What You Need To Know Before Paying Off Your Consumer Proposal Early

Key Takeaways

A consumer proposal must be completed within 60 months, but you can pay off a consumer proposal early without any penalties. If you are considering paying off a consumer proposal early, you should review your options on how to do this and whether it makes sense with your budget and long-term financial goals.

Are you considering paying off your consumer proposal early? If so, there are a few important things to consider before taking this action. Paying off a consumer proposal early can be a great way to improve your credit score. Still, it's important to understand the implications of doing so, including the advantages and disadvantages. This article will provide an overview of what you need to know before paying off a consumer proposal early. From understanding the financial and credit implications to considering the potential risks and rewards, this article will provide the information you need to make an informed decision.

Can I Pay Off a Consumer Proposal Early?

Yes! One of the benefits of a consumer proposal over bankruptcy is you can pay it off as soon as you want and become debt-free sooner. Consumer proposals must be completed within 60 months, so most are structured to be paid for the lowest monthly payment over this period. However, there is no restriction on how soon a consumer proposal can be completed once accepted by your creditors.

Also, there are no penalties for paying it off early. To pay it off faster, you should contact your Licensed Insolvency Trustee to make arrangements to increase the amount or frequency of your payments.

When Should You Pay Off a Consumer Proposal Early?

There are a few things to keep in mind when deciding when to pay off a consumer proposal early:

You Have the Money - Your financial situation might have significantly improved since filing the consumer proposal. For instance, you may receive a raise at work, strike it rich in the lottery, or receive an inheritance. Regardless of the situation, you can use the extra money to pay off your consumer proposal sooner by making larger installments or paying it off in whole at once.

Rebuild Your Credit Faster - You can shorten the process of repairing your credit rating by paying off your consumer proposal faster. If you plan to make a large purchase with debt, such as a house, paying off your consumer proposal faster can help you qualify at a better interest rate.

Advantages of Paying Off a Consumer Proposal Early

Improved Credit Score - Paying off a consumer proposal in full can positively impact your credit score, as the R7 rating and debts listed on your credit record will come off your credit report sooner.

Avoiding Default - By making additional payments to pay off the consumer proposal sooner, if in the future you need to miss payments, your extra payments will count towards your monthly payment and prevent you from reaching three missed payments where your proposal would be deemed annulled.

Debt-Free Sooner - Paying off your consumer proposal in full brings closure to the debt and gives you peace of mind, knowing that you have fulfilled your obligations.

Increased financial freedom - Paying off your consumer proposal early frees up money that would otherwise go towards monthly payments, giving you more financial freedom to invest and spend on other things.

Disadvantages of Paying Off a Consumer Proposal Early

There are few disadvantages to paying off a consumer proposal early. If you choose to make additional payments for the consumer proposal each month, it may make it more challenging to manage your budget. You first want to ensure your budget can handle the increased payments before agreeing to increase them. If you find the additional payments too high, you can always return to the original payment amount.

Tips For Paying Off Consumer Proposals Early

There are a few ways to pay off your consumer proposal early, such as the following:

Increase Monthly Payment Amount

You can increase your agreed monthly payment at any time during the consumer proposal so it is paid off sooner than originally agreed with your creditors.

For example, if your monthly payments are currently $200/month for 60 months, increasing your payment to $250/month will be paid off in 48 months, 12 months quicker than scheduled.

This will also provide you with a buffer in case you miss a payment in the future, so you don't fall behind by three months of payments, which could result in a deemed annulment.

Change the Frequency of Your Payments

When you first signed your consumer proposal, you may have agreed to monthly payments. However, you can always change the frequency of your payments. You could make more frequent payments by changing your payments to weekly, bi-weekly or semi-monthly.

For example, if your monthly payments are currently $100/month for 60 months, you could pay $100 twice per month, then your consumer proposal could be completed in just 30 months or in half the time.

