Debt solutions come in many shapes and sizes in order to serve a variety of debt relief needs. After all, everyone’s situation is unique to their own circumstances. One of the most flexible of these options is called a consumer proposal.
With the greatest level of asset protection and an ability to customize payment plans, it’s not surprising that proposals are the preferred choice for most of our clients. But just because something is well liked by many people doesn’t mean it is the right choice for your individual situation.
To help determine if a consumer proposal is right for you, we have put a list together with answers to the most frequently asked questions about our most popular debt help service.
Table of Contents
- What is a Consumer Proposal?
- Are Consumer Proposals and Debt Consolidation the Same Thing?
- Isn’t it Wrong to Not Pay Back a Debt in Full?
- How Does a Consumer Proposal Work?
- What Types of Debts Can Be Included in a Consumer Proposal?
- How Much Money Can I Save With A Consumer Proposal?
- What Happens to My Credit Score with a Consumer Proposal?
- What Are the Alternatives to a Consumer Proposal?
- Will a Consumer Proposal Work for Me?
What is a Consumer Proposal?
In short, a consumer proposal is a formal negotiation between someone who owes money (debtor) and the people or companies they owe money to (creditors). The process is administered by a Licensed Insolvency Trustee (LIT) and allows Canadians to pay down their debts (usually at a reduced cost) in a controlled and customized way that works for their unique needs and lifestyle – without the need to hire lawyers, go to court, or surrender all their property. Because of the immense benefits, it is a popular alternative to bankruptcy.
Are Consumer Proposals and Debt Consolidation the Same Thing?
Similar, but not the same. If you owe money to multiple creditors, your debts will automatically be consolidated as part of the proposal process. This is one reason why this debt solution is able to quickly and effectively resolve the major stresses associated with debt. By only having one single payment to make each month, you no longer have to juggle multiple accounts and balances or worry about meeting so many due dates. And, because the payments are fixed (meaning you always pay the same amount every month) at a smaller total amount, you can plan your spending more easily and keep more money in your bank account for savings and the regular costs of daily living. Plus, the total amount owing is reduced with a proposal (which saves some stress right there) – you can let out that sigh of relief now.
Unlike debt consolidation, consumer proposals have the added protection of an LIT. Meaning, once your negotiations are complete, your creditors can’t come back later and say they want to change the agreement, charge you more interest, or send collections agencies after you again. This is because a proposal is a legally binding contract and your LIT has the authority (with their license) to hold your creditors accountable for keeping their end of the bargain. With a traditional debt consolidation, you have no such protections.
So, in a way, a consumer proposal is kind of like the super hero of debt consolidation plans.
Isn’t it Wrong to Not Pay Back a Debt in Full?
Morally speaking, many people take issue with the idea of not paying their debts. But insolvency is a much more complex matter than simply what is ‘right’ or ‘wrong’. There are many legitimate reasons for why honest, hard-working people find themselves in over their heads with debt. Often, those reasons are outside of their control (for example: long-term illness, unemployment, divorce, lack of financial knowledge/education, etc.).
The government of Canada knows this and has created programs, such as the Consumer Proposal, to help support citizens through these kinds of rough patches. Much like the public health care system helps us when we’re sick, or legal aid services help us when we need someone to protect our rights, these offerings are a form of ‘financial care system’ designed to benefit both the debtor and the creditor.
It may seem counter-intuitive that negotiating a reduction of one’s debt could be a benefit to the person that is owed money, but it actually is. You see, by the time someone considers the possibility of a proposal, they have (typically) already paid enormous amounts of interest to their creditors. That is part of the reason why it is so difficult for them to pay down their balance – the monthly payments the person has been making (probably for many years) are, at best, only covering the interest. This means that the original amount borrowed (the ‘principal’) doesn’t go down and the interest keeps adding up over time.
So, when a proposal is presented to the creditor, that provides the creditor with a sense of security that they are going to get their principal back, that there is no longer a risk of bankruptcy (which could result in no principal being paid back), and they can stop paying a collections agency to chase after their money. In other words, the creditor keeps the profits they made from the interest already collected and agrees to a repayment schedule that the debtor can actually afford (to recover the principal and any remaining interest owed). In some cases, the creditor may agree to reduce both the amount of interest and principal owing – in the spirit of a win-win solution.
