A debt consolidation loan replaces your existing debts with a new loan, which you repay in full with interest. A consumer proposal is a federally regulated debt relief process that can reduce the amount of eligible unsecured debt you repay, stop interest, and provide legal protection from creditors.
The right option depends on your income, credit history, total debt, and ability to repay what you owe. This guide explains the key differences between a consumer proposal and debt consolidation in Canada.
|
Feature |
Consumer proposal |
Debt consolidation loan |
|
How it works |
Settles eligible unsecured debts through a formal agreement with creditors |
Replaces several debts with one new loan |
|
Amount repaid |
A negotiated portion of your eligible debt, reduced by up to 80% |
The full amount borrowed |
|
Interest |
Interest stops when the proposal is filed |
Interest applies to the new loan |
|
Monthly payments |
Based on the accepted proposal terms |
Based on the loan amount, interest rate, and repayment term |
|
Credit requirement |
No minimum credit score is required to file |
Approval generally depends on credit, income, and affordability |
|
Creditor protection |
Legal protection applies to included unsecured debts |
No legal protection from creditors |
|
Assets |
You retain control of your assets |
Collateral or a co-signer may sometimes be required |
|
Maximum term |
Five years |
Depends on the loan agreement |
|
Administered by |
A Licensed Insolvency Trustee |
A bank, credit union or other lender |
|
Typically suited to |
People unable to repay their unsecured debts in full |
People able to repay in full who qualify for a suitable loan |
In simple terms, debt consolidation may be suitable if you can afford to repay everything you owe but want to simplify your payments or reduce your interest rate. A consumer proposal may be more appropriate if you cannot repay your unsecured debts in full or need protection from creditor action.
What is debt consolidation?
Debt consolidation means combining several debts into one new form of credit. Instead of managing multiple balances, interest rates, and payment dates, you make one payment towards the consolidated debt.
One of the most common ways to do this is through a debt consolidation loan. The money borrowed through the new loan is used to repay existing debts, such as credit cards, personal loans and lines of credit. You then repay the consolidation loan over an agreed period.
Debt consolidation does not reduce the principal amount you owe. If the new loan has a lower interest rate than your existing debts, however, it may reduce the amount of interest you pay.
When deciding whether to approve your application, a lender may consider:
- Your income and employment
- Your credit history and credit score
- Your existing debts and expenses
- The amount you want to borrow
- Whether security or a co-signer is required
Approval is not guaranteed. If you have already missed payments or your debt is high in relation to your income, you may not qualify for an affordable interest rate or a loan large enough to cover your balances.
Learn more about debt consolidation options in Canada, including how consolidation works and when it may be suitable.
What are the pros and cons of debt consolidation?
Advantages of debt consolidation
A debt consolidation loan may offer several benefits:
- One monthly payment: combining several debts can make your finances easier to manage.
- A potentially lower interest rate: you may pay less interest if the new rate is lower than the rates on your existing debts.
- No formal insolvency filing: a consolidation loan is a lending product rather than a formal insolvency proceeding.
- A defined repayment schedule: your loan agreement establishes how much you pay and when the balance should be repaid.
Disadvantages of debt consolidation
There are also limitations to consider:
- You repay the full amount: consolidation reorganizes your debt but does not reduce the principal borrowed.
- Interest continues: you must pay the interest and fees set out in the new loan agreement.
- You may not qualify: approval and the interest rate offered will usually depend on your credit, income, and affordability.
- A longer term could cost more: a smaller monthly payment may result in more interest being paid overall if the repayment period is extended.
- Security may be required: some lenders may ask for an asset as collateral or require a co-signer.
- There is no legal creditor protection: consolidating debt does not prevent collection or legal action if you fall behind.
- You could accumulate more debt: using credit cards again after consolidating their balances could leave you owing both the new loan and additional credit card debt.
Before accepting a consolidation loan, compare its interest rate, fees, repayment term, and total cost – not only the monthly payment.
What is a consumer proposal?
A consumer proposal is a formal, legally binding process under Canada’s Bankruptcy and Insolvency Act. It allows an eligible individual to offer to repay creditors a portion of their unsecured debt, extend the time available to pay, or both.
Only a Licensed Insolvency Trustee can prepare, file, and administer a consumer proposal.
Unlike debt consolidation, a consumer proposal does not require you to apply for a new loan. Your Licensed Insolvency Trustee reviews your income, expenses, assets, and debts before developing an offer for your creditors.
Once a consumer proposal is filed:
- Interest stops on the unsecured debts included in the proposal
- Most collection calls relating to those debts must stop
- Most wage garnishments and legal action relating to the included debts are stopped
- You make the agreed payments through your Licensed Insolvency Trustee
- You retain control of your assets
- The proposal can last for up to five years
Creditors have 45 days to accept the proposal or request a meeting to consider it. Once the proposal is accepted and approved, it legally binds the included unsecured creditors.
At Spergel, consumer proposals can often reduce eligible debt by up to 80%, although the result depends on your individual circumstances and creditor approval.
What debts can be included in a consumer proposal?
A consumer proposal can generally include unsecured debts such as:
- Credit card balances
- Personal loans
- Unsecured lines of credit
- Payday loans
- Income tax debt
- Certain student loan debt
- Outstanding bills and accounts in collection
Secured debts, such as mortgages and secured car loans, are not normally reduced through a consumer proposal. You must continue making the required payments if you want to retain an asset attached to a secured debt.
