There is no joy connected to having to deal with unsecured debt issues. It’s something that can absolutely hurt a person’s quality of life. When debt issues get to the breaking point, debtors are eventually forced to face the realities of their situation and act.
There are several ways you might deal with your own debt issues. What you want to do is find solutions that relieve your stress without putting your financial future in jeopardy. As a last resort, you might contemplate filing for bankruptcy protection. While it’s a viable solution, it comes with a very high price tag. The price tag might include the loss of some of your assets and the inevitable damage it will do to your credit for many years to come.
Before you file for bankruptcy and after you have exhausted the possibility of other less restrictive debt-relief options, you might want to consider submitting a consumer proposal to your creditors. The information below is going to focus on that process and whether it might be the right solution for you.
What is a Consumer Proposal?
If you were to submit a consumer proposal, you would effectively be telling your unsecured creditors that you can no longer manage your debt. You would be asking them to negotiate some level of debt forgiveness in exchange for your written promise to repay the remaining portions of debt owed over the prescribed time as set forth in the consumer proposal. You might also be asking for the interest clock on the debt to be turned off.
As for how to file a consumer proposal, you would need to do that through a Licensed Insolvency Trustee that can help you prepare and submit a consumer proposal on your behalf. It’s not something you should try to do on your own.
Once the proposal has been approved by creditors that hold at least 50% of your aggregate unsecured debt, your proposal goes into force. Once it goes into force, you would need to start making your consumer proposal payments on a monthly basis. Those payments would no longer go directly to your creditors. You would be making your monthly payments to the Licensed Insolvency Trustee, who would be responsible for sending forth your payments to creditors as agreed upon.
Qualifying for a Consumer Proposal
As for how to qualify for a consumer proposal, there are standards you would need to meet. It would be the responsibility of the Licensed Insolvency Trustee to determine whether or not you meet the applicable standards. The criteria the Licensed Insolvency Trustee would use include:
- Must have the ability to repay some portion of your unsecured debt
- Debts must be greater than assets
- Debts must be less than $250K (including mortgage)
- Must have a monthly source of income to afford monthly lump-sum payments
If you meet these standards, then a consumer proposal becomes a viable way for you to deal with your debt issues.
Comparison to Other Debt Relief Measures
Before you settle on a consumer proposal solution, you should have some understanding about how it compares to other viable debt relief solutions. Let’s take a look at how things stack up.
1. Consumer Proposal Versus Debt Consolidation
The primary difference between a consumer proposal and debt consolidation is the consumer proposal option allows you to eliminate a part of your debt and stop the interest clock from running. With debt consolidation, you would still be obligated to pay all of your debts and creditors would still have the ability to keep changing interest unless they agree to do otherwise.
From a credit rating standpoint, an approved consumer proposal would negatively impact your credit rating or up to six years while debt consolidation would only have a moderate effect on your credit for a couple of years, assuming you make all payments on time.
2. Consumer Proposal Versus Credit Counseling
After reading the above information, you should now have a good understanding of the impact of an approved consumer proposal and the process. When comparing a consumer proposal vs credit counseling, it’s like comparing apples and oranges.
Credit counseling involves working with a credit counselor to learn how to budget and manage your finances better. Going through the process will have little to no impact on your debt or credit other than helping you get back on track with your creditors as efficiently as possible. If you can offer proof of credit counseling, some creditors will work with you to get back on track with no damage to your credit.
3. Consumer Proposal vs Bankruptcy
There was a discussion above about the impact of bankruptcy. Depending on the bankruptcy option chosen, you could lose some of your assets, and your credit rating will take a big hit. While taking these hits, you could eliminate all of your debt or reorganize it in a manner that is more manageable.
The consumer proposal option allows you to keep your assets and eliminate some of your debt with no interest. It also elongates the time you have to pay off your debt. Ultimately, the impact of a consumer proposal on your credit is only marginally better than the impact of bankruptcy.
Is Consumer Proposal the Right Option for You?
To determine if a consumer proposal worth it, you first have to decide on your own objectives. If you want to salvage your credit and are willing to honor all of your debts, this would not be the right option for you.
Conversely, a consumer proposal would be a good option if you want to lower your debt and keep your assets. It’s certainly a far better option than bankruptcy and a good alternative if debt consolidation doesn’t work for you.
If you have any doubts about which path to take, you might want to contact us here at Harris and Partners. We would glad to assess your situation and make a recommendation that we think is best for you.