At a first glance credit counselling programs and Consumer Proposals may sound much the same. Although there are some similarities between these two debt consolidation options, there are also some key differences to understand. Read on for an overview and comparison of both debt relief options to help you choose the best debt consolidation solution for you and your specific situation.
What is Credit Counselling? Who offers Credit Counselling?
Credit counselling programs consolidate your basic consumer debts into a settlement plan which is offered to your creditors. You then repay your debts through the debt settlement plan, which is facilitated by a credit counsellor. While your debt settlement plan payments are in good standing your creditors with debts under the plan will generally stop contacting you.
Credit counsellors are often trained as Accredited Financial Counsellors, but there is no law in place that requires them to have any specific types of formal training or education. There is no legal requirement for anyone to call themselves a ‘Credit Counsellor’, so it’s important that consumers conduct due diligence on the specific qualifications of the counsellor.
Although credit counselling services may be offered by both for-profit and not-for-profit companies, neither are regulated under a government authority as a professional debt service, even if they may operate as a registered charity.
What is a Consumer Proposal? Who offers Consumer Proposals?
A Consumer Proposal is an alternative to traditional debt consolidation that works to consolidate your debts, stop all future interest and finance charges, and cut the amount you have to pay back, with your creditors agreeing to write-off a significant portion of the debts. A Consumer Proposal will provide automatic protection from your creditors, they will be prohibited by law from charging interest, asking you for payment or continuing any collection action or garnishments.
In Canada only a Licensed Insolvency Trustee “LIT” (formerly called a Trustee in Bankruptcy) can file a Consumer Proposal for you (you also aren’t able to make a Consumer Proposal on your own). LITs are the only debt professionals authorized and endorsed by the Canadian government to provide legal debt solutions that can serve to forgive virtually all types of debts.
What Debts can be Consolidated Using Credit Counselling and Consumer Proposals?
Both credit counselling and Consumer Proposals can be used to deal with general consumer debts, including debt from: credit cards, lines of credit, bank overdrafts, a mortgage shortfall, old utility bills or payday loans.
If you have government debts, you need to be aware that a Consumer Proposal (or bankruptcy) will be the only methods of debt forgiveness accepted for debts such as:
- Canada Revenue Agency balances for income tax, GST, or payroll debt;
- EI debts;
- Student loans (Provincial or Federal);
- MSP debt;
- ICBC debt.
When you propose a debt settlement offer to your creditors through a Consumer Proposal only 50% (by dollar value) need to agree to your offer in order to legally bind ALL of them, whereas with a credit counselling program any creditors who do not agree to participate in the plan will need to be paid separately, in addition to the payments you’re making to the credit counsellor.
How Much Debt Do I Pay Back in a Credit Counselling Program or a Consumer Proposal? Are There Extra Costs Charged?
Debt Repaid in Credit Counselling:
With credit counselling settlements you will be required to repay 100% of all your debt.
- Your monthly payments may be primarily based on the amount of debt you owe and time in which you need to have it paid off (up to 5 years generally).
- Creditors may agree to stop charging you interest, or to charge it at a lower rate – but there is no guarantee of this.
- Various creditors could choose not to participate in the plan and require their debts to be paid separately with full interest charges and the potential for legal action against you.
Example: $20,000 in debt repaid with a credit counselling debt settlement plan over 5 years, with no interest = payments of approx. $333 per month (plus credit counsellor’s fees)
Cost for Credit Counselling:
Credit counsellors (both for and non-profit) may charge you consulting and monitoring fees and levies for their services, on top of what you repay to your creditors under the debt repayment program. There are no regulations or dispute mechanisms in place for these professional service fees.
Debt Repaid in Consumer Proposal:
Consumer Proposals serve to consolidate debts and cut how much debt you must repay, in full settlement; it’s not uncommon for debts to be reduced by up to 50-80%.
- Debts automatically stop accruing interest charges.
- Because you’re repaying just a portion of the debt without interest, the monthly payments a person makes in a Consumer Proposal are often drastically lower than those of a credit counselling plan or bank consolidation loan.
- Your income and family size are taken into account when the proposed settlement is being considered – a Licensed Insolvency Trustee is required to sign off that the proposal can fit within the household budget without causing undue hardship.
Example: $20,000 debt settled for 30% repayment with a Consumer Proposal over 3 years = payments of approx. $167 per month (no fees or interest are charged)
Cost for Consumer Proposal:
Licensed Insolvency Trustee fees in a Consumer Proposal are set by government tariff. These fees are deducted from the funds the creditors receive and there is no additional cost to the person above what they are offering to their creditors in the Consumer Proposal.
Most people will just make a first monthly proposal payment at the time they sign their official documents – no extra payments are required to start a Consumer Proposal.
How Long Does It Take to Finish a Credit Counselling Program or Consumer Proposal? What is the Impact of these Types of Debt Consolidation on my Credit History?
Credit counselling and Consumer Proposals do have some similarities when it comes to the length of time you may use to complete your debt settlement, and their impact on your credit history.
- Both can take a maximum of 5 years to complete (although they could be shorter in duration too).
- The impact to your credit rating will be comparable in either option:
- A credit counselling program will be reflected on a person’s credit history for two years following completion.
- A Consumer Proposal will be reflected on credit history for three years following completion or six years from the date of filing, whichever comes first.
- It’s important to know that this does not prevent you from seeking new credit before the notation expires from your credit history report.
Any time your debts are not paid in full per the original lending terms your credit history will take a temporary hit. The key piece to remember is that credit reports and scores are temporary – they can change drastically in a short amount of time.
Need a quick re-cap? View an infographic comparison of Consumer Proposals VS Credit Counselling
It’s important to be sure you’re turning to the right professional when you have questions about how to deal with debt, or to understand your legal rights and remedies. A Licensed Insolvency Trustee can walk you through all of your options including debt consolidation, credit counselling programs, Consumer Proposals and personal bankruptcy.
Book your free confidential debt consultation with a friendly local Sands & Associates representative today. In an hour or less you can get all the information you need to find your best debt solution!