What is a consumer proposal, and what are the pros and cons?

When you are swimming in debt, you may feel overwhelmed. Thankfully, there are options available to help reduce your debt and regain control of your life; the first step is deciding which path to take.

“It can be daunting to seek help when you’re dealing with substantial debt,” says Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada. “Your debt load won’t go away on its own, which is why you need to weigh your options carefully.”

One such option is a consumer proposal. If you are considering this, here are the consumer proposal pros and cons.

Consumer Proposal Defined

A consumer proposal is an alternative to personal bankruptcy. In a consumer proposal, you agree to pay a portion of your debts to creditors and the creditors agree, in many cases, to forgive the remainder of the debt. This arrangement is negotiated on your behalf through a Consumer Proposal Administrator (who is also a licensed Insolvency Trustee). The agreement between you and your creditors is legally binding and gives you immediate protection from your creditors.

Credit History Influence

With a consumer proposal, with successful repayment, you have a chance to move your credit rating up to an R7 (in comparison to the R9 rating with personal bankruptcy, which jeopardizes your ability to qualify for future credit). An R7 still means that you’ve got bad credit, but there is less damage to repair moving forward.

“If your credit rating is still fairly good, you may want to do what you can to avoid both consumer proposals and bankruptcy, as you will unnecessarily pull your credit rating down,” says Schwartz. “It’s worth exploring other options, like DIY debt consolidation or debt management programs.”

Consumer Proposal Pros and Cons

Much like any other approach to reducing debt, consumer proposals come with advantages and disadvantages. See a list of the benefits and drawbacks below.

Consumer Proposal Pros

There are several benefits to filing a consumer proposal, such as:

  • Once the agreement is in place, interest stops accruing on your debts, which will stop your debt load from increasing.
  • You don’t have to deal with the stress of managing debt collectors, because they aren’t allowed to call you once a consumer proposal is in place.
  • There is no wage garnishment with a consumer proposal.
  • The terms of your repayment are binding and last for up to five years. They don’t increase as your income does, so this can help you budget accordingly to erase the debt in a timely manner.

While there is no question a consumer proposal will create a negative impact on your credit history, it’s not as damaging as bankruptcy, where debts are written off. It’s very difficult and can take a long time to obtain credit after declaring personal bankruptcy.

Creditors usually agree to work with you, because a consumer proposal will get them at least a portion of the debt repaid. If you’ve got joint debt, a consumer proposal can be a viable debt repayment option, because you can file consumer proposals jointly.

Consumer Proposal Cons

  • Depending on how much debt you owe, you may not be able to seek a consumer proposal.
  • There is an upper debt limit of $250,000 (not including mortgage debt).
  • Also, while your payments won’t increase during the life of the consumer proposal, it can be challenging to reduce these payments in the event your circumstances change (i.e. job loss, wage reduction).
  • There can be hefty fees associated with consumer proposals, and all your debts may not be able to be eligible, such as secured debts and older student loans.
  • You must forfeit your credit cards.

Consolidated Credit can Help

Do you feel like you’ve run out of options to deal with your debt? We can help you understand what is available to you and help you plan for your debt-free future. Call us at 1-888-294-3130 or start with our online debt analysis.