Dealing with money problems can be really tough. When you owe a lot of money and it feels like you’re sinking, it’s important to know your options. One choice you might have heard of is something called a “consumer proposal.” But how bad is it, and what does it mean for you?
In this blog, we’re going to run you through everything you need to know about consumer proposals. At Harris & Partners, we don’t make things more complicated than they need to be. Instead, we give you the facts you need to make a smart decision about your money. Let’s get into it.
- What is a consumer proposal?
- How does a consumer proposal work?
- Consumer proposal pros and cons
- Consumer proposal vs bankruptcy
What is a Consumer Proposal?
A consumer proposal is a financial lifeline for those grappling with overwhelming debt. It’s a legal process designed to help individuals regain control of their finances and find a way out of debt while avoiding the stress of bankruptcy.
How does a consumer proposal work?
Let’s delve into the nuts and bolts of how a consumer proposal works.
Step 1: Seeking Professional Guidance
The first crucial step in the consumer proposal process is to connect with a Licensed Insolvency Trustee (LIT). They will become your guiding light throughout this journey, offering expert advice tailored to your unique situation.
Step 2: Financial Assessment
Once you’ve chosen an LIT, the next phase involves gathering your financial information. This step is a pivotal one, as it helps you and your trustee create a comprehensive picture of your financial health. You’ll need to provide details about your income, expenses, assets, and, most importantly, your debts.
Step 3: Crafting the Proposal
With your financial information in hand, your LIT will work with you to craft a consumer proposal. This proposal is essentially an offer you make to your creditors, proposing to pay them a portion of what you owe over an extended period. The proposal must be fair and reasonable, taking into account your income, assets, and the interests of your creditors.
Step 4: Filing the Proposal
Once the consumer proposal is prepared, it’s time to officially file it with your creditors. Your LIT will do this on your behalf. From this point onward, you gain several advantages. First, the proposal immediately stops creditors from taking any legal actions against you. This means no more collection calls, wage garnishments, or threats of legal action.
Step 5: Legal Protections and Negotiations
One of the key aspects of a consumer proposal is the legal protection it offers. Your creditors are legally required to stop their collection efforts and attend to the proposal. They’ll have 45 days to review the proposal and decide whether to accept or reject it. During this period, negotiations may occur between your LIT and your creditors to ensure the proposal is acceptable to all parties involved.
If the majority of your creditors agree to the proposal, it becomes legally binding on all of them, and you can breathe a sigh of relief. You’ll be making manageable monthly payments to your LIT, who will then distribute the funds to your creditors.
Advantages and Disadvantages of a Consumer Proposal
Consumer proposals can be a ray of hope in the dark world of debt, but like any financial decision, they come with their own set of advantages and disadvantages. Let’s explore these pros and cons to help you make an informed choice.
Advantages of a Consumer Proposal
Some of the main advantages of a consumer proposal are:
- Debt Reduction: A consumer proposal allows you to negotiate with your creditors to pay back only a portion of your total debt. This often means a significant reduction in the overall amount you owe.
- One Monthly Payment: Instead of juggling multiple creditors and varying interest rates, a consumer proposal consolidates your debt into a single, manageable monthly payment.
- Legal Protections: As soon as your proposal is filed, you gain legal protection from creditor actions. This means an end to collection calls, wage garnishments, and legal proceedings.
- No Interest Accumulation: Unlike some other debt relief options, consumer proposals freeze the interest on your debts. This prevents your debt from growing larger while you work to repay it.
- Financial Fresh Start: Completing a consumer proposal allows you to hit the financial reset button. Once you’ve fulfilled the terms of your proposal, you can start rebuilding your financial life.
Disadvantages of a Consumer Proposal
Some of the main disadvantages of a consumer proposal are:
- Credit Rating Impact: Consumer proposals can have a negative impact on your credit rating. They will be listed on your credit report for several years, affecting your ability to obtain credit during that time.
- Limited Access to Credit: While under a consumer proposal, you may find it challenging to secure new credit. Lenders may view you as a higher risk, and if they do extend credit, it may come with higher interest rates. However, obtaining credit is not illegal and is encouraged to help rebuild your credit.
- Secured Debt Not Included: Consumer proposals do not cover secured debts like mortgages or car loans. You’ll still be responsible for making these payments if you want to keep your assets.
- Public Record: Consumer proposals are a matter of public record, which means they can be viewed by anyone who checks your credit report.
Consumer Proposal vs Bankruptcy
The debt relief solution most often compared to consumer proposals is bankruptcy. Each of these approaches has distinct differences that can significantly impact your financial future. Let’s compare them to help you understand which might be the right path for you.
1. Credit Impact:
- Bankruptcy: Filing for bankruptcy typically has a more severe and longer-lasting impact on your credit score. A first-time bankruptcy will remain on your credit report for at least six years after your discharge, while a second is 14 years after discharge, making it challenging to obtain new credit during that time.
- Consumer Proposal: While a consumer proposal does affect your credit rating, it generally has a less severe impact than bankruptcy. A proposal will stay on your credit report until the sooner of three years after you complete your payments or six years after you file, whatever comes first, giving you the opportunity to rebuild your credit sooner.
2. Asset Protection:
- Bankruptcy: In a bankruptcy process, you may have to hand over your assets to your trustee. They will then use these to repay your creditors. This can include valuable possessions or even your home in some cases.
- Consumer Proposal: Under a consumer proposal, you retain control of your assets. There’s no risk of losing your home or other essential possessions as long as you continue making agreed-upon payments.
3. Time Frame:
- Bankruptcy: Bankruptcy generally has a shorter timeline for discharge, within 9 to 21 months if it is your first bankruptcy or 24 to 36 months for a second or more.
- Consumer Proposal: A consumer proposal typically lasts longer than bankruptcy, with a maximum length of up to five years. While this means a more extended commitment, it can also result in reduced payment and a less severe impact on your credit.
4. Costs and Long-Term Consequences:
- Bankruptcy: The cost of filing for bankruptcy typically includes fees to the trustee, administrative costs, and potentially a portion of your assets. The long-term consequences may include limited access to credit, potential difficulty renting, and a marked impact on your financial reputation.
- Consumer Proposal: While there are costs associated with a consumer proposal, they are often lower than those of bankruptcy. The long-term consequences are generally more manageable, allowing you to rebuild your financial life with fewer restrictions on credit access, renting, or employment prospects.
For a more in-depth comparison, look at our article comparing consumer proposals and bankruptcies.
Regain Financial Control with Harris & Partners
Our Licensed Insolvency Trustees have years of experience in helping people just like you. We know how crushing the weight of debt can feel, but you don’t have to face it alone.
When you partner with us, we take the time to fully understand your situation, giving you a judgement-free space to openly talk about the struggles you’re facing. We are always on hand to answer any question you may have and support you every step of the way.
Get in touch today and start your journey towards financial freedom.