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You’re in serious debt, and you’re planning to file a consumer proposal as a solution. A consumer proposal is a legally binding agreement made between you and your unsecured creditors, allowing you to repay a reduced portion of your debts. You could reduce the total by up to 80%.
You will cover that reduced debt through a carefully planned repayment schedule. When you finish all of those payments, along with some credit counselling sessions, your proposal will be complete, and your debts to these unsecured creditors will be considered paid in full.
One of the biggest concerns that you might have is how long a consumer proposal will take for you to finish. It takes several weeks to submit the proposal, contact the creditors and make any amendments. If the proposal is accepted, you have a maximum of 60 months (five years) to complete the terms of the proposal and free yourself of financial stress.
But is it possible to do the proposal in under five years? Can you finish it sooner? The answer is “yes.” Here’s how:
How Can You Pay Off Your Consumer Proposal Early?
Applicants have up to five years to complete the terms of their consumer proposal, but there’s no rule saying that you have to take the maximum allotted time to finish it. You can tackle it sooner if you’d like. Here are some of the ways that you can speed up the repayment process for consumer proposals in Ontario.
Make More Payments:
Consumer proposals are usually set up so that you send a single monthly payment to your Licensed Insolvency Trustee. But, if you want to shorten your payment time, you can switch from monthly payments to bi-weekly payments. By increasing the frequency of your payments, you can trim down the time it takes to finish the proposal.
Talk to your trustee about this option.
Make Bigger Payments:
Another way that you can speed up the repayment process is to increase the size of your payments. Even increasing your payments by $20 or $30 could make a huge difference. You should only agree to this option when you’re positive that it won’t negatively affect your budget.
If your income increases during your proposal, you might want to consider this approach. Talk to your trustee about making an amendment and boosting the payment amount. One of the biggest advantages of a consumer proposal is that your payments don’t automatically go up when you make more money — this is an issue that can come with the personal bankruptcy process. So, you can use a raise, inheritance or second job to help you 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 debt total and shorten your repayment plan. Applicants 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 look to this option when you’re positive that it won’t negatively affect your budget or your ability to make payments down the line.
You are free to do what you want with your assets during a consumer proposal. Be careful if the assets are pledged against secured debts. Your proposal only deals with unsecured debts, so, if you sell assets that have secured debts against them, you will have to pay the secured debt in full from the proceeds first, then use the surplus to pay down your proposal. If your asset does not have a secured loan, you can sell and use the entire proceeds to help you pay down your proposal faster.
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 difficult to manage. Or maybe you want to sell your vehicle because it’s more convenient for you to commute by public transit.
Paying down your consumer proposal faster shouldn’t be your main motivator to sell an asset. It should be a perk that comes with the sale.
Options That You Should Reconsider
Using an RRSP:
Some applicants consider using their RRSP to help them pay down their consumer proposal faster. This is not a solution that we recommend because it comes with short-term and long-term financial consequences.
The short-term consequences are that your early withdrawal will be taxed in the year of withdrawal, or your employer could stop matching your contributions if it is a company RRSP plan. The long-term consequences are that you will be taking retirement funds away from your future self. You will need those savings eventually and an RRSP is designed to allow these funds to grow at a faster rate as they are tax free inside the RRSP.
Taking Out a Loan:
Some applicants consider taking out loans and using them to pay down their consumer proposal early. This presents several problems. First, lenders will likely offer you high-interest loans because you have a lower credit score and you’re in the midst of an insolvency proceeding. Second, you are taking out more unsecured debt in order to recover from your debt problems. You will be undermining your debt recovery with this solution. It will cost you more as the loan comes with interest, whereas the proposal has no interest.
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.
The Benefits of Paying Off Your Consumer Proposal Early
A credit bureau adds your consumer proposal to your credit report the moment that it goes into effect. They will not remove it right after you’ve completed it. The credit bureau Equifax keeps that information on your report for three additional years. The credit bureau TransUnion keeps it for three additional years after you complete it or six years after you sign it — whichever option comes first.
Your credit report is a vital resource for lenders. Having information like a consumer proposal on your report or a poor credit score will influence how lenders respond to your loan applications. They might offer you smaller amounts and higher interest rates, or they might reject your application until your report shows signs of improvement.
This is why some applicants want to pay off their consumer proposals early. They want credit bureaus to remove the proposal from their credit report faster. If they took the maximum payment schedule, the proposal would stay on their report for a total of six to eight years.
Avoiding Missed Payments:
Some applicants believe that the longer the timeframe they have for paying down the proposal, the more opportunities they’ll have to miss payments and nullify the agreement.
However, nullifying a consumer proposal is not a common problem. You need to miss three months’ worth of payments to nullify your proposal. Your licensed insolvency trustee works hard to calculate your proposal payments so that they’re manageable. If you ever feel like you’re going to miss a payment or have already missed one, you should contact your Licensed Insolvency Trustee right away to discuss ways to bring your proposal back into good standing. The earlier you contact your Licensed Insolvency Trustee, the more options you will have available to you.
Ripping Off the Band-Aid:
Finally, some applicants want to speed up repayment because they want to get the process over with. They want to be debt-free as soon as possible. Think of it like taking off a band-aid. Some people want to peel it off slowly, and others are ready to rip it right off.
Disadvantages of Paying Off a Consumer Proposal Early
Puttingtoo much pressure on yourself to pay your proposal off early could put a strain on your finances. You will want to commit to a payment strategy that is sensible and easy to maintain. Doing this will help you cover your proposal payments without missing a month and risking nullification.
It will also help you manage other financial responsibilities during your proposal, like your rent/mortgage or insurance. If you default on mortgage payments, you could lose your home. Missing insurance payments could cancel your plan and leave you without protection. This is very risky! Read our blog about life during the consumer proposal process to see how you can avoid defaulting on any important payments.
Ignoring Interest Relief:
Racing to pay off your proposal as soon as possible also means that you’re ignoring one of its biggest advantages: interest relief. A consumer proposal pauses interest, penalties and hidden fees that could make your debt total grow. This makes repayment much more manageable and takes the pressure to pay quickly off your shoulders. When will you get another chance to repay creditors without any interest? This is a rare opportunity.
What About Your Credit Report?
It’s true that your consumer proposal will affect the score on your credit report and, by extension, your ability to get loans. But that score isn’t set in stone. Your score will improve when you complete your consumer proposal — this is because you’ve repaid creditors and reduced your total debt load. You’ll be in better financial standing than you were when you first filed the proposal.
You also have the power to boost your credit score. Paying your bills on time, reducing your credit utilization rate and avoiding new credit accounts are all habits that can help your score move up the ranks. A higher score will lead to better financial opportunities.
David Sklar & Associates
Are you looking for debt relief? Our debt professionals at David Sklar & Associates can assess your financial situation to see whether you qualify for a consumer proposal. If you do, one of our trustees will help you file the proposal and plan the payments in a way that works with your income. If you want to speed up the process, they can show you how to reach that goal without sabotaging your financial well-being.
Our trustees have years of experience under their belts. They have helped people across the Greater Toronto Area dig themselves out of debt and find financial stability. They can help you do the same.