A consumer proposal can provide debt relief, although filing a consumer proposal in Canada has consequences. But is a consumer proposal bad? Under what circumstances does a consumer proposal work as a way out of debt? When do the benefits outweigh the downsides?
Here are 8 possible disadvantages of a consumer proposal and how they may impact your decision to file a consumer proposal.
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A consumer proposal will affect your credit score.
A consumer proposal is debt restructuring. This means you’ve acknowledged to your creditors that you can’t pay back your debts in full. When you file a consumer proposal, a note is added to your credit report, which will hurt your credit score for a short while. A consumer proposal remains on your credit report for a maximum of six years. However, filing a proposal helps you eliminate debt, and high debt balances also hurt your credit rating. Getting out of severe debt is the first step to rebuilding credit.
You will have to turn in all credit cards, and any lines of credit will be cancelled.
Since you are settling your debts through a consumer proposal, you will no longer have access to those credit accounts. Creditors will close your accounts, and you are required to stop using your credit card and line of credit. Your trustee will ask you to hand back or cut up your cards. It is possible to obtain a new credit card within a year of filing a consumer proposal. You may qualify for an unsecured card or you may need to apply for a secured credit card, depending on your credit rating before you filed.
A consumer proposal does not deal with secured debt.
A consumer proposal covers only unsecured debts. Secured loans, such as a car loan or a mortgage, cannot be included in your proposal. This can be both a disadvantage and an advantage. If you can afford the monthly payments on your car or house, you can continue to pay the secured lender and keep those assets. However, if you cannot afford your car or mortgage payment, you can opt to surrender these assets back to the secured creditor. They can then file a claim in your proposal for any shortfall after selling the asset to pay back the loan.
Your creditors may reject your proposal.
Creditors have 45 days to vote in your proposal, and the weight of their vote is measured by how much you owe. A proposal can be rejected if more than 25% of your creditors (by dollar value) ask for a meeting, AND at the meeting, more than half of the creditor’s claims vote against your proposal. Consumer proposal rejections are rare. Licensed Insolvency Trustees are experienced at preparing consumer proposal offers, and most proposal terms are accepted as filed. If a creditor does not accept your initial offer, most will make a counteroffer. Your trustee will work with you to negotiate terms acceptable to both you and your creditors or may recommend rescinding your proposal if an agreement cannot be reached.
A consumer proposal cannot be filed if you owe more than $250,000.
Consumer proposals have a debt limit. A consumer proposal can only be filed if you owe less than $250,000 in debts not including the mortgage on your primary residence. If you owe more than the consumer proposal debt limit, you must file a Division I proposal. There is an added risk with a Division I proposal. If your creditors reject a Division I proposal, you are automatically bankrupt. This does not happen with a consumer proposal. If your creditors reject a consumer proposal, you are in the same position as you were before filing.
Large creditors can dictate higher payment terms.
Because creditors get a vote based on the dollar value of their claims, creditors with very large balances can demand a higher payout percentage. Most major bank creditors have a minimum percentage they will expect before voting yes on a proposal. If you owe a significant amount to one of these creditors, you may need to offer more in your proposal for it to be accepted. It is essential to work with a Licensed Insolvency Trustee who knows what creditors expect when deciding how much a consumer proposal might cost and what your monthly payment may be.
Some unsecured debts are not eligible for a consumer proposal.
Not all unsecured debts are eligible for discharge through a consumer proposal. A consumer proposal cannot release certain debts, including debts due to fraud, child support or alimony payments, and court fines. Student loan debt cannot be included if you have not been out of school for seven years.
If you miss three months’ payments, your proposal can be annulled.
A consumer proposal is a legal agreement between you and your creditors where you agree to a settlement amount with a fixed payment schedule. Most consumer proposals are based on monthly payments. If you fall behind three monthly payments, your consumer proposal is deemed annulled. When your proposal is annulled, your debts return, and you lose the benefit of the stay of proceedings provided in a consumer proposal that stops collection activity. Your creditors can now call, sue or garnish your wages again.
Not sure if a consumer proposal is right for you?
A consumer proposal is an alternative to bankruptcy. You may be looking at your debt relief options because you can’t repay your debts. A consumer proposal is intended to help you pay off debt faster.
Here are some positive points to consider about consumer proposals:
- A consumer proposal is a deal to repay less than you owe so you get out of debt sooner.
- It legally binds all your creditors to the same debt settlement plan. No creditor can back out.
- It provided creditor protection against collection actions like a wage garnishment or lawsuit.
- A proposal preserves any assets you have, such as tax refunds, investments and home equity.
- It is generally the lowest cost debt consolidation. You have lower monthly payments than other options, including a debt consolidation loan or credit counselling.
- You will have a fixed monthly payment and avoid the surplus income penalty that can be triggered if you file personal bankruptcy.
Get consumer proposal advice from a Licensed Insolvency Trustee
Talk with a Licensed Insolvency Trustee about a consumer proposal if you are struggling with debt. Only a Licensed Insolvency Trustee can legally file a consumer proposal for you. Do not pay unlicensed debt consultants or credit counsellors for consumer proposal advice, as they will only refer you to a LIT to complete your proposal filing.
Our team at Hoyes Michalos is happy to answer any further questions you may have about consumer proposals and help you decide what debt solution is best for you. Contact us for a free virtual or in-person consultation.