Understanding Your Debt Relief Options: Debt Consolidation vs. Consumer Proposal

When trying to find your way out of debt, the wide choice of relief options can seem overwhelming. That’s where we help. With decades of experience in supporting thousands of Canadians to find their way back to financial stability, we have the experience and advice you can count on.

Today, we will focus on two debt relief options: debt consolidation and consumer proposals. Both offer unique benefits and could be the key to regaining your financial footing, but choosing the right one depends heavily on your individual financial situation. Let’s take a look.

Key Points

1. What is debt consolidation?
2. What is a consumer proposal?
3. What’s involved during a consumer proposal?
4. Comparing the biggest differences
5. Which option is right for me?

What is debt consolidation?

Debt consolidation involves taking out a new loan—a debt consolidation loan—to pay off multiple debts, typically including high-interest debt like credit card debts, personal loans, and payday loans.

This method merges various outstanding debts into a single loan with one monthly payment, potentially at a lower interest rate. This simplification can make it easier for you to manage your debt load, reduce the number of collection calls you might be receiving, and help you focus on making payments on time.

Pros of debt consolidation:

• Potential for a lower interest rate on one single loan rather than multiple interest rates on several debts.
• Simplifies your monthly budgeting by consolidating multiple debt payments into a single payment.
• Maintains or can improve your credit score if payments are consistently made on time.

Cons of debt consolidation:

• Often, it requires a good credit score to qualify for beneficial rates.
• It doesn’t reduce the total amount of your outstanding debts; it just restructures them.
• It may require collateral or a co-signer, adding potential risk.

What is a consumer proposal?

A consumer proposal is a form of debt settlement facilitated by a Licensed Insolvency Trustee (LIT). It allows you to pay creditors a percentage of what you owe them over a period of time—up to five years—with the remainder of the debt forgiven upon completion of the proposal. This option is specifically designed for unsecured debts and offers significant legal protection from creditors, including stopping wage garnishments and other legal actions.

Pros of a consumer proposal:

• Reduces the total amount owed to unsecured creditors.
• Stops interest and provides legal protection from further collection action.
• It does not require surrendering any assets.

Cons of a consumer proposal:

• It has a negative impact on your credit score, noted as R7.
• Limited to unsecured debts (secured debts like mortgages are not covered).
• It could be rejected by creditors, although this is rare.

What’s involved in the consumer proposal process?

We understand that the consumer proposal process might seem complicated at first, but don’t worry – we are here to help. Our short video below explains everything you need to know, but if you still have questions, just give us a call.

 

 

Comparing the biggest differences

Here are a few of the main differences you should keep in mind when considering debt consolidation and consumer proposals as a debt management option:

Impact on credit score

Debt consolidation loans often maintain or improve your credit score, provided you manage the new loan responsibly. In contrast, a consumer proposal will have a temporary negative impact on your credit score, reflecting a settled debt rather than repaid in full. However, with the final amount of debt often much lower with a consumer proposal, it can be easier for you to rebuild your credit score.

Reduction in debt amount

Debt consolidation does not reduce the debt itself—it restructures it into more manageable terms. A consumer proposal can significantly reduce the debt you owe, making it a more suitable option for those with a high debt load who are unable to keep up with minimum payments.

Financial management

A debt consolidation loan requires you to still handle a loan with a potentially large amount, albeit more streamlined. It’s ideal for those with a stable income who can handle regular payments but want to simplify their finances. A consumer proposal is a step towards debt settlement with more substantial legal protection, designed for those under severe financial distress or handling higher debt burdens.

Which option is right for you?

The decision between these two debt relief options depends heavily on your specific financial situation, including your ability to secure lower interest rates, your current credit score, and your overall financial future goals.

If you have a reasonable credit score and a stable income, and you’re looking for a way to simplify your payments without reducing the total amount owed, debt consolidation might be your best path.

If you’re facing significant financial distress, unable to manage high monthly payments, or have a lower credit score, a consumer proposal is likely the debt relief you need.

Both paths lead to regaining control of your finances, but it’s essential to choose one that aligns with your current situation and future aspirations. Understanding these options is the first step toward a brighter financial future.

Ready to Start Your Journey to Financial Freedom?

Feeling overwhelmed by debt is tough, but you’re not alone. We’ve helped thousands of Canadians break free from the grip of overwhelming debt through consumer proposals and other effective debt solutions. Our team of Licensed Insolvency Trustees understands that everyone’s financial situation is unique, and that’s exactly how we approach helping you.

We’re here to listen to your story, understand your challenges, and work closely with you to tailor a plan that fits your life. From figuring out the nitty-gritty of your finances to stopping those relentless collection calls, we’ll be with you every step of the way.

You can trust us to help you navigate through this. We’re not just about numbers and forms; we’re about people. Let’s work together to find the best way forward and get you back on track to a more secure and stress-free financial future. Why not give us a call on 888-376-8488 or send us a message? Let’s start this journey together.