Dealing with Debt – What Is a Consumer Proposal and Other Options to Know
When your financials no longer add up, it can be a sign that your debt may have become an issue that you can’t ignore any longer. Dealing with debt and financial struggles not only adds to stress, coping is often
It’s important to know that you are not alone, and inflation has created an affordability crisis for many, with more than half of Canadians living paycheque to paycheque, but the troubles don’t end there.
- Two in five Canadians (38%) say money is their biggest concern 
- Nearly 40% of Canadians do not feel like their wages are keeping up with inflation 
- Around 56% of Canadians are concerned if they can afford housing or rent 
- More than half (53%) of Canadians within $200 of financial insolvency 
- Nearly half of Canadians are struggling to afford household grocery bills 
If you find yourself dealing with debt and no signs of being able to dig yourself out, it would be important to know a few things such as how you might make some changes and what the available options would be.
For some the answer is called Consumer Proposal, which does not include all debts. It can be an option with certain types of unsecured debt like credit cards, personal loans, payday loans, lines of credit and student loans.
What is a Consumer Proposal?
A consumer proposal is an option for Canandians struggling with debt. It’s a legally binding agreement for debt settlement created by a Licensed Insolvency Trustee (LIT) that is between you and your creditors which stipulates that you agree to pay a percentage of what you owe in exchange for full debt forgiveness. It is regarded as an alternative to bankruptcy.
How Does a Consumer Proposal Work?
This is an agreement that can only be put together by a Licensed Insolvency Trustee (formerly known as a licensed bankruptcy trustee) which costs about $1,500 to file. After this is completed, it would be up to your creditors to accept, and the courts to approve. If the terms of your Consumer Proposal are accepted and approved, you have up to 5 years to repay what you owe.
It also becomes part of a permanent public record that is placed in a searchable online database with the Office of the Superintendent of Bankruptcy (OSB) and will appear on your credit report for up to 3 years with TransUnion and Equifax. In addition to the filing fee, the trustee will take 20% of your future payments as their fee to oversee and manage.
Using a Consumer Proposal is an option with certain types of eligible debt which include lines of credit, unsecured personal loans, store credit cards or credit lines and collection accounts. Other types of debt such as alimony or child support arrears are not an option. You can not use a Consumer Proposal for secured debt such as mortgages, home equity loans or car loans.
When you start working with a trustee, there will be a debt assessment which requires you to provide details about your income, assets, liabilities (debt) and your expenses. After the trustee has reviewed your finances and determined what you would be able to afford to pay on a monthly installment plan the draft proposal is sent to your creditors for review, where they can accept or reject the proposed terms.
After you have completed the payments of a Consumer Proposal your creditors will discharge the remaining balances and report to the credit bureaus that these balances have been paid off. But as mentioned previously, they will still appear on your credit report for up to 3 years, which can be a red flag to lenders if you were applying for a personal installment loan in future and affect what is considered creditworthiness along with whether you might be approved.
Not to be confused with a debt consolidation loan, a Consumer Proposal is an option when struggling with debt, and a way to avoid more severe damage to your credit report that might be caused by declaring bankruptcy.
You can also create an informal proposal which is similar, but you would have to deal with every creditor individually. Negotiations (and acceptance) can go on for a long time and has no legal protection.
Is a Debt Consolidation Loan a Better Option?
While similar, a debt consolidation loan does not involve a trustee and is an option provided by lenders and financial institutions. There are a number of factors to consider when it comes to loans for debt consolidation which we get into further down below which talks about how they work and more.
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Consumer Proposals versus Bankruptcy
The two are very different ways to help you manage debt. While a Consumer Proposal is an agreement to pay off your debt with monthly installment payments, declaring bankruptcy is about asking that your debts are forgiven. Both options have a negative impact on your credit score for years, but a Consumer Proposal would be less damaging. Twice as many Canadians choose a Consumer Proposal  over bankruptcy. When you declare bankruptcy it can stay on your credit report for 7 to 10 years, depending on the type of bankruptcy filed. For a second bankruptcy declaration it might stay on your credit report even longer. The term can also depend on provincial legislation.
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When to Consider a Consumer Debt Proposal?
If you have been struggling with your personal finances for a while and find that your debt is greater than your income, a consumer proposal might be something to consider. If you owe more than $5,000, can’t afford to make your payments, and at risk of having money or assets seized by creditors, you might be a candidate.
The minimum debt required in Canada for a Consumer Proposal is $1,000, and the maximum allowable amount is $250,000 (or $500K for married couples).
What Other Options Do I have?
When looking for debt relief options, besides a consumer proposal, declaring bankruptcy, or considering a debt consolidation loan, there is also debt settlement and debt management.
Debt settlement is typically handled by a third-party company which will negotiate with your creditors in resolving delinquent accounts, where they will try to get the lowest possible percentage for repayment.
Much of the time a consumer proposal is a better option to debt settlement as it provides legal protection from creditors once an agreement has been reached. While it isn’t as bad as bankruptcy, a debt settlement can appear on your credit report for up to 6 years.
A consumer proposal is likely a better option than debt management as well. It can protect your from collections calls, wage garnishments and threats of legal action, fluctuating interest charges, and avoid additional fees. Debt management can appear on your credit report for up to 3 years.
If you are not too far in debt, it would be good to look into whether debt consolidation loans are a possibility. This requires good money management and budgeting skills and a way to take matters into your own hands. If you are not completely confident in your ability you might consider looking into credit counselling. This is where a trained credit counsellor would look at your current finances to evaluate your debts, credit, and budget to help provide suggestions that can assist you with tackling your debt.
How Does a Debt Consolidation Loan Work?
This is where you borrow so you can pay off your debt. Which might sound confusing, but in certain cases it makes sense.
Suppose you owed on a credit card, and a high interest installment loan from the past. So long as the interest rate of the debt consolidation loan is lower than your debt, you should come out ahead. Perhaps your only have a fair credit rating. and the interest rate on the credit card debt doesn’t make sense to include since it’s lower than the rate with the debt consolidation loan. Besides rates and APR, you would also want to look for any fees that can affect your costs, along with prepayment penalties in case you wanted to pay off early. A debt consolidation loan isn’t the answer for everyone, and your credit score often determines what rate lenders might offer with your loan. One other advantage to choosing a debt consolidation loan over the other options is that the impact to your credit score would be minimal for a short time, where the other options can stay with your credit report for years.
Can You Get a Loan with a Consumer Proposal?
It is certainly possible to get a loan while you are in consumer proposal, but having it on your credit report can make it more challenging for your request to be accepted.
Lenders look at those with a consumer proposal on their report as higher risk borrowers, but there are many types of lenders, with some willing to consider such an application.
When your debt accumulates to the point it is getting out of control, you should take charge quickly because delays can make your situation worse. Hopefully the above information has provided you with the necessary knowledge to make an informed decision, or at least help with determining next steps.
If you’re truly serious about getting your debt under control, it might call for drastic measures. One way to go about making some changes would be selling your assets and downsizing your home. But downgrading your life is never easy and many will refuse to take this step. The benefit is the lump sums of cash you might come into that could help you get your debt under control if you have a considerable amount of assets and whether this is an option. If you do have assets, even though this might seem like a step backwards, it might also be one of the better choices available for those that have the option.
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