If you’re having trouble making ends meet every month, you’re not alone. A recent study by the credit reporting company TransUnion has determined that nearly one-third of Canadians don’t feel they can pay their bills in full.
So what is a hard-working family to do if they find themselves in this situation?
One option would be a consumer proposal. This debt repayment tool allows you to write off most unsecured debt and consolidate the rest. There are some advantages and disadvantages of a consumer proposal to consider. Let’s take a look at them compared to some other debt-relief options.
Advantages & Disadvantages of a Consumer Proposal vs The Status Quo
The status quo, maintaining your current state of affairs while trying to get ahead of your bills, is how many Canadians deal with overwhelming debt. And it rarely works. Even missing one month’s worth of payments on your unsecured debt could set you so far behind that future payments are outside of your reach financially.
A consumer proposal can relieve you of this endless cycle of paying normal and compound interest on your unsecured debt. While there are some disadvantages of a consumer proposal when compared to maintaining the status quo, the advantages usually far outweigh them for those who are struggling. Let’s take a look.
Advantages of a Consumer Proposal vs The Status Quo
Your Licensed Insolvency Trustee will work with you and your creditors to negotiate reducing the amount of money you owe to your creditors. Sometimes by as much as 80%.
Fewer Monthly Payments
Making monthly payments to pay off your unsecured debt could take you years, especially if you’re only making minimal monthly payments.
For example: If you have a credit card balance of $5,000 at 18% interest, and you’re making monthly payments of $100 on that debt, it would take you 94 months to pay it off. By entering into a consumer proposal, that credit card could be completely paid off in 36-60 months.
Little to no Interest Payments on Debt
Using the above scenario, after 94 months of paying that $5,000 in credit card debt, you will have actually paid $9,311. $4,311 of which will be interest payments. An accepted consumer proposal would eliminate all of the interest on this debt, keeping those interest payments in your pocket.
No More Harassing Phone Calls
If you’re full of dread collecting the mail, or every time the phone rings, due to unscrupulous collection practices, a consumer proposal will put an end to that.
Once your consumer proposal is filed by your Licensed Insolvency Trustee, your creditors will be notified. After this notification, they will be forbidden to contact you in any way to collect their debt.
No More Strong-Arm Tactics
After a few months of not making full payments on your unsecured debt, one or more creditors may decide to up the stakes. They can do this by asking a court to make a judgment against you. And they’ll most likely succeed.
This could mean garnishing your wages and seizing your assets. After entering into a consumer proposal, you will be protected from these strong-arm debt collection tactics.
Disadvantages of a Consumer Proposal vs The Status Quo
Repayment Rules Less Forgiving
If you fall three payments behind on your consumer proposal, it’s more than likely that your proposal will be considered annulled. This will restore all of your creditors’ rights, and they can begin the collection process again. You must monitor your upcoming consumer proposal payments and ensure they are made.
Consumer Proposals Go on Your Credit Report
A consumer proposal will be on your credit report for a maximum of 6 years from its filing or 3 years from the last payment, whichever comes first.
Advantages & Disadvantages of a Consumer Proposal vs a Debt Consolidation Loan
For individuals starting to fall behind on numerous monthly payments, a debt consolidation loan may be an option. Let’s take a look at some of the pros and cons of a consumer proposal vs a debt consolidation loan.
Advantages of a Consumer Proposal vs a Debt Consolidation Loan
Consumer Proposal Doesn’t Require Good Credit
A debt consolidation loan is still an unsecured loan, so you may not qualify for one if you have bad credit. A consumer proposal can still be entered into with good or bad credit.
Little to no Interest Payments with a Consumer Proposal
As opposed to a debt consolidation loan, which includes interest, a consumer proposal is paid back with absolutely no interest. This will allow you to pay off your debt without the added expense of interest payments.
A Consumer Proposal Can Eliminate Some Debt
While a debt consolidation loan will make for a lower monthly payment and fewer creditors, you’re basically moving debt from one creditor to another. With a consumer proposal, most of your unsecured debt, in some cases up to 80%, can be outright forgiven.
