Consumer proposals are a legal document that consumers use to negotiate with creditors. It is a way for consumers to reduce interest rates, make payments more manageable, and reduce their debt.
As a legal debt solution, a Consumer Proposal is a formal agreement between you and your creditors that is submitted on your behalf by a Licensed Insolvency Trustee (LIT). It is an offer you make to settle your debt with creditors for a smaller amount than the total amount that you owe.
Consumer proposals if done right can result in as much as an 80% debt savings. According to statistics, consumer proposals continue to grow in popularity in Canada as a practical way for debtors to obtain relief and protection from unsecured creditors.
Advantages and Disadvantages of Consumer Proposal
As a matter of fact, filing a consumer proposal has become the preferred choice now among consumers over that of filing a personal bankruptcy. But, what’s so good about a consumer proposal? Consumer proposals have some advantages over other options.
For instance, they can help borrowers avoid bankruptcy if they are having financial difficulties. They also help consumers avoid defaulting on their loans and repaying the debt through an extended repayment plan.
The disadvantages of consumer proposals include high fees, limited ability to negotiate terms, and the possibility of losing collateral or assets in the process.
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Advantages of a Consumer Proposal
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You keep your assets
One of the biggest advantages of a proposal is assets protection, which allows you to keep all your assets including tax refunds, investments and home equity.
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Lower monthly payments
First of all, interest charges are frozen which can go a long way in lowering your monthly payments. You can also repay only a portion of your total debt and arrange to make one affordable monthly payment over a span of no more than 5 years.
Depending on the terms and agreements negotiated with your Trustee, it is possible to see your total debts reduced by as much as 70% of the amount you owe.
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No surplus income
You pay a fixed monthly amount for the duration of your proposal regardless of any changes in income. In a bankruptcy, if your income increases, and it goes over the income threshold. You may have to pay surplus income which will increase your monthly payments.
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Creditor protection
A stay of proceedings takes effect immediately after your proposal is approved by your creditors. Which will provide you with creditor protection and automatically put a stop to collection calls and wage garnishments.
Disadvantages of a Consumer Proposal
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Completion time
A consumer can take up to 5 years or 60 months to complete. If your finances improve, you can increase your payments and pay off the proposal early.
In a first-time bankruptcy, it can take 9 months to complete. If you are required to make surplus income payments, this will be extended to 21 months.
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Credit rating impact
Your credit rating will be affected in a consumer proposal. It will show as an R7 rating in your history and stay there up to 3 years after completion.
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Proposal terms
You cannot miss payments or fall behind on monthly payment. You will also be required to follow all agreements stated in the proposal, otherwise you risk a default or termination of your proposal.
If you do not own assets that would be seized and sold to pay off part of your debt. If you cannot afford to pay monthly payments to shorten the length of time to make payments, then a Consumer Proposal might not work for you. In this case, alternative debt relief solutions would possibly be your best option.
Only a LIT can determine if a Consumer Proposal is right for your unique circumstances.
If you are struggling with overwhelming debt, talk with a Licensed Insolvency Trustee about all your options for paying off your debts. Contact us today to find out if a Consumer Proposal is right for you.
