Four Good Reasons For Making A Consumer Proposal Instead Of Settling Debts On Your Own

Picture this scenario: you are experiencing major debt challenges. You might also not be in a position to address your debt problems by obtaining a debt consolidation loan, or seek credit counselling. Furthermore, filing for personal bankruptcy is something you prefer to avoid. You do not find a debt management service attractive because you know it can be incredibly expensive. You could pay somewhere between 100 cents and 130 cents to eliminate one dollar of your debt by enrolling in a debt management plan with a for-profit credit counselling agency. You, like many consumers dealing with debt problems, have narrowed your final decision to two debt relief options: making a Consumer Proposal and settling your debts on your own, through what’s known as an informal debt settlement.

Quite simply, a Consumer Proposal is a formal, legally binding process to deal with debt. Although it is not a bankruptcy, it falls under the Bankruptcy and Insolvency Act. A Consumer Proposal can be thought of as a settlement between you and your creditors to forgive some or all of your debts in full in return for an agreed lower monthly payment over an extended period, not exceeding five years. Payments are made through a Licensed Trustee, who will be the Administrator of the Consumer Proposal. The Trustee will disburse the payments to each creditor that has proved a claim in the proposal. 

An informal debt settlement is a voluntary arrangement negotiated between you and your creditors, without the comfort of ensuring you have a legally binding agreement and the step-by-step guidance provided by a Licensed Trustee. Your creditors have no legal obligation to work with you on creating a debt agreement and they could cancel it with little or no notice if it is not properly documented in a binding legal document.

There are four compelling reasons why you might prefer to make a Consumer Proposal instead of settling your debts on your own.

1.     You feel uncomfortable settling debts on your own

Regardless of the actual merits of settling debts on your own, there are several reasons why settling your debts independently might not be suitable for you or your personal situation. These reasons include:

• You lack the knowledge, confidence, patience or discipline to obtain a satisfactory settlement
• You prefer the certainty of a Consumer Proposal over the uncertainty associated with settling debts on your own
• You do not feel comfortable negotiating a settlement with bill collectors
• The prospect of not being able to settle your unsecured consumer debts until they have been unpaid for six months is not attractive to you
• The fact that interest will likely continue to accrue on your outstanding balance is not ideal
• You will receive collection calls and collection notices in the mail
• You could be sued
• You lack the wherewithal to accumulate the necessary monies on your own to fund a one-time lump sum settlement on each of your accounts

2.     You are feeling the negative effects of a wage garnishment

One of the most compelling advantages of making a Consumer Proposal is to terminate existing wage garnishments—as well as to immunize yourself from future wage garnishments. By making a Consumer Proposal, all wage garnishments against you are stayed, except for those involving spousal support and child support. This creditor protection will be in place as long as you make your monthly payments under your Consumer Proposal, over a period not to exceed five years.

3.     You have been sued

A Consumer Proposal can be a very attractive debt relief option if you are sued. This is particularly the case where your creditor can either impose a wage garnishment or a lien on real property which you own in your own name. If your creditor obtains a judgment against you, then it can put a lien on your real property. In these circumstances, your creditor will likely recover from you an amount between 90 cents and 130 cents on the dollar of your original indebtedness. This amount is so high because it includes the original outstanding balance, court costs, legal fees, pre-judgment interest and post-judgment interest—the latter of which can be huge. You can avoid this doomsday scenario by simply having a Licensed Trustee file a Consumer Proposal with the Office of the Superintendent of Bankruptcy before your creditor puts a lien on your real property—in which case this particular creditor would only receive a compromised amount!

4. You owe a significant amount of money to the government

Under a Consumer Proposal, you can eliminate one dollar of debt owing to the government for a compromised amount. In contrast, you cannot eliminate debt owing to the government at a discount by negotiating a one-time lump sum settlement. If you owe monies to the government and you do not file for personal bankruptcy or make a Consumer Proposal, then you face the prospect of paying not only the outstanding principal, but also interest and penalties.