Is Consumer Proposal Worth It?

In Canada, Consumer Proposals are a popular type of debt solution that can help you deal with your unmanageable debt by consolidating your repayments into manageable monthly payments based on how much you can afford.

However, while it can help you settle your debt by paying back less than you owe, it’s normal to worry about whether the benefits are worth the risks or if another debt solution would better suit your financial situation.

This article will outline Consumer Proposals in more detail, including what they are, how they work, and some common alternatives. This can help you know whether it’s the right option for you.

What is a Consumer Proposal?

A Consumer Proposal is a legally binding agreement between you and your creditors (the people you owe money to) that outlines how you’ll repay your unsecured debt over a set period (typically a maximum of five years).

They are administered by Licensed Insolvency Trustees (LITs), who are financial professionals authorized and regulated by the Office of the Superintendent of Bankruptcy (OSB) to protect and manage your assets during insolvency.

Consumer Proposals are designed to consolidate your unaffordable debt into one monthly payment while protecting your assets, including your home and car. However, like all debt solutions, there are various benefits and risks to familiarize yourself with.

How does a Consumer Proposal work?

Consumer Proposals usually follow a set process, with just a few basic steps involved. Here is what you can expect when you apply for a Consumer Proposal:

Meet with a Licensed Insolvency Trustee (LIT)

The first step in the application process is meeting with a Licensed Insolvency Trustee (LIT). They will review your financial situation, including your income and expenses, and determine whether a Consumer Proposal is the right option for you or if another option would be more suitable.

Prepare your repayment plan

The LIT will work with you to prepare a reasonable repayment plan, which will then be sent to your creditors for approval. They will take a number of factors into account during this process, such as your assets, unsecured debts, and financial obligations.

Wait for a decision

Once your creditors have received a copy of your proposal, they will have 45 calendar days (including weekends and holidays) to cast their votes. If more than 50% of your creditors by dollar value accept your proposal, it will become binding on all of your unsecured creditors.

Carry out your duties

It’s important to carry out your duties as required if you want to leave your arrangement and become debt-free after five years as planned. This includes making the required payments on time and attending two financial counselling sessions where you will discuss how to better manage your finances going forward.

How does a Consumer Proposal affect my credit score?

In Canada, credit bureaus give you a credit rating on a scale of R1 to R9 with R1 considered a perfect credit rating (e.g. you pay all your bills on time) and R9 considered the worst (e.g. you’re bankrupt).

To put this into perspective, debts included in a Consumer Proposal are usually labelled as R7 for six years, which isn’t the worst rating but it is on the higher end of the scale. This means that, if your Consumer Proposal lasts the standard five years, your credit rating will remain at R7 for another year after you make your final payment and exit your arrangement. This can make it difficult to get approved for most forms of credit, from a payday loan to a mortgage.

However, the impact of a Consumer Proposal on your credit score is temporary and there are various things you can do to repair your credit rating both during and after your arrangement.

Is Consumer Proposal worth it?

If you’re struggling with unaffordable debt, you may have considered whether filing a Consumer Proposal could help you alleviate the burden of debt repayment and make a fresh financial start.

We’ve outlined the various benefits and risks of a Consumer Proposal below so you can make an informed decision on how to deal with your debts:

The benefits of a Consumer Proposal

Your assets are protected

Unlike bankruptcy – where all non-exempt assets must be surrendered to your LIT – you’ll never be asked to give up any of your belongings during a Consumer Proposal. In other words, your home, car, and investments won’t be affected and you should be able to keep them and continue using them as normal.

It’s legally binding on you and your creditors

Once you file a Consumer Proposal, both you and your creditors are legally bound to it and must agree to fulfil the terms as laid out in the original proposal. This means that your creditors can’t go back on their promise and ask you to increase your payments or take legal action against you to get you to pay.

