Creditor Protection: Consumer Proposal vs. Debt Management Plan

Posted in Consumer Proposals
Posted by Sandra Sykora, B.Comm, CIRP - LIT

creditor-protection-cp-vs-dmpGenerally, the reason people contact us at Hoyes Michalos is to see what their options are for dealing with their debts. They’re looking for debt relief so they can get a fresh start. However sometimes what prompts them to make a call is some type of creditor action: a collection call, a wage garnishment or threatened law suit. The type of debt relief option you choose depends on both the financial factors and the type of creditor protection you need.

Debt management plan for small debts but voluntary

Depending on your income and your budget the options for debt relief will vary. Most people we see are looking for some form of consolidation with one monthly payment that works within their budget. The path to this outcome has two proactive options: that is a debt management plan or a consumer proposal.

If your total debt is owed to a small number of creditors and is a relatively small in dollar value, then a debt management plan from a credit counsellor may be a good path to choose. These are voluntary plans through not-for-profit agencies. Creditors choose whether they want to participate or not.  A debt management plan pools all your existing debts together with little or no interest charges. Usually a debt management plan runs for four years (take your debt and divide it by 48 months to get an estimate of your monthly payment). There are no additional fees or expenses for the service beyond your monthly debt management plan payment.

A debt management plan is a great solution if you can afford to repay your debts, but just can’t afford the interest. This path is typically chosen if you can support repaying your debts and if your problem debts are generally no more than $10,000- $15,000 and consist of two or three credit cards. By making a deal with the one or two creditors you are having a problem paying, you can get these creditors to voluntarily stop any action they may be taking like sending your account to collections or garnishing your wages.

Consumer proposal deals with all debt and is binding

It is important to know however, that debt management plans are not legally binding contracts between you and your creditors. As noted earlier, they are entirely voluntary.  If a creditor won’t participate, and if you need creditor protection, it is usually a time to look at a consumer proposal as a better solution. A consumer proposal is also something to consider if your debts are higher than $10,000 and your monthly payment under a debt management plan may be too high for you to afford.

Where a debt management plan is filed with a credit counsellor, a consumer proposal can only be filed through a Licensed Insolvency Trustee. This is because a proposal is a legal remedy through the Bankruptcy & Insolvency Act. This is what provides you with creditor protection in the form of a stay of proceedings that can stop wage garnishments, legal actions and collection calls.

A consumer proposal is a solution for dealing with debt you can’t repay where you repay instead a portion of your debt over what’s typically a maximum period of five years (or 60 months). You can always increase your payments and pay your proposal off faster, you just cannot extend payments past the date set in your proposal.

This remedy is called a consumer proposal because you – the consumer – make your creditors an offer that they may either accept, amend or reject. Once you sign the paperwork for your consumer proposal, your creditor protection begins. Then your creditors have 45 days to consider your offer. If your proposal is accepted by more than half of all votes (each creditor gets one vote for every dollar they’re owed) the deal is approved and all of your creditors are forced to accept it (even those who didn’t vote or voted no). The proposal, once accepted, becomes a legally binding contract between you and your creditors.

Take Aways

The key difference between a debt management plan and a consumer proposal:

  • Consumer proposals are legally binding on your creditors, debt management plans are voluntary;
  • Filing a consumer proposal can stop your wage garnishment or other creditor actions while debt management plans do not;
  • Consumer proposals reduces the total amount of debt you repay while in a debt management plan you still must repay everything you owe;
  • The monthly payment in a consumer proposal is typically much less than that in a debt management plan (try our calculator to compare what your payments might be)

Is it time to talk to the professionals? If you or someone you know is struggling with overwhelming debt, there are options. Contact us to talk to a Licensed Insolvency Trustee to find your best option to become debt-free.