If you’re overwhelmed by debt, a consumer proposal may be the perfect solution to give you a fresh start. As a bankruptcy alternative, it allows you to negotiate with your unsecured creditors to pay less than what you owe. In other words, a significant portion of your debts are forgiven, leaving you with lower monthly payments—and more financial freedom. However, a consumer proposal isn’t ideal for everyone grappling with unaffordable debts. In this guide, we’ll discuss the pros and cons of filing a consumer proposal so you can decide if it’s right for your debt situation.
Pros of a consumer proposal
Filing a consumer proposal to secure debt relief has many advantages:
You pay less than what you owe. Depending on your circumstances, you could reduce your current debt obligations by up to 80%. That means your monthly debt payments will drop sharply, freeing up more of your paycheque to cover living expenses and other financial commitments.
Zero interest and fees. You won’t pay any further interest, fees, or other hidden costs on debts included in your proposal. This is a benefit that debt consolidation loan can’t match.
You get to keep all your assets. A notable benefit of filing a proposal is that your assets are off-limits to creditors. You get to keep everything you own, including your home, car, investments, and tax refunds.
Consolidate you debts under one monthly payment. Say goodbye to managing multiple debts and due dates. Once your proposal is approved, your remaining debts are combined, and you’ll be responsible for making only one fixed payment. This feature makes budgeting a whole lot easier.
You pay what you can afford. Your consumer proposal payment is based on what you can afford to pay, not simply what creditors dictate. Your LIT will work with you and your lenders to arrange a fair and reasonable payment plan for everyone.
Collection calls stop. Creditors must cease all collection efforts by law under a consumer proposal. Those intrusive phone calls and letters from debt collectors will stop immediately.
Creditor protection from the court. Once your proposal is filed, creditors can no longer take legal action against you to recover what you owe. Thanks to a court order called a stay of proceedings, wage garnishment, bank account freezes, and other lawsuits will grind to a halt.
Your monthly payment never increases. Your monthly payment will NEVER rise throughout your proposal, regardless of how much income you earn. This isn’t the case with bankruptcy, where the more money you take home, the more creditors are entitled to receive
The agreement is backed by law. A consumer proposal is a legally binding contract. That means your creditors (including those who voted against your proposal) cannot opt out of the agreement and resume their collection efforts.
You get to keep zero-balance credit cards. You can retain any credit cards during your proposal, provided you don’t use them, sparing you from the trouble of applying for new ones upon completing the program.
Access to credit counselling. LITs provide two free credit counselling sessions to help you better manage your money, rebuild your credit, and avoid future debt problems.
No recurring paperwork. Once your proposal is up and running, there are no other forms to fill out, making the process smooth and manageable. In contrast, you must submit monthly income and expense reports to your LIT during bankruptcy.
Option to pay off your proposal early. Have some extra cash on hand? If so, you can put it towards your fixed monthly payment, allowing you to complete your proposal sooner. You can even pay off your remaining balance in one lump sum without penalty.
Reduce tax debt. This is a huge advantage if you owe a massive tax debt to the CRA. Usually, the CRA won’t forgive a dollar of your unpaid taxes. But under a proposal, they’re treated like any other unsecured creditor. Filing a consumer proposal is the only way to write off a portion of your unpaid taxes.
Avoid bankruptcy. Personal bankruptcy is a valuable option if you are experiencing severe debt problems. But it has drawbacks, like losing certain assets and facing social stigma, which may affect your confidence and career. Opting for a consumer proposal allows you to steer clear of these pitfalls.
Cons of a consumer proposal
Despite the numerous advantages of a consumer proposal, it’s not the optimal debt relief option for everyone in financial distress. Let’s take a look at the downsides:
Negative impact on your credit. Enrolling in a consumer proposal results in a negative remark on your credit report, called an R7 rating. This rating will remain on your report for three after you complete it. As a result, your credit score will decline, making it harder to qualify for new loans at affordable interest rates. However, this temporary impact is less severe than if you filed for bankruptcy.
Can take up to five years to complete. A consumer proposal takes longer to complete than bankruptcy. A first-time bankruptcy lasts only nine months, while a proposal usually requires four or five years of commitment.
Your proposal fails without creditor approval. A consumer proposal requires approval from your unsecured creditors. If they reject your offer, you’ll need to pursue bankruptcy or another solution to solve your debt issues. Luckily, most consumer proposals (99%, from our experience) are gladly accepted by creditors since they offer a safer and more lucrative deal than bankruptcy.
Altering your monthly payment can be tough. If you lose your job or encounter other financial trouble, your proposal payments may be no longer affordable. Unfortunately, you cannot lower your fixed payment at your whim. Instead, you must file an amendment to the proposal, which requires creditor approval.
Missing too many payments results in a default. If you miss three monthly payments, your proposal automatically fails, and your debts return in full. By law, you can’t file another one until you’ve paid off the debts included in your current one.
Limited eligibility. You won’t be eligible for a consumer proposal if your unsecured debts exceed $250,000. If you owe more than this threshold, consider filing a Division 1 proposal.
Certain debts don’t qualify. You can only include unsecured debts in a consumer proposal. Some examples are credit cards, payday loans, utility bills, and lines of credit. Mortgages, car loans, and other debts backed by assets don’t qualify for inclusion. You can include government student loans, but only if it’s been seven years since you finished your studies.
Who should file a consumer proposal—and who should not?
Use the chart below to determine if a consumer proposal can give you the help you need. Depending on your situation, bankruptcy may be a preferable solution.
A consumer proposal is an effective and safe way to get debt relief if you earn a reliable income and own significant assets you don’t want to give up. The program requires a monthly payment commitment, so you must be capable of repaying a portion of your unsecured debts. If you wish to preserve your home, investments and other assets, a proposal is preferable, as your creditors cannot seize them after you file. In contrast, you must surrender specific assets to creditors under bankruptcy.
Conversely, a consumer proposal won’t help much if you’re saddled with massive debts and lack a stable income. For example, you’re a low-income individual unable to make even minimum payments on your credit cards. In this scenario, you must eliminate your debts entirely to obtain meaningful relief. Filing for bankruptcy would be wiser and more practical, especially if you own little or no assets, as creditors will have nothing to seize.
Is a consumer proposal worth it? We can help you decide
Pursuing a consumer proposal can eliminate a sizable chunk of your debts. However, it’s essential to understand the benefits and drawbacks of this government-backed program before filing. Consider if you can afford the monthly payments. Assess the value of your assets. And determine if a proposal can deliver enough debt relief for you to get ahead financially.
If you’re pondering a consumer proposal, the next step is speaking with a Licensed Insolvency Trustee (LIT). LITs are the only financial professionals in Canada who can legally administer a proposal or bankruptcy on your behalf.
At David Sklar & Associates, our knowledgeable and supportive LITs have been helping individuals across Ontario find lasting debt relief since 1997. Book your free no-obligation meeting today and start the first step toward a debt-free future.
