Key Takeaways
If you are looking to reduce your debt, then you will likely come across the consumer proposal and credit counselling options. A consumer proposal is most helpful if the debt is too high to repay and would be helpful to reduce the total debt, while credit counselling may be more helpful if you can repay the total amount but want relief on the interest accruing on the debt.
When it comes to managing your finances and reducing debt, there is no one-size-fits-all solution; two of the various options available stand out prominently — Consumer Proposal and Credit Counselling. Understanding the differences between these two can help you make an informed decision suitable for your financial situation.
What is Credit Counselling?
Credit counselling is a process where a professional counsellor helps you create a Debt Management Plan (DMP) to consolidate your debts into a single manageable monthly payment. Not-for-profit agencies often facilitate this program, and it is best for individuals with small debts or those who can repay their debts in full within a specific period.
Credit Counselling: Who is it Suitable for?
Credit counselling serves best for individuals who:
Have small debts, ideally less than $10,000 - $20,000;
Can afford to repay 100% of their debts but need relief on the interest costs; and
They have too much equity in their home to benefit from filing a consumer proposal but don't qualify for a second mortgage or debt consolidation loan.
Advantages of Credit Counselling
It provides a path to restructuring your debt;
Potential for a lower interest rate on your debt;
Offers protection from your creditors; and
It helps in developing better budgeting skills and financial management.
Disadvantages of Credit Counselling
There is no reduction on the principal of your debt;
It can negatively impact your credit report; and
Not all creditors may be included.
What is a Consumer Proposal?
A consumer proposal, on the other hand, is a legal agreement prepared with the help of a Licensed Insolvency Trustee (LIT). This agreement is between you and your creditors, offering to repay a portion of your debt over up to five years. The main difference from credit counselling is you are typically paying less than the total amount owed.
Consumer Proposal: Who is it Suitable for?
Consumer proposals serve best for individuals who:
Cannot afford to repay 100% of their debts;
Have large unsecured debts, tax debts, student loans, or multiple payday loans;
Want to repay a portion of their debts based on what their budget can manage; and
Avoid personal bankruptcy
Advantages of a Consumer Proposal
You can keep your assets, including your home and investments;
It offers manageable monthly payments that reduce your debt by up to 80%; and
It gives you protection from all unsecured creditors via a stay of proceedings, so all creditors are included in the proposal.
Disadvantages of a Consumer Proposal
It can take longer to complete than bankruptcy;
It negatively impacts your credit score; and
You need to commit to a consumer proposal, making agreed payments each month or the proposal will get cancelled.
Consumer Proposal vs. Credit Counselling: A Comparison
To help you decide between a consumer proposal and credit counselling, here's a table comparing their features:
Features | Consumer Proposal | Credit Counselling |
Service Provider | Licensed Insolvency Trustee | Credit Counsellor |
Program | Consumer Proposal | Debt Management Plan |
Repayment Amount | Varies, Typically 30% of debt owed | 100% |
Interest Charges | 0% | Sometimes waived or reduced |
Duration | Must be completed within 60 months and can be repaid early | Usually 3 to 5 years |
Fees/Costs | Included in payments (Government-regulated) | 10% + administrative fee |
Creditor Protection | Binding on all creditors, legal protection from creditor actions, stops wage garnishments | Voluntary participation so creditors may continue collection actions |
Choosing the Right Option
Both these options will affect your credit and will appear as an R7 on your credit report, showing you're in a program to repay your debts. Choosing between a consumer proposal and credit counselling usually begins with a free initial debt assessment. A credit counsellor will review your budget to determine if you can repay 100% of your debts, while a Licensed Insolvency Trustee will review your finances to understand how much you can afford to repay.
It's important to work with a qualified, experienced, reputable advisor. Consumer proposals can only be filed with a Licensed Insolvency Trustee.
Conclusion
Your financial situation should determine the decision between credit counselling and a consumer proposal, your ability to repay your debts, and your kind of debts. Ensure you understand the implications of each option before making your choice. It's advisable to consult a financial advisor or a Licensed Insolvency Trustee to determine the right option for you.
As a Licensed Insolvency Trustee, Litvack Group can provide a Free Consultation and help you determine if credit counselling or a consumer proposal is the best option for paying off your debts. Contact us today!