What are the pros and cons of a Consumer Proposal?

Almost half of all Canadians are $200 or less from not being able to meet their financial obligations at the end of the month. In the current economic environment, any unexpected expense may be enough to push you into debt — and now you may be wondering what to do next.

You have debt, but there may be assets you want to keep — and you may be worried about the long-term financial impact of a Bankruptcy. A Consumer Proposal is an alternative solution that could help you achieve a fresh financial start.

Let’s review what a Consumer Proposal is, as well as the pros and cons of filing a Proposal, to help you determine if it’s the right solution for your unique situation.

What is a Consumer Proposal?

A Consumer Proposal is an alternative to Bankruptcy. The process begins when you meet with a Licensed Insolvency Trustee (LIT) for a Free Confidential Consultation. LITs are highly qualified debt management professionals, and they are the only professionals who can file Consumer Proposals and Bankruptcies.

The LIT will review your financial situation and help you explore all the options that could help you achieve a fresh financial start. If you choose a Consumer Proposal as the solution to your debt, the LIT will help you prepare the Proposal for your creditors.

The majority of your creditors must agree to your Proposal before you can proceed. Throughout the process, you will make a monthly payment to your creditors that you can afford. After you have fulfilled the duties outlined in your Proposal, you will receive a Certificate of Completion and be released from most of your debts.

Pros of a Consumer Proposal

There are many advantages to filing a Consumer Proposal — for example, it halts and prevents any further legal action from your creditors, you will get to keep your assets, and you will repay less than what you owe.

We have summarized the pros of a Consumer Proposal below to help you determine if it is the right solution for your situation:

• Immediately stops collection action from your creditors
• No further interest is added to your debts
• You are not required to fill out monthly income and expense reports
• You get to keep all your assets and tax refunds
• You will repay less than what you owe
• Offers higher recovery to creditors than a Bankruptcy
• Your monthly payment is fixed so you don’t have to make higher payments if your income increases
• If you have student loans, a Consumer Proposal will pause active collection. However, interest will continue to accrue
• Your creditors approve the Proposal at the beginning of the process and there is no court hearing to determine if your debts are extinguished
• Payments are set by you and are within your financial means
• If you have declared Bankruptcy before, filing a Proposal will have less impact on your credit report than filing for a second Bankruptcy
• You can keep credit cards with nil balances
• You will receive budgeting and money management counselling throughout the process
• You have the option to pay out the Proposal early by increasing your payments or paying a lump sum

You will also receive the knowledge and support of an LIT throughout the Consumer Proposal. The LIT will communicate with your creditors on your behalf and provide guidance through each step of the process.

Cons of a Consumer Proposal

It is important to weigh the disadvantages of a Consumer Proposal against the advantages it may provide before you decide if it is the right solution for you. For example, a Consumer Proposal typically takes longer to repay, you will not be able to file another Proposal if you default on three payments, and it will be included on your credit report.

We have summarized the cons of a Consumer Proposal to help you make an informed decision on the debt solution that works best for you:

• If the majority of your creditors vote against the Proposal, you may have to file for Bankruptcy
• It typically takes four to five years to repay a Consumer Proposal, which is longer than a typical Bankruptcy
• Your payments are fixed. If you need to change the amount you pay each month, you have to amend the Proposal and go through the voting process again
• If you default on the Consumer Proposal by falling three months behind in payments, you are not able to file another Proposal until the debts included in this Proposal are paid in full
• A Consumer Proposal is included on your credit report and negatively impacts your credit score for three years after completion
• When you are rebuilding your credit score after completing your Proposal, some financial institutions will treat a Proposal on your credit report the same way as they do a Bankruptcy
• You must have less than $250,000 in debt (excluding your mortgage on your personal residence) to file a Consumer Proposal

Talk to an LIT to learn about other debt relief solutions that may be a better fit for your situation if the cons of a Consumer Proposal outweigh the pros it might provide.

Take the steps toward financial freedom

Filing a Consumer Proposal allows you to take the first steps toward a debt-free future. However, it is important to carefully consider both the pros and cons of a Proposal before you begin the process to ensure it is the right fit for you.

Don’t wait to take control of your financial future. An MNP LIT can help you explore each of your options and support you on your journey toward a fresh financial start.