Make Lump Sum Payments

You may not be comfortable increasing your monthly payments or frequency of payments because you don't want to incur any NSF fees. Instead, you could save money each month and keep that money in a separate bank account. Then once or twice a year, you could pay a lump sum payment from the money you saved.

Sell Assets

If you have assets you no longer need, like a second vehicle or investments in a TFSA or RRSP, you could sell/withdraw them and use the proceeds to pay your consumer proposal. This will help pay off the consumer proposal sooner and provide a buffer in case you miss monthly payments in the future.

Before selling any assets, you should be aware of any tax consequences. For example, if you withdraw funds from an RRSP, you must pay taxes on the proceeds received, and some of the funds received should be set aside if you must pay taxes in the future. Before you take this action, you may want to talk with a financial advisor or the Licensed Insolvency Trustee.

Credit Score Implications of Paying Off a Consumer Proposal Early

When you pay off your consumer proposal, the credit agencies are advised, which begins the timer for when the R7 rating and your included debts will come off your credit record. Generally, the included debts and credit rating will come off three years after you complete the consumer proposal payments or, to a maximum of 6 years from when you filed the proposal, whichever is sooner.

Can I Get a Loan to Pay Off My Consumer Proposal?

In a consumer proposal, you can still apply for credit, such as credit cards and personal loans. Some companies even offer consumer proposal loans to help pay off your consumer proposal. However, it would be best if you were extremely careful before obtaining new credit to pay off your consumer proposal and consider the following:

Interest - Consumer proposals stop all interest on your debts while paying off the proposal, like an interest-free debt. If you get a loan to pay off the consumer proposal early, you will have to pay interest on your debts. This makes it more expensive to repay your debts and could cost you more than repaying the consumer proposal earlier without a loan.

Debt - You likely filed the consumer proposal to get out of debt, so why would you want to get right back into debt? In the future, you may have trouble repaying the loan and find yourself in the same position you had just gotten out of by filing a consumer proposal.

Extending Repayment Term - The loan may have helped you pay off your consumer proposal sooner, but the new loan extends the term for paying off your original debts. Repaying the loan may take longer than paying off the consumer proposal payments as scheduled.

You may also have friends and family willing to assist you in paying off the consumer proposal with favourable terms such as no interest. Consider this option rather than a personal loan from a company with high-interest rates.

You may feel a quicker sense of relief if you pay off your consumer proposal quickly, but you need to make sure you don't cause future problems by doing so. A great benefit of a consumer proposal is that it stops all interest payments on unsecured debts. Therefore, you should use this benefit to balance your budget and build up some savings. However, paying off the consumer proposal early will provide more room for other things in your budget and help you become debt-free sooner.

Tips for Improving Credit Score

You don't have to wait for your consumer proposal to be completed to start rebuilding your credit record; here are some ways to improve your credit score:

Secured credit card

Once you file a consumer proposal, it may become difficult to qualify for credit again immediately. Applying for a secured credit card is an easy way to qualify for credit. This is similar to a prepaid credit card but has your name attached to it, and all payments will be reported to the credit bureaus towards your credit report. You can use this card for everyday purchases such as groceries and gas and then pay the total amount every month, which can start to rebuild your credit.

Car Loan

If you have a car loan or get one after filing a consumer proposal, your payments will be reported to the credit bureaus. Continue making your scheduled loan payments on time, showing positive activity on your credit report.

Conclusion

You may feel a quicker sense of relief if you pay off your consumer proposal quickly, but you need to make sure you don't cause future problems by doing so. A great benefit of a consumer proposal is it stops all interest on your unsecured debts. Therefore, you should use this benefit to balance your budget and build up some savings. However, paying off the consumer proposal early will provide more room for other things in your budget and help you become debt-free sooner.

Are you considering filing a consumer proposal? Litvack Group would happily provide a Free Consultation to review your financial circumstances and see if a consumer proposal would be the best option.