Debt consolidation plus debt settlement.
While a debt management plan is a negotiated plan to repay all of your debts, a consumer proposal is a negotiated agreement to pay back less than the full amount you owe.
It is a debt consolidation alternative because you stop paying your individual creditors and make one payment to your consumer proposal administrator. However, more than that, a consumer proposal also offers debt relief:
- You pay back less than you owe;
- Interest stops accumulating.
Consumer proposals provide a way to eliminate your debt and avoid bankruptcy, while still receiving the benefit of creditor protection.
Because you are settling your debts for less than you owe, consumer proposals are a low-cost debt consolidation option.
A consumer proposal must be administered by a Licensed Insolvency Trustee, who negotiates a settlement with your creditors for less than you owe. You agree to pay a certain amount of money per month for a specific time period – up to five years – to wipe out your debts. You also might be able to get rid of your debt with a lump sum payment. For the plan to work, more than 50 percent of your creditors – based on dollar value – must agree to the proposal.
There are a two important things to consider with a consumer proposal:
- First, your creditors probably won’t agree to your terms if you don’t offer them more money than they would be likely to receive if you filed for bankruptcy;
- In addition, you must be able to meet the payments that you agree to make. If you can only afford $500 a month, it makes little sense to agree to pay $750 a month.
It is not unusual to see consumer proposal agreements that settle your debts for 30 to 35 cents on the dollar. However, the actual payment depends on several factors, including your income and what assets you have.
For more information on how a consumer proposal works, read our Insider’s Guide To Consumer Proposals.
Why Can’t Everyone Do That?
A consumer proposal only works for individuals who are “insolvent.” This means that they must owe more than they own and be unable to repay their debts in full. Someone who has $50,000 in equity in their home and owes $25,000 in unsecured debts cannot qualify to settle their debts through a consumer proposal. In that situation, a traditional debt consolidation loan makes more sense and is the better option.
RUNNING THE NUMBERS
Let’s revisit our scenario.
Steve also owes $20,000 in credit card debt and he is struggling to pay $420 each month:
If Steve files a consumer proposal, a Licensed Insolvency Trustee might be able to arrange a monthly payment of $120 over five years. This is a settlement rate of 36 cents on the dollar, which is fairly common.
Among all of our scenarios so far, a consumer proposal resulted in the lowest monthly payment and the most savings. However, it is a legal proceeding completed under the Bankruptcy and Insolvency Act and is only available if you are unable to repay your debts in full.
Summarizing The Pros and Cons
Consumer Proposals – The Advantages:
- You only repay a part of your debt.
- You only have one monthly payment to make.
- Once you file for a consumer proposal, the interest on what you owe is frozen.
- You won’t lose your house or other assets.
- You won’t have to deal with calls from collection agencies and your wages won’t be garnished.
Consumer Proposals – The Disadvantages:
- It’s possible that some of your creditors won’t agree to the terms of your initial proposal. In most cases however, your trustee will help you renegotiate.
- A consumer proposal will appear on your credit report for three years after you complete your payments.
- If you miss three payments, your proposal will be annulled and you won’t be able to file another consumer proposal.
Should You File A Consumer Proposal?
If you need to make a settlement with your creditors while protecting your assets, a consumer proposal is the most cost-effective option.
However, if you do not think you can keep up with the monthly payments during the term of your proposal, or you do not have assets that you would like to keep, bankruptcy may be your final option.