In this way, whether someone has gotten into uncontrollable debt because of bad luck or bad spending choices, consumer proposals are a natural solution for anyone concerned about the morality of paying back their debts. That being said, sometimes bankruptcy is the only viable option and the best pathway forward to helping someone get back on their feet. So, it is also important to hold a space of compassion and understanding for those who are in need and do not qualify for consumer proposal services.
How Does a Consumer Proposal Work?
The process begins with an initial consultation. This is when your LIT gets to know you, your needs, your financial history, what you owe, how many creditors you have, etc. and makes an assessment of what the best debt solution is for your unique situation.
If you decide to move forward with a proposal, there will be some paperwork you need to complete. Now that proposals and bankruptcies are allowed to be filed online, you can complete the paperwork from home.
After you sign on the dotted line, the first thing your trustee will do is ensure that collection calls, interest accruals, wage garnishments, and bank account freezes stop immediately.
Then, he/she will call a meeting with all of your creditors, propose a win-win offer, and collect their votes. In order for a proposal to be accepted, a simple majority (meaning, the creditors holding at least 51% of your total debt) must vote in favour of the offer. Once accepted, the offer is legally binding for all creditors.
Then, you send the agreed upon monthly payments to your trustee (who holds the funds in trust for the creditors, hence the name ‘trustee’). At the end of each year, he/she distributes payments to all of your creditors proportionally (meaning, fairly – based on how much each is owed).
The maximum term for a proposal is five years, but you can pay it off in-full anytime (without penalty) if you have the means and desire to do so.
What Types of Debts Can Be Included in a Consumer Proposal?
- Tax debt
- Credit card debt
- Lines of credit
- Student loan debt (if you left school at least 7 years ago)
- Medical debt
- Personal loans
- Payday loans
- Small business debt (with certain limitations)
Debts that cannot be included are:
- Secured debts (such as your mortgage or car loan)
- Child support or alimony payments
- Court fines and other legal penalties (such as parking tickets)
- Debts from fraud
Though you can, of course, choose to sell your home or car in order to pay off your debts, the intention is to work out a solution that lets you keep your assets, such as your house, car, etc. (not have them be lost in the process).
How Much Money Can I Save with a Consumer Proposal?
The exact amount that you end up paying back and saving depends on a number of factors and really depends on what arrangement your creditors agree to. When you meet with your Licensed Insolvency Trustee, they will be able to give you a reasonable estimate after they assess your situation.
In the meantime, you can get a rough estimate using our online debt freedom calculator.
What Happens to My Credit Score with a Consumer Proposal?
Any time you don’t pay your debts in the manner originally agreed upon, there is an impact on your credit score. Meaning, even if you miss one payment, that mistake will show up on your credit report for 6 years – and even if you pay the past-due balance. If you miss many payments with many creditors over the course of many years, that can really add up.
In contrast, a consumer proposal resolves all of your debts at once and is removed from your history either 3 years after you finish making your proposal payments or 6 years after the date you defaulted on your account (whichever comes first). Meaning, the maximum amount of time the proposal will affect your credit rating is 6 years. If you choose a lump sum proposal, for example, it will only affect your credit report for 3 years. Either way, your debts don’t follow you forever, and you have the possibility of starting over sooner than if you continue making late payments.
While in a proposal, the rating for the debts you have renegotiated will be temporarily listed as R9 (the same as a debt in collections or bankruptcy). But, once you have completed the process, those credit ratings get bumped to R7 for the 3 year period after your completion (which helps to improve your overall credit score). R7 is higher (meaning, less good for your credit score) than a late payment, but it may not stay on your report for as long as late payments (which are registered as R1-R5; the longer the payment is overdue, the higher the number).
Chances are, if you are considering a consumer proposal, you probably already have collection agencies calling you and that means your account is being rated as R9 (the most detrimental rating possible). Which means a consumer proposal may actually help your credit rating in the long run (short term pain for long term gain). If you want to know where your ratings currently stand, you can get a copy of your credit report from Equifax or Transunion in Canada.
What Are the Alternatives to a Consumer Proposal?