Some other debts also cannot be discharged. A Licensed Insolvency Trustee can review your debts and explain how each would be treated.
What are the pros and cons of a consumer proposal?
Advantages of a consumer proposal
A consumer proposal may provide the following benefits:
- Reduced unsecured debt: you may repay only an agreed portion of the eligible debt you owe, sometimes as little as 20%.
- No further interest: interest stops on the included debts when the proposal is filed.
- Legal protection from creditors: most collection calls, wage garnishments, and legal action relating to included debts must stop.
- One affordable payment: you make one agreed payment through your Licensed Insolvency Trustee.
- You retain your assets: you keep control of assets such as your home and vehicle, although their value is considered when your offer is calculated.
- An alternative to bankruptcy: a proposal can provide a structured way out of debt without filing for bankruptcy.
Disadvantages of a consumer proposal
A consumer proposal also has consequences:
- It affects your credit: the proposal is recorded on your credit report.
- Creditors must accept the offer: creditors can accept, reject or request changes to your proposal.
- Only eligible debts are included: secured debts and certain other obligations cannot be discharged.
- You must maintain the payments: a proposal can be annulled if you fall three monthly payments behind.
- It becomes part of the public insolvency record: a consumer proposal is a formal insolvency proceeding recorded by the Office of the Superintendent of Bankruptcy.
Equifax and TransUnion generally remove a consumer proposal from a credit report three years after it is completed or six years after it is signed, whichever comes first.
What is the difference between a consumer proposal and debt consolidation?
The main difference is the amount you repay. A debt consolidation loan requires you to repay the full amount borrowed, plus applicable interest. A consumer proposal may allow you to settle eligible unsecured debts for less than the full amount owed.
Other important differences include:
Interest
A debt consolidation loan charges interest at the rate stated in the loan agreement. Interest on debts included in a consumer proposal stops when the proposal is filed.
Eligibility
Debt consolidation requires approval from a lender, normally based on your income, credit, and ability to repay the loan.
A consumer proposal does not require a minimum credit score, but you must meet the legal eligibility requirements and make an offer your creditors are likely to accept.
Protection from creditors
Debt consolidation does not provide legal protection from creditors. If you fall behind, creditors may continue collection or legal action.
Filing a consumer proposal creates a stay of proceedings. This generally stops creditors from continuing collection calls, most wage garnishments, and legal action.
Effect on credit
A consolidation loan may affect your credit through the application, new account, and payment history. It is not recorded, however, as a formal insolvency.
A consumer proposal has a more significant and defined effect on your credit report because it is a formal insolvency proceeding.
Who administers it
A bank, credit union or other lender provides a debt consolidation loan. Only a Licensed Insolvency Trustee can file and administer a consumer proposal.
Consumer proposal or debt consolidation: which is right for you?
Neither option is right for everyone. The key question is whether you can realistically afford to repay your debts in full.
Debt consolidation may be suitable if:
- You have a stable income
- You can afford to repay everything you owe
- You qualify for a lower interest rate
- The new payment fits comfortably within your budget
- You are not facing serious collection or legal action
- You are confident you will not accumulate further debt
A consumer proposal may be suitable if:
- You cannot afford to repay your unsecured debts in full
- Interest is preventing you from reducing your balances
- You cannot qualify for an affordable consolidation loan
- You are missing or struggling to make minimum payments
- Collection agencies are contacting you
- Your wages are being garnished
- You want to avoid bankruptcy while retaining your assets
A Licensed Insolvency Trustee can compare the costs and consequences of each option using your actual income, assets, expenses, and debts. They are required to explain all suitable debt relief options, not only consumer proposals.
Consumer proposal vs debt consolidation: FAQs
Is a consumer proposal the same as debt consolidation?
No. Both can result in one monthly payment, but they are different processes. Debt consolidation replaces several debts with a new loan that must be repaid in full. A consumer proposal is a formal agreement that may reduce the amount of eligible unsecured debt you repay.
Does debt consolidation reduce how much you owe?
A standard debt consolidation loan does not reduce the principal amount owed. It may reduce your interest rate, but you must repay the full amount borrowed, plus applicable interest and fees.
Does a consumer proposal reduce your debt?
A consumer proposal can reduce the amount of eligible unsecured debt you repay by up to 80%. The amount depends on your income, assets, and debts, as well as what your creditors are prepared to accept.
Which option affects your credit more?
A consumer proposal is a formal insolvency proceeding and has a more significant, defined effect on your credit report. A debt consolidation loan can also affect your credit, but its impact depends on your credit profile and how you manage the loan.
Can you pay off a consumer proposal early?
Yes. You can generally pay off a consumer proposal early without a penalty. Completing it sooner may also result in it being removed from your credit report earlier, subject to the credit bureaus’ reporting rules.
Do you lose your house in a consumer proposal?
A consumer proposal allows you to retain control of your assets, including your home. Home equity, however, is considered when calculating an acceptable offer, and you must continue making your mortgage and other secured payments.
Get help comparing your debt relief options
Choosing between a consumer proposal and debt consolidation can be difficult when you are already under financial pressure. The right option should provide a realistic and sustainable route out of debt – not simply a lower monthly payment.
At Spergel, a Licensed Insolvency Trustee will review your debts, income, assets, and expenses and explain every suitable option. Your initial consultation is free, confidential, and without judgment or pressure.
Book a free consultation with Spergel today to find out whether debt consolidation, a consumer proposal or another debt solution may be right for you.
