For many Canadians, resolving debt issues might involve filing a consumer proposal with a trustee. (A consumer proposal is a form of insolvency, but it's not as serious as bankruptcy.) Once the proposal has been accepted by your creditors, and you maintain your monthly payments with some relative ease, you might start to think about paying it off early. But is it a good idea?
In this post we'll review some of the most important details regarding consumer proposals, as well as the impact (if any) of paying it off early.
A consumer proposal (CP) is a legally binding agreement administered by a Licensed Insolvency Trustee that allows you to reach an agreement with your creditors to pay only a percentage of the total debt owed to them, or extend the time you have to pay your debts in full, or both.
A consumer proposal can last up to a maximum of 5 years and during that time your credit rating will show as an R9. After completing the consumer proposal, your credit rating goes to an R7 for 3 years and after the 3 years are up, the debts included in your proposal will be removed from your credit file.
Once a consumer proposal has been accepted by both you and your creditors, it becomes a binding agreement and no further interest is charged on the debt you owe. So, is it really worth paying off sooner? Let's discuss.
Some people might think they can get a loan to pay off their consumer proposal sooner, but the truth is if you're doing a consumer proposal, you probably won't qualify for a loan. And remember, you'll have to pay interest on that new loan, whereas the consumer proposal is interest free, so it doesn't make much sense to get a loan to pay off a consumer proposal if you're going to pay interest on that loan.
However, there are other ways to pay off your consumer proposal sooner that might make more financial sense:
There are also instances where it might make sense to pay off your consumer proposal early through new financing. For example:
So, yes, there are instances where you can pay off your consumer proposal early and there will be no negative impact.
In fact, it will speed up the process of having negative information come off your credit report. But improving your credit rating shouldn't be your only focus. You need to make sure that by paying off your consumer proposal earlier you aren’t jeopardizing your finances. You need to take control of your finances and then be able to maintain this control. Don’t be in too much of a hurry.
If you're wondering if a consumer proposal might be the best option for you to resolve your debt, give us a call at 1.800.267.2272 and we'll set you up with a free appointment with one of our friendly certified credit counsellors. They will be able to lay out all of your options for paying off your debt, give you the pros and cons of each option, and then provide with your next steps, all for free!
Topics: Consumer Proposals
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