6 Advantages of Consumer Proposals

If you are having debt problems you may have heard of the Canada consumer proposal, but what are the advantages of consumer proposals? How are they different from filing for bankruptcy? Do creditors accept them? Will a consumer proposal relieve your debt effectively and protect you from your creditors?

Why File A Consumer Proposal

In recent years consumer proposals have become a very popular option for Canadian consumers facing insolvency and unmanageable debts to unsecured creditors (typically credit cards, store cards, unsecured loans, etc). For those who qualify, a consumer proposal offers the same debt relief as bankruptcy and the same creditor protection.  A Licensed Insolvency Trustee can tell you in-depth about consumer proposal pros and cons, and how it can relieve your debt in your particular situation.

As soon as a consumer proposal is filed, you are protected from your creditors – phone calls and letters from creditors will stop.

In 2019, Canadian consumers filed 54,409 bankruptcies and 82,769 consumer proposals. This should tell you that a consumer proposal is often the preferred option for debt relief – and also, that you are not alone.

How Is a Consumer Proposal Different from Bankruptcy?

If an individual is insolvent and has a combined debt of at least $1,000 to their unsecured creditors (apart from secured debts such as mortgages and leases), he or she may qualify to file either a consumer proposal or bankruptcy. Being “insolvent” simply means not being able to meet monthly financial obligations, such as paying bills to creditors.

Whereas anyone in this debt situation could file for bankruptcy, a consumer proposal is suitable to a more specific situation: one in which the debtor has a reliable income from which they can make regular monthly payments during the term of the proposal  – usually for five years.

The amount of this payment will be determined using the information you provide to a Licensed Insolvency Trustee about your income, expenses, debts and assets. Most debtors find that making this one payment every month is far easier than the multiple payments they have been juggling to satisfy their creditors.

More differences between a consumer proposal and bankruptcy are outlined below.

Top 6 Advantages of Filing a Consumer Proposal

There are many advantages of consumer proposal. Here, we will list the top six.

Advantage #1: A Consumer Proposal is Not a Bankruptcy

Many honest but unfortunate debtors feel embarrassed and ashamed of their situation. The idea of “going bankrupt” can worsen these feelings. Although bankruptcy is a useful financial alternative, it may feel good to know that a consumer proposal is not a type of bankruptcy, but a distinct debt solution.

Because of this, once you have completed your consumer proposal, you will not need to respond “yes” if you are ever asked if you have been bankrupt.

Both consumer proposals and bankruptcy are solid ways to deal with unsecured debts.

Advantage #2: You Can Pay Off your Consumer Proposal Early

Unlike in bankruptcy and many other debt-reduction or debt-settlement arrangements, in a consumer proposal you are allowed to pay off and complete your consumer proposal early. If you make extra money, you can put it towards your proposal.

Filing a consumer proposal and paying it off early has the added benefit of allowing you to begin repairing your credit rating sooner than expected.

Advantage #3: A Consumer Proposal Has a Shorter Effect on your Credit Rating (Credit Score)

Although bankruptcy and consumer proposal have similar negative effects on your credit rating, once your consumer proposal has been completed your credit rating can recover quite speedily, compared to if you had been bankrupt. The record of a consumer proposal stays on your credit report for six years from the date you file the proposal or three years from the date you complete it, whichever is shortest. In contrast, Equifax reports that a first bankruptcy will stay on your credit report for six years from your date of discharge.

If you succeed in paying off your consumer proposal early, as in Advantage #2 above, you’ll be repairing your credit rating in no time.

This is one of the key advantages of a consumer proposal as opposed to bankruptcy.

Advantage #4: A Consumer Proposal is Legally Binding – on you AND your Creditors

Unlike credit counselling and many other debt settlement solutions, a consumer proposal is legally binding. This means that once you enter into it, you agree to fulfill its terms – and in return, your unsecured creditors agree to release you from your debts once you have fulfilled the terms of the proposal. The terms are legally binding, so your creditors cannot legally “go back” on the agreement and demand any funds at a later date, when you may have increased your income or assets.

Advantage #5: A Consumer Proposal is a Negotiated Agreement

Once it has been drafted by a Licensed Insolvency Trustee, both you and your unsecured creditors must agree to the terms of a consumer proposal before it is approved by the court and comes into force. This is another key factor in its difference from bankruptcy, and can make it feel more respectable.

Advantage #6: Your Consumer Proposal Payment Never Changes

Among the advantages of consumer proposal is that your required payment never changes. Unlike with filing for bankruptcy, where the monthly payment can increase if your income increases, when you file a consumer proposal your monthly payment stays the same throughout its term (unless you choose to pay extra and fulfill it early). If you are lucky enough to increase your monthly income, your payment will not go up.

Need Help with a Consumer Proposal?

The professional who was once called a “bankruptcy trustee” or “insolvency trustee” is now called a Licensed Insolvency Trustee (LIT).

Licensed Insolvency Trustees are the only professionals who can assist you in actually filing a bankruptcy or a consumer proposal. It is not necessary to pay another professional to help you prepare the paperwork – a Licensed Insolvency Trustee is specially trained to recommend the debt-relief approach that will be of the greatest benefit to both you and your unsecured creditors. Most people come away from their initial, confidential meeting with a LIT feeling quite relieved of their worries.

How to Get Started with Filing a Consumer Proposal

The first step is to realize that you could use some help. Happily, help is available!

The Licensed Insolvency Trustee will meet with you to discuss your debt-relief options, and a consumer proposal or bankruptcy as a debt relief solution. They will be able to recommend which one of these options is a good fit for your needs and situation. The LIT is also knowledgeable about other locally available debt relief options such as credit counselling, debt consolidation loans, or debt settlement programs (options vary by province).

The consumer proposal filing process is relatively easy, compared to filing for bankruptcy. If you choose a consumer proposal, the LIT will explain the consumer proposal process, and outline it simply for you.

Your first meeting with the Licensed Insolvency Trustee is free, so there’s no need to wait. See a Trustee and begin your recovery from debt today!

Additional Helpful Reading: Consumer Proposal Payment Terms