Disadvantages of a Consumer Proposal vs a Debt Consolidation Loan
If you’re behind on monthly payments yet still maintain a healthy credit rating, a consumer proposal will put that in jeopardy.
Secured Debt Unaffected by a Consumer Proposal
Car loans are considered secured debt and are not covered by a consumer proposal. If you’re making high-interest payments on one or more vehicles, a debt consolidation loan may be a better option to restructure those high-interest payments.
A consumer proposal doesn’t cover some debts, such as child support arrears, court fees, and unpaid property taxes. Depending on the debt consolidation loan, you may be able to wrap these payments into a more manageable monthly payment.
Advantages & Disadvantages of a Consumer Proposal vs Bankruptcy
If you’re drowning in monthly payments you don’t think you can make, a consumer proposal or bankruptcy may be the only way out. Let’s look at the advantages and the disadvantages of a consumer proposal vs bankruptcy.
Advantages of a Consumer Proposal vs Bankruptcy
Consumer Proposals are Discharged From Credit Report Quicker
A consumer proposal will be off your credit report within a maximum of six years from the filing date. It could take 6 or 14 years after the date of discharge for a bankruptcy to be taken off your credit report. This depends on if you have been bankrupt before.
Keep Your Tax Refunds
If you file for bankruptcy, your tax refunds and credits will be withheld and used to pay off your creditors. A consumer proposal allows you to keep your tax refunds and credits to use however you like.
Keep Your Assets with a Consumer Proposal
With a consumer proposal, you will be able to keep all of your assets. After filing for bankruptcy, your assets will be ‘vested’ with your Licensed Insolvency Trustee. You do have the option, though, to purchase these assets back from the trustee.
There Are No Monthly Reports
After filing for bankruptcy, you will be required to report your income and expenses to your Licensed Insolvency Trustee every month you’re in bankruptcy. This will be used to determine if your monthly bankruptcy payments will be increased or extended. There are no monthly reporting requirements with a consumer proposal.
Consumer Proposals Have One Set Payment
With a consumer proposal, your Licensed Insolvency Trustee will help you negotiate one set payment to cover your unsecured debts. This payment will stay the same regardless if your financial situation improves. If your income improves substantially before your bankruptcy is discharged, your bankruptcy can become significantly more costly and potentially be extended.
Monthly Payments Are Usually Cheaper
Let’s assume your Licensed Insolvency Trustee is able to help you negotiate all of your debt down to $10,000 in a consumer proposal, and the alternative is you could file a bankruptcy and only pay $7,000. Since consumer proposals are stretched out over a longer period of time, your monthly payments for a consumer proposal will be less than bankruptcy.
For example, if through bankruptcy you would pay $7,000 due to surplus income, and you have not been bankrupt before, your monthly payments will be $333 per month. An accepted consumer proposal whereby you pay back $10,000 would cost you $167 a month.
Disadvantages of a Consumer Proposal vs Bankruptcy
Your Creditors Could Vote Down Your Consumer Proposal
In order for a consumer proposal to be successful, your creditors must agree to the terms. If some of your largest creditors, based on the amount owed, don’t feel they’re getting enough money, they could vote against approving your consumer proposal. At least 50% of your creditors, by dollar value, must agree to your consumer proposal for it to pass. Unless your creditors suspect fraud, there’s nothing they can do to stop you from filing for bankruptcy.
Consumer Proposals Take Longer to Settle
Bankruptcy can be discharged anywhere between 9-21 months for your first bankruptcy. A consumer proposal takes considerably longer to settle, lasting anywhere from 36-60 months before being discharged. That being said, there are no penalties for paying off your consumer proposal early if you can afford to do so.
Weighing the Advantages & Disadvantages of a Consumer Proposal
Everyone’s situation is different. If you’re unsure which route to take, Powell Associates Ltd can help. We’re committed to helping individuals find the best option for their individual needs. Contact us today to learn more about the advantages and disadvantages of a consumer proposal – and how you can get your debt under control.