What Happens If I Pay Off a Consumer Proposal Early?

For many Canadians, resolving debt issues might involve filing a consumer proposal, which is a form of insolvency that isn't as serious as bankruptcy. In order to file a consumer proposal, you will need to work with a Licensed Insolvency Trustee (LIT). Once the proposal has been accepted by your creditors, and you can maintain your monthly payments with some relative ease, you might start ti 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.

What is a consumer proposal?

A consumer proposal (CP) is a legally binding agreement administered by a Licensed Insolvency Trustee (LIT) that allows you to reach an agreement with your creditors to pay only a percentage of the total debt you owe to them. It could also mean extending the time you have to pay off your debts in full. Or it could be a combination of both.

How consumer proposals can impact your credit rating

A consumer proposal can last up to a maximum of 5 years and during that time your credit rating will show as an R9, which is the worst credit rating you can have, but remember, it's only temporary. After you completed the consumer proposal, your credit rating goes to an R7 for 3 years. Then after those 3 years are up, the debts included in your proposal will be removed from your credit file entirely.

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.

Ways to pay off a consumer proposal early

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 sense financially:

1. If you were to come into some money or a family member gives you money, you could put it towards the consumer proposal.
2. If you are able to decrease some of your expenses, you could increase your monthly payments and pay off the proposal sooner.
3. Make bi-weekly payments to the LIT instead of monthly payments and you can pay it off a little earlier.
4. You could also take any extra funds you get, like your tax return or overtime pay, and put it towards your proposal. 
5. Maybe your circumstances improve and you start earning more money; or you no longer have  certain costs to cover, such as daycare; or other loans have been paid, like your car loan. Or you've taken on a side job or side hustle. These funds could now go towards paying off the consumer proposal sooner, and the best part is you can do so without taking on new debt and incurring interest charges.

Refinancing other debt to pay off a consumer proposal early

There are also instances where it might make sense to pay off your consumer proposal early through new financing. For example:

1. When your mortgage renews, you could add the balance of your CP to the amount you are remortgaging. This would save you the monthly CP payment, but remember, you could be paying off your mortgage for the next 20 years.
   
   
2. If you are buying a home and need to take on insurance, the Canada Mortgage and Housing Corporation (CMHC) wants you to be out of a consumer proposal for 2 years (plus have job stability, etc.). In this case, if you can’t clear the CP early using the methods listed above, you may want to try to get a loan from your bank or credit union. But make sure you can afford the loan payments and eventually the mortgage payments, too.  After all, you filed a consumer proposal in the first place because you ran into financial difficulties, so don't set yourself up for failure by taking on too much.

Should you pay off a consumer proposal early?

So, yes, there are instances where you can pay off your consumer proposal early and there will be no negative impact. In fact, it may 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.

Is a consumer proposal the best way to resolve debt?

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!