for a major purchase, such as a home?
- Will paying off my consumer proposal early help me achieve some crucial goals?
- Is my income stable and reasonably secure?
- Do I have an emergency fund to cover unexpected expenses, including the risk of missing proposal payments?
The bottom line on paying off a consumer proposal sooner
Early repayment of a consumer proposal early is advantageous in the right circumstances. If you have a steady income, an emergency fund, and paying off your proposal early support your long-term goals, it’s worthwhile to complete it sooner. However, refrain from borrowing to achieve this unless you have a compelling reason to do so you risk getting into financial trouble again by doing so.
It’s also perfectly fine to take the full term to complete your proposal. After all, you won’t pay any interest, and your payments will never increase, providing you with financial stability and the ability to rebuild your credit along the way.
Before making any changes, talk to your Licensed Insolvency Trustee. They can review your financial situation, explain your options, and help you decide whether paying off your proposal early makes sense—or whether staying the course is the smarter move.
