Consumer Proposals are a unique solution for Canadians to consolidate and cut their debts, without needing new financing or loans. Read on to understand how filing a Consumer Proposal works, how you can finish a Consumer Proposal early – and why you should be cautious if you’re offered a loan as part of the Consumer Proposal process.
What is a Consumer Proposal, and How Does it Consolidate my Debt?
A Consumer Proposal is a legal debt relief option that allows you to consolidate your debt and make an agreement with your creditors to settle your debts in full by repaying what’s affordable for you. After you repay the portion of your total consolidated debt as agreed, your creditors will consider the unpaid balance legally forgiven.
Consumer Proposals can be used to consolidate virtually all types of debt – and you can often cut your debt considerably – anywhere from 50% up to 80% or more – including (but not limited to):
- Credit cards, overdrafts, lines of credit, payday loans
- Government debts such as income tax debt, business GST debt, CERB overpayments
- Student loans (government and bank-loaned)
To do a Consumer Proposal you’ll work with a Licensed Insolvency Trustee who will help you come up with a fair Consumer Proposal offer, and will then manage communications with your creditors and facilitate their payments. You’ll also receive guidance and support throughout the Consumer Proposal with two detailed financial counselling sessions forming an integral part of the process.
Consumer Proposals are very flexible and are tailored to fit each person’s unique circumstances – for example, you might offer a single lump-sum payment, or offer monthly payments for as long as 60 months (five years). Here’s an example of what a Consumer Proposal might look like for you:
If you have various debts that total $25,000 and you’re trying to pay them off in five years with an interest rate of 18%, you would need to make payments of around $635/month for five years…
- Meeting with a Licensed Insolvency Trustee, you decide you can afford to pay around $200/month on your debt, so you offer your creditors a Consumer Proposal where you’ll repay a total of $7,500 – 30% of your debt – by making monthly payments of approximately $210/month for 36 months.
- Your debts are frozen, with no more interest charges from your creditors, and no borrowing is involved, so you’re not paying any interest costs on the consolidated balance either.
- These payments ($210 per month in this example) are all you need to pay towards your debts being consolidated in your Consumer Proposal – there are no added fees or costs; you make just the one simple monthly payment.
- If you have a mortgage or vehicle financing agreement that you are going to keep, you can continue to pay these as usual, outside of your Consumer Proposal.
- Once you’ve completed all the terms of your Consumer Proposal – that’s it! Your creditors will be required to legally write-off the unpaid balances and your debts are considered cleared!
Do I Need a Loan to do a Consumer Proposal?
A Consumer Proposal is NOT a loan or borrowing agreement, it is a legal debt solution – and it can only be filed by working with a Licensed Insolvency Trustee; no other professionals or agents are authorized to file a Consumer Proposal for you.
If you are interested in consolidating (and cutting) your debt with a Consumer Proposal and the representative you are working with offers you a loan, this should be a red flag that:
- You may not be talking with a Licensed Insolvency Trustee, but rather a debt agent or third-party referral source – who may eventually introduce you to a Licensed Insolvency Trustee; and,
- You may be pressured to pay for financing or other services that you simply don’t need.
Licensed Insolvency Trustees are not lenders, we are Canada’s only officially recognized and qualified debt help professionals:
- You do not need any sort of referral or additional agent working with you to do a Consumer Proposal or connect with a Licensed Insolvency Trustee – just get in touch directly with a Licensed Insolvency Trustee local to your province.
- You do not need to make payments to any agents to ‘build up’ money towards your Consumer Proposal – this suggestion would also be a red flag that you may not be dealing with a Licensed Insolvency Trustee.
- Most Licensed Insolvency Trustees will recommend either that you make your first monthly Consumer Proposal payment at the time you sign your official Consumer Proposal documents, or shortly after.
- At Sands & Associates we do not charge any upfront fee to start your Consumer Proposal – you just start paying the proposal once it’s been filed, and you are no longer required to make any payments on the debts consolidated in the Consumer Proposal, which places most clients in a much-improved financial situation right away.
As well as debt agents who charge unnecessary fees for referrals or ‘pre-Proposal’ administrative services, there are also lenders (and their referral agents) who might offer or encourage you to take out a loan to pay off or ‘exit’ your Consumer Proposal. These are unnecessary and, in some ways, un-do some of the key benefits you gained from consolidating your debt with an interest-free Consumer Proposal.
Consumer Proposal ‘Exit’ Loans
Consumer Proposal ‘exit loans’ are often advertised to help you quickly pay off your Consumer Proposal, and in turn, shorten the time it takes until your Consumer Proposal is wiped from your credit history. Many of these ‘exit loan’ providers advertise in a way that creates urgency, over-inflating the importance of fast-tracking a high credit score.
A Consumer Proposal will show on your credit history for three years after you finish paying the Proposal off – OR for six years from the date you started it, whichever comes first. For example:
- If you file your Consumer Proposal in May 2023 and it takes you until April 2026 to pay it off, the Consumer Proposal will be cleared from your credit history in 2029.
- If you file your Consumer Proposal in May 2023 and it takes you until April 2028 to pay it off, the Consumer Proposal would clear from your credit history in 2029.
- This credit rating impact is similar to the impact of following a credit counselling repayment plan, even though credit counselling debt management plans don’t allow you to reduce your debt.
