Pros and Cons of Filing a Consumer Proposal: Is It for You?

Debt can feel overwhelming, and finding the right path to relief can be difficult. If you have been researching options, you may have come across something called a consumer proposal. But what exactly is it, and how do you know if it is the right option for you? We will explain what a consumer proposal is, along with the advantages and disadvantages of filing a consumer proposal.

Let us explore the consumer proposal pros and cons to help you decide if it is the right way to tackle your debt!

What is a Consumer Proposal?

Before we can dive straight into the consumer proposal pros and cons, you should have a good idea of what a consumer proposal is.

Not everyone has heard of it, but a consumer proposal is an excellent debt-relief option offered by the government that can eliminate your debt. It is a formal and legally-binding debt settlement agreement between you and the companies you owe money to, also known as your creditors.

Consumer proposals ensures that you pay only some of the money you owe. The rest of the debt is forgiven forever! It covers unsecured debts like credit cards, personal loans, and tax debt.

A consumer proposal is overseen by a Licensed Insolvency Trustee (LIT), who will negotiate on your behalf and communicate with creditors to accept a repayment plan that fits your financial situation. They are authorized by the government to manage debt solutions by providing a safe, judgment-free space.

Now that we know what a consumer proposal is, let us break down the consumer proposal pros and cons to see how it could impact your financial future.

The Pros of Filing a Consumer Proposal

1. Debt Reduction and Affordable Payments

One of the biggest advantages of a consumer proposal is that you only have to pay a portion of your debt, making it more manageable. The total amount owed is reduced once your unsecured creditors agree to the proposal. This can often be up to 80% and the rest of the debt? That is forgiven forever because for your creditors, getting something back is better than nothing! Also, your interest charges on most debts are frozen and there is no interest on your remaining debt.

Your payments are then based on what you can afford. It will be structured into one affordable, manageable monthly payment to help keep you on track while completing the consumer proposal. The payments are spread out over a maximum of five years, giving you the flexibility to afford your everyday living expenses without the pressure from debt collectors.

In terms of paying your LIT, these fees are regulated by the government, which means they are transparent and fair. These fees are deducted from the payments you make.

2. Protection of Assets

Unlike bankruptcy, which is used as a last resort when all other solutions have been ruled out, your assets are protected when you file a consumer proposal. You will not have to hand over your assets to clear your debts. That means your home, car, and other personal belongings stay with you, as long as you continue to make any payments associated with those assets.

3. Stopping Creditor Actions

You will not have to worry about communicating with your creditors once the proposal is filed. And when you file a consumer proposal, collection calls and creditor actions from your unsecured creditors are stopped. They will not be able to keep calling you, they cannot take legal action against you to collect on the debt, and any existing legal action must stop.

This includes no wage garnishment. Once your proposal is accepted, the amount you pay back is fixed even if you get surplus income.

That means no more constant reminders, nerve-racking phone calls, or worries about having to pay more than what is needed. This legal protection can provide you with peace of mind and the space to focus on paying off your debt rather than constantly worrying about what is coming next.

4. Faster Debt Resolution

In some cases, a consumer proposal can help you pay off your debt faster than other debt-relief options. While it is typically spread over five years, you have the option to pay off the proposal sooner if you are able. This gives you more control over your financial timeline, letting you speed up your debt resolution. And for those worried that you may not be able to get a credit card while on a consumer proposal, you do have some options.

5. Improved Credit Rating Potential

Although filing a consumer proposal will affect your credit, as well as your income tax refund, the impact is less severe than bankruptcy. With a consumer proposal, you have the chance to start rebuilding your credit sooner. Additionally, your credit report will reflect that you took responsibility for your debts, which can work in your favor in the long run.

The Disadvantages of a Consumer Proposal

While there are many benefits to filing a consumer proposal, it is important to understand that there are also some drawbacks. Let us take a look at the cons:

1. Impact on Credit Rating (Though Less Severe)

As mentioned earlier, a consumer proposal will show up on your credit report and can lower your credit rating. However, the damage is typically less severe than with bankruptcy. The proposal will stay on your report for about three years after the completion of the repayment, which may make it harder to secure credit during that time.

It is also important to note that there is a good chance that your credit rating is already negatively affected if you already have bad credit from missing debt payments. Instead of looking at your credit rating and how a consumer proposal can affect it, start looking at the future potential.

Once you successfully complete your consumer proposal, you will be able to start slowly building your credit back up. Debt experts, such as the LITs, Debt Solution Managers, and Insolvency Counsellors at Farber, will work with you to ensure you are on the right track to building a healthier relationship with money in the long run.

2. Upfront Costs

There are fees involved with filing a consumer proposal. Licensed Insolvency Trustees, who manage the process, charge fees that are included in your monthly payments. While these costs are not typically overwhelming, they are there.

What could these fees be? Essentially, the overall cost of the consumer proposal is whatever your LIT ends up negotiating you need to pay with your creditors. There are standard fees that you will need to cover through your proposal offer amount, such as the $115 filing fee that goes to the Office of the Superintendent of Bankruptcy. This will be all included within the amount you offer to your creditors.

3. Not All Debts Are Included

A consumer proposal does not cover all types of debts. It covers unsecured debt such as credit card debt, tax debt, student loans, personal loans, lines of credit, and payday loans. For student loans, recent loans may not be eligible for inclusion if you have been out of school for less than seven years.

Secured debts, like your mortgage or car loan, are not included in the proposal. This means that while it helps with unsecured debts, you will still be responsible for making full payments on any secured loans

We recommend booking a free, no-obligation consultation with a debt expert to explore your options and see which debts could be included. They will give you a better idea of the best debt-relief options based on your unique situation.

4. Strict Repayment Plan

Once your proposal is accepted, it is important to stick to the court-approved repayment plan. Missing payments can have serious consequences, including the potential for the entire proposal to be annulled. This would mean that all your remaining debt would be due immediately, and you could lose the protection the proposal provides.

However, your payments are made to be affordable based on what they expect you to be able to pay monthly. This is so you can focus on paying off your debt and breaking the cycle of missing payments. Your debt expert will work with you to get you back on track so you can tackle your debt once and for all!

How Farber Can Help with Filing a Consumer Proposal

If you are considering the consumer proposal pros and cons and still have questions, it may be time to reach out to a professional. At Farber, our Licensed Insolvency Trustees are here to help you explore your options. We will guide you through the process, explain the benefits and drawbacks of each debt relief solution, and help you make the right choice for your financial future.

Filing a consumer proposal is a big decision, but it does not have to be a stressful one. With the right support, you can find relief from debt while keeping your assets and gaining peace of mind. Contact Farber today — for a free consultation — to discuss how a consumer proposal might be the best to get back on track.