Understanding Consumer Proposals
A consumer proposal is a legal agreement in Canada filed through a Licensed Insolvency Trustee. This approach is for individuals overwhelmed by debt, allowing them to repay a fraction of what they owe over time. It’s a step short of bankruptcy and can be a lifeline for those struggling with unmanageable debt loads.
Crowe MacKay & Company’s Licensed Insolvency Trustees in Vancouver and Surrey provide expert guidance through the nuances of consumer proposals, helping you weigh the pros and cons, understand the impact on your credit score, and explore alternative debt relief options. If you require assistance, contact our team in Vancouver and Surrey to start your debt relief journey.
Is a Consumer Proposal Worth It?
This question is pivotal when considering debt relief options. A consumer proposal might be suitable if your debts are mainly unsecured, like credit card debts or personal loans, and you have a stable income to support the payment plan. A consumer proposal may also be an option if you have assets you wish to remain in your control.
Weighing the Pros
1. Reduced Debt Amount
A consumer proposal often means you only pay a portion of your total debt. This reduction can significantly lower your financial burden.
2. Interest-Free Payments
There is no interest on a consumer proposal. The arrangement freezes interest on your debts. This means the amount you owe won’t grow over time, making it easier to manage your repayments.
3. Legal Protection from Creditors
Once you file a consumer proposal, creditors are legally barred from pursuing you for debt collection. This includes stopping all legal actions against you.
4. No Asset Loss
In contrast to bankruptcy, a consumer proposal doesn’t require you to surrender your assets, such as your home, car or investments.
Considering the Cons
1. Impact on Credit Score
Filing a consumer proposal will negatively impact your credit score, though the effect is less severe than bankruptcy. A consumer proposal is a 7 on the credit rating scale. The notation of the consumer proposal will appear on your credit report for three years after you have fully performed the terms of the consumer proposal.
2. Not All Debts Covered
Consumer proposals don’t cover secured debts like mortgages or car loans. You’ll need to continue making these payments separately. Certain debts also survive a consumer proposal, such a student loans that are less than 7 years old, certain court fines or child support payment arrears.
Alternative Debt Relief Options
1. Debt Consolidation Loans
This option involves taking out a new loan to pay off multiple debts, potentially at a lower interest rate. However, it requires a good credit score and could extend your debt repayment period. If your debt to income ratio is to high, you will most likely not qualify for a debt consolidation loan. Debt consolidation does not reduce your debt amount but it does simplify managing your debts by having a single monthly payment.
2. Credit Counselling
Credit counselling provides education and resources to manage your debt better. This can include budgeting advice and debt management plans. A debt management plan will simplify the process of paying back your debts by only having to make one monthly payment and a credit counsellor will negotiate on your behalf to greatly reduce and possibly eliminate the interest on your debt. A debt management plan will have an impact your credit rating and the record will stay on your credit report for 2 years after you pay off your debts.
As a last resort, bankruptcy discharges most of your debts but has severe consequences for your credit and asset ownership. For more information, please contact our team in Vancouver and Surrey for assistance.
How to Decide if a Consumer Proposal Fits You
Analyzing Your Debt Load
Consider the types and amounts of debt you have. A consumer proposal is ideal for significant unsecured debt.
Your income should be stable enough to meet the regular payments outlined in the proposal. Alternatively, a one-time lump-sum offer from a third party can also be offered through a consumer proposal.
Impact on Credit Score
Short-term vs. Long-term
While your credit score will take an immediate hit, a consumer proposal can be a stepping stone to rebuilding your financial health in the long term.
The Process of Filing a Consumer Proposal
1. Consult a Licensed Insolvency Trustee
An experienced professional will assess your financial situation and help draft your proposal.
2. Drafting the Proposal
The proposal outlines how much you can pay and for how long, seeking to reduce your total debt.
3. Creditor Approval
Your creditors will vote on the proposal. It’s approved if creditors holding the majority of your debt agree. If the majority of creditors reject the initial proposal offer, a counter offer can be made and negations can take place to find a payment plan that is acceptable to both the debtor and the creditors.
Life After a Consumer Proposal
During the term of your consumer proposal, you will be required to attend 2 counselling session. These sessions are designed to educate you and give you the tools to have a better financial future. The counsellor will discuss Adopting strict budgeting and spending habits is crucial to avoid falling back into debt as well as how to start rebuilding your credit slowly with tools like secured credit cards, and be diligent about future financial commitments.
1. How long does a consumer proposal stay on my credit report?
It remains for three years after you complete the payments.
2. Can I pay off my consumer proposal early?
Yes, you have the right to repay your consumer proposal in part or in full at any time without penalty, if your financial situation improves.
3. What happens if I miss payments?
You may defer two payments during the term of the consumer proposal however once the aggregate of three payments is in arrears then the consumer proposal is in default which will lead to the annulment of your proposal. When a proposal is annulled, the creditors may resume collection activity again. Should you be able to remedy the default within the prescribed time, the administrator can revive the consumer proposal.
4. Is my spouse affected by my consumer proposal?
No, your spouse will not be affected by your consumer proposal unless they are co-signed on the debts included in the proposal. A co-signer will be called upon by the creditor to pay the remaining outstanding debt.
5. Can all types of debts be included in a consumer proposal?
No, a consumer proposal only covers unsecured debts. Secured creditors shall continue to be paid in accordance with present arrangements existing between yourself and the creditor.
6. How does a consumer proposal affect my assets?
A consumer proposal is designed to allow you to retain your assets, unlike in bankruptcy. Your income level and assets are accounted for when the proposal calculations are prepared so as to determine a fair settlement offer for your creditors.
A consumer proposal can be a valuable tool for debt relief, but it’s not suitable for everyone. It’s crucial to consider your financial situation, the types of debts you have, and your ability to make regular payments. With careful consideration and proper guidance, a consumer proposal can be a stepping stone toward financial stability and freedom from debt.
At Crowe MacKay & Company, we have over 60 years of experience and offer free initial consultations. If you have any questions regarding the information above, contact our office today and start your debt relief journey.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.