Disadvantages of consumer proposals: what are the alternatives?

Posted on 15 June 2023

Written by Graeme Hamilton

A consumer proposal is a form of debt relief that is backed by the Canadian government. A common bankruptcy alternative, a consumer proposal can reduce debts by up to 80%. There are many advantages to filing a consumer proposal. As well as enabling you to avoid bankruptcy, it has a range of advantages from allowing debtors to keep their assets to having less of an impact on your credit report than other forms of debt relief like bankruptcy. While there are certainly pros, there are also some disadvantages of consumer proposals. In this article, we explore the disadvantages of consumer proposals.

What is a consumer proposal?

In Canada, a consumer proposal is a debt settlement that is legally supported by the government as regulated by law in the Bankruptcy and Insolvency Act. It is a method of debt relief that must be administered by a Licensed Insolvency Trustee, the only professionals able to file consumer proposals. Firstly, they will review your financial circumstances with you to establish a manageable monthly repayment for you to make. On your behalf, they will then negotiate with your creditors to agree a monthly amount for you to pay back over a maximum of five years. The remaining debt will be cleared, meaning you can reduce your debt by up to 80%. It is a great bankruptcy alternative, and most often enables you to keep your assets unlike bankruptcy. At Spergel, we have helped over 100,000 Canadians become debt free, and we have a 99% acceptance rate on any consumer proposals we file. Unlike other bankruptcy firms, you will be assigned your own bankruptcy trustee to walk you through each stage of filing a consumer proposal.

Disadvantages of a consumer proposal

Despite the many advantages of a consumer proposal, there are also disadvantages of consumer proposals. It can be difficult to know if a consumer proposal is worth it, and for some it will be, and others not so well suited. Although consumer proposals are becoming increasingly popular in Canada, they are not the right form of debt relief for everyone. So, what are the disadvantages of a consumer proposal?

A consumer proposal typically takes longer to complete than a bankruptcy

This is because you are often paying back a low monthly payment over a longer period of time. Of course, should you come into more money, you can make your repayments more quickly. Should you not have assets at stake or earn a sizable wage, filing bankruptcy could well be a better option for you. The first step to gaining a debt relief solution should be a free consultation with a Licensed Insolvency Trustee so that you can discuss the advantages and disadvantages of a consumer proposal based on your situation.

A consumer proposal will affect your credit rating

A key disadvantage of a consumer proposal is that it will stay on your credit report as a R7 rating for up to six years from the date of filing. Therefore, if it takes you five years to complete your consumer proposal, it will remain on your credit report for a further year. The consequences of a consumer proposal on your credit report means it may be difficult for you to borrow further money like payday loans, or even borrowing on credit cards. This also applies to secured debt, like mortgages and car loans.

A consumer proposal is a commitment

When you file a consumer proposal, you are taking on a new legally bound contract. As a disadvantage of consumer proposals, there is a remit you must fulfil in the form of monthly payments. As with any contract, you cannot skip payments or fall behind, else your consumer proposal terms will be terminated. This is particularly risky if you do not have much in the way of income, in which case you may want to consider another form of debt relief like bankruptcy.

Alternatives to a consumer proposal

If you have considered the disadvantages of consumer proposals and feel it is not the right approach for you, it is important to first consult a Licensed Insolvency Trustee. They can advise you as to the most appropriate form of debt relief for you. A bankruptcy trustee will work to establish your financial circumstances and help you to understand the advantages and disadvantages of each method of debt relief. Here are some alternatives to a consumer proposal:

In Canada, a debt consolidation loan is a new loan that is taken out to condense multiple separate debts. It is a great way of simplifying a number of different debts and consolidating your credit in one place. This means a single manageable monthly payment, and most often, interest on debt consolidations is lower than other loans meaning a reduced repayment rate. In some cases, you can even eliminate your interest rate completely. In order to get a debt consolidation loan, you must be able to afford to make your monthly payments by ensuring you have a steady and stable incoming coming in. You can often spread debt consolidation loan payments over a longer period of time to make your payments more manageable.

Debt settlement in Canada is an informal negotiation made with any creditors to whom you owe debt. It can be carried out by yourself, or on your behalf by a debt settlement company for a fee. Typically, it involves agreeing a repayment plan with your creditors to clear your debts, or offering them a lump sum to persuade them to agree to your settlement. The idea is to repay your creditors less than you originally owe. The setback of a debt settlement is that it does not guarantee debt relief legally, and you can potentially have to pay a debt settlement company a fee. Bear in mind that Licensed Insolvency Trustees are the only professionals legally able to file debt settlements in the form of consumer proposals.

In situations where a complete clearance of unsecured debt is required, bankruptcy is likely your best option. Requiring a Licensed Insolvency Trustee to administer bankruptcy, it is the process of assigning any non-exempt debts to a trustee. You are able to keep some essential items, depending on which Canadian province in which you live. They will use these to go towards the repayment of your debts to creditors in exchange for clearance of your debt. Bankruptcy automates a stay of proceedings to prevent creditors from contacting you or harassing you, allowing you to begin a fresh financial future.

If you want to know more about the disadvantages of consumer proposals, book a free consultation with a reputable Licensed Insolvency Trustee. At Spergel, we have been filing consumer proposals for over thirty years, and can share the pros and cons of consumer proposals, as well as other forms of debt relief including bankruptcy. We have helped over 100,000 Canadians gain debt relief, and we can help you too.


Graeme Hamilton

Graeme Hamilton is a Chartered Insolvency and Restructuring Professional with over 10 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on bankruptcy and debt relief in the Ontario region. Prior to establishing his career in the insolvency industry, Graeme lived in Cambodia doing volunteer work with NGO's.

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