What is a Consumer Proposal?
When you are swimming in debt, you may feel overwhelmed. There are options available to you to help reduce your debt and get control of your life back, but the first step is deciding which path to take.
“It can be daunting to seek help when you’re dealing with substantial debt, but your debt load won’t go away on its own, which is why you need to weigh your options carefully,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
One such option is a consumer proposal. What is a consumer proposal? What is involved and what are the pros and cons? If you are considering a consumer proposal, here is what you need to know:
Consumer Proposal: Defined
A consumer proposal is an alternative to personal bankruptcy. Basically, in a consumer proposal, you agree to pay a portion of your debts to creditors and the creditors agree, in many cases, to forgive a portion 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.
“However, 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. It’s worth exploring other options, like DIY debt consolidation or debt management programs,” says Schwartz.
Consumer Proposal Pros and Cons:
Consumer Proposal Pros:
There are a number of benefits to filing a consumer proposal. 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. Typically under a consumer proposal, your wages aren’t garnished and your assets (i.e. your home) aren’t vulnerable.
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 it will create a negative impact on your credit history, it’s not as damaging as bankruptcy (where debts are considered written off. It’s very difficult and/or can take a long time to get credit again after declaring personal bankruptcy).
Creditors are usually agreeable to work with you in order to come to some sort of agreement, because a consumer proposal will see them get 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 are allowed to file them jointly.
Consumer Proposal Cons:
Depending on how much debt you owe, you may not be able to do a consumer proposal. There is an upper limit of $250,000 (not including mortgage debt). While your payments won’t increase, it can be challenging to reduce them in the event that your circumstances change (i.e. job loss, wage reduction).
There can be hefty fees associated with consumer proposals; all of your debts may not be able to be included (i.e. secured debts and older student loans, etc.).
You will have to close your credit cards and generally you aren’t allowed to re-apply to the existing creditors for credit, at least for a specified time period.
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 future, debt-free. Call us at or start with our online debt analysis.