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Debt Relief Options: Consumer Proposal vs. Credit Counselling


Consumer Proposal vs. Credit Counselling

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


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!

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