Consumer Proposal vs Debt Consolidation
When you are struggling with mounting debt and facing debt problems, it can be difficult to know where to turn. You might have heard of consumer proposals and debt consolidation, but you may not know which option is right for you. In this blog post, we will compare the two options and help you decide which is the best solution for your unique situation.
To put it simply, debt consolidation is the process of combining all of your monthly payments into a single monthly (or whatever frequency you prefer) payment. This means that technically speaking a consumer proposal is a type of debt consolidation program. Other forms of debt consolidation include a debt consolidation loan, debt management plans and can even include bankruptcy despite people thinking of them differently.
Let’s break down the debt relief pros and cons one by one.
Debt Consolidation Options
Consumer Proposal
A consumer proposal is a legal debt settlement process that allows you to repay a portion of your unsecured debts and have the rest forgiven. This is an option for people who are unable to repay their debts in full and are struggling to make their monthly payments. A consumer proposal can be an effective way to get out of debt, especially if you want to avoid bankruptcy.
While a proposal does affect credit, most consumers who file them wish they would have done so sooner. A proposal will stop creditor calls, it will usually free up considerable amounts of cashflow, and oftentimes allow for a healthy savings account to be set up over time. Read here to determine if a consumer proposal is worth it for your situation.
A consumer proposal is usually what people are actually looking for when they are looking for debt settlement programs and are often what some debt consulting companies refer to as a government debt-relief program.
A consumer proposal is filed through a Licensed Insolvency Trustee (LIT).
Debt Consolidation Loan
A debt consolidation loan is another option for people who are struggling with debt. This involves taking out a new loan to pay off your existing debts. The benefit of this option is that you will have one monthly payment instead of multiple payments. Debt consolidation loans can also help you get a lower interest rate on your debts, which can save you money in the long run.
However, debt consolidation loans are a double-edged sword – if you already have affected credit you may get declined, or worse, fall victim to predatory lenders a consolidation loan may put you in a worse situation. Read more about debt consolidation loans when having bad credit here.
An easy way to avoid the above-mentioned concern is to be honest with yourself on your budget. If the new payment doesn’t fit inside of your budget, then you should explore other options.
Debt Management Plans
A debt management plan is an option that requires a credit counselling agency. The credit counsellor will contact your creditors on your behalf which usually results in the reduction or elimination of interest. While it can be an effective option when dealing with smaller debt loads, the monthly payments can still be quite large depending on the principal amount owing.
Debt Management Plan vs Consumer Proposal
The main difference between a consumer proposal and a debt management plan is that a consumer proposal is a legal debt settlement process, while a debt management plan is not. A consumer proposal typically results in a reduction in the overall debt load whereas debt management plans simply reduce or eliminate the interest charges.
Also, creditors voluntarily participate in a debt management plan, whereas creditors do not have a choice but to participate in a proposal if it is accepted by the majority of creditors.
This is particularly important if you are struggling with CRA debt such as income taxes, or other government debt like student loans where debt management plans will not work.
A typical consumer proposal could reduce a $30,000 debt to $15,000 with payments of $250 per month, whereas credit counselling would have payments of ~$525-550 for the same initial debt load.
It should be noted that credit counselling plans have the same effect on your credit as a consumer proposal.
Bankruptcy
Bankruptcy is a legal process that allows you to have your unsecured debts forgiven. It takes into account your household income, your family size, and realizable assets. While bankruptcy is often believed to completely eliminate all payments, this isn’t true. Bankruptcy will release you from most but not all obligations.
The main benefit to bankruptcy over other options is the amount of debt doesn’t play as important of a role in bankruptcy as it does in other options.
Because of how bankruptcy payments are calculated they can often be the most expensive, on a monthly basis. This can be quite the shock to most people as bankruptcy is often seen as the least expensive option. While this may be true overall, it isn’t true on a per-payment basis.
A bankruptcy is filed through a Licensed Insolvency Trustee.
So, which option is right for you?
The answer depends on your unique situation. We highly recommend meeting a Debt Solutions Advisor or Licensed Insolvency Trustee to discuss your specific situation. For convenience, we have added the basic pros and cons of each option below and we have also included links to more in-depth articles about each topic. You can also check out our general article on 10 ways to pay off debt faster.
Pros and Cons of Consumer Proposal
Consumer proposals are usually best suited for individuals who are not able to obtain and afford a consolidation loan, want to avoid bankruptcy, but still want to pay what they are able to settle their debts.
Specific Blog Link: Consumer Proposals
Pros:
- Can eliminate up to 80% of your debt
- Stops interest from accruing
- You make one monthly payment to the trustee who then distributes the funds to your creditors on your behalf
- Your assets are protected
Cons:
- Will have a negative impact on your credit score
- If your financial situation isn’t that bad (typically when you have more assets than liabilities) a consumer proposal may not be as good as other options.
Pros and Cons of Debt Consolidation Loan
Debt consolidation loans are a good option if you can pay off your existing debts in a reasonable timeframe, but want to accelerate the process and can get a lower interest rate by consolidating your debt.
Specific Blog Link: Debt Consolidation
Pros:
- One monthly payment instead of multiple payments
- Can help you get a lower interest rate on your debts
- Can be used for secured debt as well, not just unsecured debt.
Cons:
- Unless your interest is reduced, your payment may end up being the same or close to the same as your old payments. It could be higher if you consolidate minimum payment debt to an amortized loan such as consolidating credit cards & lines of credit to a personal loan.
- You may get declined or become a victim of predatory lending practices which could affect your credit negatively.
- If you use an interest-only payment consolidation loan (such as a line of credit) and you do not pay more than the minimum payment you will never reduce the principal amount owing.
Pros and Cons of Debt Management Plans
Debt management plans are ideal for individuals with smaller amounts of debt who want to pay their creditors in full.
Specific Blog Link: Debt Management Plans
Pros:
- The credit counselling agency will contact your creditors on your behalf which usually results in the reduction or elimination of interest.
- Can be an effective option when dealing with smaller unsecured debt loads.
Cons:
- Monthly payments can still be quite large depending on the principal amount owing.
- Your credit report & score will suffer as your creditors may report the debt management plan to the credit bureau.
Pros and Cons of Bankruptcy
Bankruptcy is usually the last resort option for most and is ideal when other options do not work.
Specific Blog Link: Bankruptcy
Pros:
- Usually the cheapest option, overall.
- It takes into account your household income, your family size, and realizable assets.
Cons:
- Because of how bankruptcy payments are calculated they can be more expensive than other options, on a monthly basis.
- You may be required to give up assets if you cannot afford to retain them.
- Will have a negative effect on your credit report & score.
Debt Consolidation and Your Credit Report & Score
The question of credit report & score impact comes up anytime someone is looking to get assistance with their unsecured debts and reduce their monthly payments. This isn’t a surprise.
Credit scores are an incredibly important part of our lives, however, what is more important is having the cash flow necessary to actually live our lives.
When people are struggling to pay their debt obligations, the truth is that credit only serves to help people dig themselves further into the hole. We recommend solving the real problem, the debt, rather than trying to preserve a credit score that only aids in obtaining more debt.
Your best bet: Speak with a Licensed Insolvency Trustee
If you are unsure about which option is best for you, the best thing to do is speak with a LIT. They will be able to review your unique financial situation and provide you with the advice and guidance you need to make an informed decision as to which option is best for you. The Financial Consumer Agency of Canada also has some great resources here.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.