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 sooner, 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 either making larger installment payments 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 sooner. If you are planning to make a large purchase with debt such as a house, paying off your proposal 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 sooner.
Avoiding Default - By making additional payments to pay off the consumer proposal sooner, if in the future you need to miss payments, your additional payments will count towards your monthly payment and prevent you from reaching 3 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 not many 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 difficult to manage your budget. You first want to make sure your budget can handle the increased payments before agreeing to increase them. If you find the additional payments are too high, you can always go back 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 you are monthly payments are currently $200/month for 60 months, increasing your payment to $250/month will then be paid off in 48 months, 12 months sooner 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 change 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
Maybe you don't feel 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 that you no longer need like a second vehicle or investments in a TFSA or RRSP, you could sell/withdraw them and use the proceeds towards paying 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 will have to pay taxes on the proceeds received. Some of the funds received should be set aside if you will need to pay taxes in the future. Before taking this action, you may want to speak 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 3 years after you completed the proposal, 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 loans. Some companies even offer loans to help pay off your consumer proposal. However, you should be 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. If you get a loan to pay off the consumer proposal early, you will incur interest on your debts. This makes it more expensive to repay your debts and could cost you more money than repaying the consumer proposal without a loan.
Debt - You likely filed the consumer proposal to get out of debt, so why would 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 as scheduled.
You may also have friends and family are would willing to assist you to pay off the consumer proposal, with favourable terms such as no interest. You may want to consider this option rather than a loan company with high-interest rates.
Conclusion
You may feel a quicker sense of relief if you pay off your consumer proposal quickly, but you need to make sure you didn'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 be happy to provide you with a Free Consultation to review your financial circumstances and see if a consumer proposal would be the best option.