You can consolidate your repayments

If you’re considering a debt solution, it likely means you can’t afford your repayments as they stand. However, a Consumer Proposal can allow you to consolidate your repayments into one monthly payment and put a stop to any extra interest and charges, resulting in lower monthly payments and a shorter repayment period.

The risks of a Consumer Proposal

It can take up to five years to complete

Consumer Proposals usually take up to five years to complete. However, if your financial situation improves at any point during this period, you may be able to make a lump sum payment and exit your arrangement sooner.

Your credit rating will be affected

From the date your Consumer Proposal begins, it will be marked on your credit report for six years. This will damage your credit score and will be visible to lenders, making it difficult to get approved for credit during this time.

It’s dependent on creditor approval

Canada has a high acceptance rate for Consumer Proposals, but it’s not a guarantee and more than 50% of your creditors by dollar value must still approve it for it to go ahead. Some creditors may make additional requests or negotiations before they agree to accept your proposal.

When should I consider a Consumer Proposal?

Recognizing when you should consider a Consumer Proposal is just as important as knowing whether it’s the right option for you. Remember, the sooner you get debt help, the sooner you can regain control of your finances.

Here are some of the signs that might indicate that it’s time to get help with your debt and apply for a Consumer Proposal:

• You’re constantly worrying about money
• You’re struggling to pay your bills
• You’re relying on credit to get by
• You’re juggling multiple debts
• You’re receiving collection calls
• You can’t afford minimum payments
• You’re regularly dipping into your savings

In most cases, it’s never too soon to get debt help. It can be tempting to bury your head in the sand and hope your debt simply disappears but this will only make the situation worse when you eventually do something about it.

What are some alternatives to a Consumer Proposal?

A Consumer Proposal is a popular debt relief option that can help you deal with your unaffordable debt in a way that works for you, but it isn’t the only solution. The preferred debt relief solution for you will depend on your individual circumstances.

Here are some alternative debt solutions worth familiarizing yourself with if you’re struggling with debt:

Bankruptcy

Bankruptcy is a legal process that can give you temporary relief from your unaffordable debts for a set period. If your financial situation doesn’t improve after this time, your debts will be written off and you’ll be free to make a fresh financial start.

It is usually recommended if you’re struggling with multiple unsecured debts and don’t have any disposable income left over at the end of the month to make payments towards what you owe.

Debt Consolidation

Debt Consolidation is a method of combining your debts into a single monthly payment, making it easier for you to manage multiple debts and helping you keep track of what you owe.

It can also help you minimize interest charges which can reduce the total amount repaid over the course of the loan and ensure you’re not paying anything over and above what you originally borrowed.

Debt Management Plan

A Debt Management Plan (DMP) is an informal debt solution that can help you repay your unsecured debt in a way that’s more manageable for you.

It is one of the most flexible debt solutions available as it allows you to increase or decrease your payments depending on your situation. However, because it’s informal, it’s not legally binding and your creditors are not obligated to stick to the terms or freeze interest and charges.

Conclusion

A Consumer Proposal is a formal debt solution that allows you to repay your debt in manageable instalments over a set period (usually five years). At the end of this period, all your debts will be cleared – regardless of whether you’ve repaid them or not.

Before choosing a Consumer Proposal, it’s important to weigh up the various pros and cons. Generally, a Consumer Proposal will be a suitable option for you if you have multiple debts and you’re struggling to keep on top of them.

There are several alternatives to a Consumer Proposal, including bankruptcy, debt consolidation, and a Debt Management Plan (DMP).

Key Takeaways

• A Consumer Proposal is a legally binding agreement between you and your creditors to repay your debt in manageable monthly instalments
• It’s important to familiarize yourself with the various benefits and risks of a Consumer Proposal before applying
• A Consumer Proposal will be noted on your credit file for six years, making it difficult to get approved for a loan or a mortgage
• It may be time to consider a Consumer Proposal if you’re constantly worrying about money or regularly dipping into your savings
• There are several alternatives to a Consumer Proposal that may be better suited to your financial situation, such as bankruptcy or a debt consolidation loan