What you need to be aware of is that even though your Consumer Proposal is still showing on you credit history, you are not prevented from seeking new credit. It is still possible to get a new credit card, renew your mortgage, finance a vehicle, etc. during the term of your Consumer Proposal.
- Most people do well to start with a secured credit card with a lower limit that reports payment history to a credit bureau, since this will allow you to have the convenience of a credit card and some credit history benefit – but without the risk of accumulating a big balance.
It’s also very important to understand that there is no real way to instantly boost your credit rating. Your credit rating is tied to your credit history, and building a positive credit history simply takes time, and the right actions. Fortunately, you have control here, with the most important factors being:
- Paying all your bills on time every time
- Demonstrating consistent employment history
- Getting a new credit account and using it responsibly
- Keeping balances under 50% of the total credit limit
These are just a few examples of good credit use habits, and during your Consumer Proposal you’ll have the opportunity to get more resources and tools during your financial counselling sessions with a Qualified Insolvency Counsellor – this is built into the Consumer Proposal process.
Problems with Consumer Proposal ‘Exit’ Loans
While you may be able to take out a loan to pay off your Consumer Proposal early and start rebuilding your credit history sooner, these loans often come at a high cost:
- Using a loan to pay off a Consumer Proposal negates the interest-free perk of a Consumer Proposal.
- Proposal exit loans may be offered at interest rates ranging from as much as 19-32%, or even 40%+.
- Lenders that offer these types of loans are likely to tack on administration and legal fees which might range between $300-$1500, as well as additional (optional) loan protection insurance.
- Loan terms commonly range from 36-84 months and may have minimum terms – so the time it takes you to become debt-free may be even longer than if you had just kept paying your Consumer Proposal as agreed.
Revisiting our prior Consumer Proposal example where you were dealing with $25,000 of debt and had arranged to repay $7,500 in total at $210/month for 36 months – imagine if you’ve paid for one year and have another $5,000 left to pay, then take out an exit loan with a 20% interest rate to finish your Consumer Proposal early. If your loan term was for two years you may be facing:
- Now paying around $255/month for your loan repayment, and the loan’s total interest will cost you $1,100 – PLUS the administration and legal fees – all of which you would have avoided if you’d kept going with your interest-free Consumer Proposal!
Is this worth resetting your credit history two years earlier than planned? For most people – the answer is a clear no!
Whether you’re in a Consumer Proposal or not, the advice of Licensed Insolvency Trustees is often the same: that individuals should prioritize paying off debt and becoming debt-free above a high credit score. Credit scores are always changing, and you may substantially change yours in just a few short years – whereas the costs of carrying debt with interest can take a toll far longer, and can limit how you are able to use your income.
- Carefully consider the costs and reasons for taking out a loan or other financing to pay off your Consumer Proposal before moving forward. In most cases, the high costs of borrowing against the early credit history reset just don’t add up – not to mention that you risk ending up with an unmanageable or long-term debt again!
Some agents will use high-pressure sales tactics to get you into a Consumer Proposal loan, or make unrealistic promises of being able to quickly fix your credit rating. If you still want to work with an agent, be aware that unregulated and unlicensed debt agents often charge individuals thousands of dollars for unnecessary services, or services they are not qualified to provide – both before, during and after a Consumer Proposal. Be on the lookout for tactics such as:
- Offering you financing with high fees and high interest rates.
- Encouraging you to stop making your bill payments to accumulate a lump-sum settlement.
- Suggesting you use your credit to pay their fees.
Also, if anyone besides a Licensed Insolvency Trustee recommends you NOT file a Consumer Proposal, ALWAYS get a second opinion. Remember, only a Licensed Insolvency Trustee is authorized to advise you on a Consumer Proposal, and file one for you. The best thing to do is simply ask “Are you a Licensed Insolvency Trustee?”
How Can I Finish my Consumer Proposal Early, Without a Loan?
With a Consumer Proposal, you’ll have a clear debt-free date in five years or less – and some people complete their Consumer Proposal ahead of schedule. Absolutely – if you can or want to – you can pay off your Consumer Proposal early, at any time, with no penalty or hassle.
If you want to aim to finish your Consumer Proposal sooner than planned, you might:
- Increase your monthly payments or increase your payment frequency – say from monthly to biweekly, so you get in extra payments.
- Make additional payments as you have extra cash available, whether from your regular income, or even from irregular funds like a tax refund.
Get Advice About Consumer Proposals and Other Debt Solutions
If you’re wondering about ways to consolidate or settle your debt or want to learn more about how a Consumer Proposal could work for you the next step is to connect directly with a local Licensed Insolvency Trustee in your province. Remember, there is no cost or commitment required to have a conversation with a qualified professional (a Licensed Insolvency Trustee) about your situation and all the options you have.
- Sands & Associates’ Licensed Insolvency Trustees provide safe, unbiased, and non-judgmental advice and we work with BC residents across the province.
- We will take the time to understand your situation, needs, and goals – our goal is that you have all the information to make the decision about what’s best for YOU and your debt-free plan.
- In under an hour, we can help you better understand your options, and provide you clear next steps – and all of our advice comes at no charge to you.
Get support and solutions – and a debt-free plan that’s right for you. Book your free, confidential consultation with a caring, local Sands & Associates debt expert today.