Why Consumer Proposals Outweigh Debt Consolidation
Many Canadians are struggling with insurmountable levels of debt. However, there are many solutions that can help you to manage debt and get on the path to recovery.
Consumer proposals are becoming an increasingly popular debt relief solution amongst Canadians, and while it may appear complicated, negotiating a consumer proposal is a straightforward process which begins with a Licensed Insolvency Trustee. Depending on your situation, a consumer proposal can lower the total amount owed to creditors while still allowing you to retain your assets.
This blog will explain the benefits of negotiating a consumer proposal over less sustainable debt relief alternatives like debt consolidation, which can actually exacerbate debt.
So, what is a consumer proposal?
If your debt does not exceed $250,000 (excluding claims secured by your principal residence: mortgages, property taxes, etc.), a consumer proposal may be the right choice for you.
A consumer proposal is an offer to creditors to pay back a percentage of the debt you owe over a period of up to five years. The terms of the offer are prepared and negotiated by a Licensed Insolvency Trustee (LIT).
There are many benefits to a consumer proposal. Consumer proposals can often reduce your debt by a significant amount while allowing you to retain your possessions. If the terms of the agreement are accepted by your creditors, they are bound to the agreement in perpetuity, provided you meet all obligations. Furthermore, if the involved parties are garnishing your wages or suing you, these actions will be stayed at the time you start your proposal.
After the proposal is submitted, your creditors will have 45 days to accept or reject your offer. If there are unsatisfied with the terms of the agreement, they have the power to negotiate amendments.
If the terms of the proposal are rejected, you will be forced to consider other options. However, in the event that your proposal is accepted, you will be responsible for periodically making payments according to the terms of your proposal to your insolvency trustee which will be used to pay your creditors.
If all conditions are met, you will be legally released from the debts included in the proposal.
What About Debt Consolidation?
While debt consolidation may seem like a viable alternative to a consumer proposal, there are many downsides to the latter. Debt consolidation is effectively the act of paying off multiple debts using a different form of debt; it is the same debts in different form.
While consumer proposals present the opportunity to reduce your overall debt, debt consolidation involves taking an unsecured loan from the bank for the total amount owed to pay your debts, leaving you with only the monthly loan payment to the bank. In some cases, consolidation can actually worsen debt.
Unfortunately, while few are denied the opportunity to consolidate their debts, the sole benefit of debt consolidation—securing a lower interest rate or monthly payment—is often out of reach for those who would benefit from them, as securing such a rate often requires the consumer to have an impeccable credit score.