Consumer proposals have helped Canadians from all walks of life manage their debt troubles and transform their lives. CPs aren’t the only way to resolve debt problems, though.
Here is a breakdown of some common alternatives and how they compare to proposals:
Bank Consolidation Loan
A bank consolidation loan is when a lender steps in to pay off your debts, merges the balances into one new loan, and then you repay the new consolidated loan with interest. Though the concept is relatively simple (which makes it attractive), this one is tricky – because, the total amount of interest you pay on the new loan could end up being higher than what you were already paying on your previous loans. That, in turn, could create more debt (instead of less) and for an indefinite period of time. Conversely, with a proposal, your debt still gets consolidated, but your monthly payments are fixed, predictable, and interest-free over a limited repayment term.
Refinancing Your Home
Refinancing is the process of taking out a loan against the equity in your home to pay off debts. This is sometimes called a home equity consolidation loan. The obvious downside is, if you can’t make your payments, the bank can take your home through foreclosure. You may also end up paying more in fees. A consumer proposal, on the other hand, allows you to keep your principal residence while resolving your debts, so you never have to worry about losing your home.
Transferring your credit card balance to a line of credit or another credit card with a lower interest rate can help reduce the amount of interest accrued over time and buy you more time to pay off high-interest debt. But, a balance transfer at a lower rate now doesn’t guarantee that your interest rate will stay low forever. So, make sure you read the fine print – often times, creditors reserve the right to increase your interest rate after a certain number of late payments. Also, make sure that you actually qualify for any advertised promotional interest rates; your credit score, income or existing debt can make you ineligible and cost you more in unexpected fees.
Aside from winning the lottery, bankruptcy is the fastest way to clear out your debt entirely. With this option, you may be required to give up some of your assets in exchange for your debt freedom and your creditors may or may not be paid back. The outcome depends on a number of factors – most notably, if there are changes to your income level. If your income increases during a bankruptcy, you may have to pay what is called ‘surplus’ (meaning, any amount of money above the minimum threshold required to make no payments). So, if you make more money, you pay more money. In contrast, with a consumer proposal, you keep your assets and your payments always stay the same.
Additional considerations with bankruptcy in Canada:
- Your credit rating will be listed as R9
- Your credit rating will be impacted for a minimum of 6 years after discharge
- You have to submit monthly income reports to your trustee
- You have to attend 2 credit counselling sessions
In either case, whether you choose a bankruptcy or consumer proposal, once you file, any harassing collection calls and wage garnishments stop immediately. No more late-night phone calls or stressful deductions on your paycheque. This is not necessarily the case for balance transfers, consolidation loans, or home equity refinancing.
Will a Consumer Proposal Work for Me?
Now you have a general understanding of what a consumer proposal is, what it does, and what the typical benefits are. The next step is to talk to a Licensed Insolvency Trustee in your region. Doing so will give you a clear picture of how this debt relief option can be used in your specific situation. This is important, because different provinces have slightly different regulations and the amount you offer to pay back to creditors in a proposal must be better than what you could offer in a bankruptcy.
Once your trustee understands your unique needs and concerns, they will be able to advise you on whether or not a proposal is the right fit and share other debt help options that may be available to you. This way, you have all the information you need to make a confident choice on your life-changing path to debt-freedom.
There is no charge for our consultations, they are 100% confidential, and can be done remotely by phone or video conference at your convenience.
To schedule a call with your local Spergel LIT, you can contact us in the following ways:
- Phone 1-877-501-4321 (toll-free)
- 24/7 live chat (with a human) on our website
- Facebook messenger
- Email (firstname.lastname@example.org)
- Online booking calendar
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For over 30 years, our team of insolvency experts has been helping hundreds of thousands of hardworking Canadians take back control of their lives through financial counselling and award-winning personalized debt solutions. Now, let us help you. You Owe It to Yourself.
More Posts About Consumer Proposals:
- Cost Differences Between Consumer Proposals & Bankruptcies
- Consumer Proposal vs Bankruptcy (Downloadable Fact Sheet)
- Consumer Proposals and Your Credit
- Is a Consumer Proposal a Good Idea?
- Consumer Proposal (General Information)