No one wants to fall delinquent on their accounts or not be able to pay their debts. However, debt is increasingly becoming a very real problem for the majority of Canadians.A recent CNBC article stated that “Household debt levels in Canada are higher than in any other country, according to a report by the Organisation for Economic Co-operation and Development (OECD).” In fact, the average non-mortgage debt owed by Canadians has grown to $22,154.
There are several ways to handle debt, including debt consolidation programs, debt consolidation loans, credit counselling, budgeting and cutting costs, or, as a last resort, bankruptcy. Another option that people might consider is a consumer proposal. But what is a consumer proposal? How does it work? And what are the benefits and drawbacks?
Benefits of Consumer Proposals
A consumer proposal is a legally binding process that allows you to reach an agreement with your creditors to pay only a percentage of the debt owed to them, or extend the time you have to pay off your debts in full, or both. A consumer proposal is administered by a Licensed Insolvency Trustee (LIT) who will decide how much of the debt you can pay based on your assets and income. It is very important to understand this because frequently there is a misunderstanding that you choose the amount you pay back, and that simply isn't the case.
A consumer proposal is typically a last resort for creditors, who perceive that the debt may not be repaid. In many cases, creditors only agree because they want to recover some of the funds that would otherwise be lost forever. However, creditors have the right to reject the proposal if they feel it isn't enough for what is owed.
Among the benefits of consumer proposals is that most wage garnishments will immediately cease, interest stops accruing from the date you file, and your creditors and their collection companies can no longer legally contact you for repayment. You also can retain all of your assets and resolve your debt without going so far as to declare bankruptcy, but a consumer proposal is still considered insolvency.
Drawbacks of Consumer Proposals
Much like bankruptcy, consumer proposals are a form of insolvency, so they have their downsides which will adversely affect your credit rating and score. On your credit report, your creditors will assign a credit rating between R1 and R9 — R1 being the best and R9 being the worst. A consumer proposal will land your credit rating at an R7 for about three years after you've paid back the agreed amount in full, or six years after you filed the consumer proposal, whichever comes first, so you'll likely not be able to get any additional credit for a while.
Another drawback is that if you do not consistently make your payments or default on your consumer proposal, the proposal can become void and you would be unable to file another one, which means you're back to square one and your creditors can start collections again or take legal action. Additionally, consumer proposals are a matter of public record — they're not private — so technically anyone can find out that you filed for insolvency. Lastly, you might come across some untrustworthy companies that may try to scam you out of money by charging a variety of fees.
Qualifying for Consumer Proposals
If your total unsecured debt (credit cards, payday loans, etc.) does not exceed $250,000, you may be eligible to qualify for a consumer proposal. However, you must be able to pay off a portion of the total debt owed.
Before considering a consumer proposal, we recommend you use Credit Canada’s free debt calculator to determine what you can afford to pay back on your own, so you avoid any major hits on your credit rating and score. It's also a good idea to get in touch with one of our credit counsellors for a free debt assessment. Our specialists will offer an honest, unbiased evaluation of your situation and provide you with all of your debt solution options, whether it's a consumer proposal or a debt consolidation program which will have less of an impact on your credit history. Call us to get some free advice and expert know-how at 1-562-867-5309.