In Canada, consumer proposals have become increasingly popular as an alternative to bankruptcy for debt relief from unsecured debts. However, despite their appeal, they are not without their disadvantages. This article will explore some of the main disadvantages of consumer proposals and why they may not be the best solution for everyone.
Dealing with debt can be a stressful and overwhelming experience. With so many options available, knowing the right choice can be complex. Consumer proposals are one option that many people consider as an alternative to bankruptcy for debt relief. They offer a way to consolidate your debts and make a single monthly payment more manageable to pay off debts. However, while they may seem appealing initially, there are some disadvantages to be aware of.
Impact on Your Credit Rating
One of the most significant disadvantages of consumer proposals is their impact on your credit rating. When you file a consumer proposal, it is reported to the credit bureaus, and it remains on your credit report for three years after you have completed the proposal or six years from when filed, whichever is first. This can make it more challenging to get approved for credit in the future. However, you can rebuild your credit score while in the consumer proposal and have a higher score than before filing the consumer proposal.
Limited Debt Reduction
While a consumer proposal can help you consolidate your debts and make them more manageable, it does not necessarily mean your total debts will get reduced. Sometimes, the consumer proposal filing will only reduce your monthly payments, not the total amount you owe. This mainly depends on your income and assets and whether your creditors will receive more money in a consumer proposal than a bankruptcy.
However, in most cases, a consumer proposal can reduce your total debts, even up to 80%. This can be much better than a debt consolidation loan or credit counselling, where you still have to repay all the debts and can only reduce or stop the interest incurred.
Takes Longer Than Bankruptcy
Filing bankruptcy can take between 9 and 36 months to complete depending on your income and whether you have previously filed bankruptcy. A consumer proposal usually takes longer than bankruptcy because the payments can be stretched up to 60 months for a lower monthly payment. However, once a consumer proposal is accepted, you can increase your payments' frequency and amount so they are paid off sooner.
Credit Cards and Lines of Credit Will be Cancelled
When you file a consumer proposal, any unsecured debts, including credit cards and lines of credit, will be included in the proposal. This means that the balances on these accounts will be consolidated into a single monthly payment under the terms of the proposal. As part of the debt consolidation process, your credit cards and lines of credit will be cancelled.
This can be challenging for some people who rely on credit cards or lines of credit for daily expenses or emergencies. It's essential to be prepared for this change and make any necessary adjustments to your budget to ensure you can manage your costs without relying on credit. You can start by building an emergency savings account to help cover any unexpected expenses in the future and closely monitor your budget.
Your Consumer Proposal May Not be Accepted
Upon a consumer proposal filing, creditors will have 45 days to review it, submit their proof of claim, and vote either in favour or against it. For the consumer proposal to be accepted, the majority of the creditors in dollar value need to vote in favour. However, it is very rare for a consumer proposal not to be eventually accepted. The Licensed Insolvency Trustee will start negotiations with the debtor and the creditors to find an agreed amount that the creditors accept and the debtor can afford.
If the proposal is not accepted, you can still withdraw it and return to the same position before filing a consumer proposal. There is no automatic requirement to file for bankruptcy if the consumer proposal is not accepted.
Not All Debts are Included
Consumer proposals include most debts but not all, as they don’t include secured debts such as vehicle loans and mortgages. This can be good or bad, as you will likely want to keep the secured debt on your vehicles and mortgage, so you must continue payments to keep them during the proposal.
There are other debts that will be included in the consumer proposal but will not be discharged upon completion of the proposal. This includes child support, spousal support and court fines. Also, student loans outstanding for less than seven years from finishing school will still be payable during and after completing a consumer proposal. secured debt
If You Don’t Keep Up With Payments, Your Proposal Can be Annulled
When you file a consumer proposal, you agree to a set payment plan that typically lasts for five years. You must make your payments on time and in full to the Licensed Insolvency Trustee, or you risk annulling or cancelling the consumer proposal. This can happen if you fall behind three months of payments in total at any point during the consumer proposal.
The proposal payments can be challenging for some people, especially if unexpected expenses or changes in income make it difficult to keep up with the payments. However, you can still miss payments and catch up later, as long you don't fall behind three months of payments. Also, if something dramatic happens to your finances, like losing your job, you can speak to your Licensed Insolvency Trustee to possibly amend the terms of your consumer proposal.
When Should You Consider a Consumer Proposal
A consumer proposal is still an excellent option for reducing debt and avoiding bankruptcy. If you are considering a consumer proposal, here are the benefits to consider:
All interest on your debts is immediately stopped;
Your unsecured debts can be reduced;
Immediately stop all collection activities against you, including garnishments and lawsuits;
Only have to pay one fixed monthly payment.;
All unsecured creditors are included as long as the majority of votes are in favour of the consumer proposal, and all creditors are bound by the terms of the proposal, even if they voted against it;
You keep all your assets, such as personal belongings, vehicles, home and investments; and
If your income rises or you receive an inheritance, your payments don’t change.
While consumer proposals can be a helpful tool for managing debt, they have disadvantages. Consider all the pros and cons before deciding whether a consumer proposal is right for you. Consumer proposal disadvantages include the impact on your credit rating, limited debt reduction, and restrictive payment terms. However, many advantages exist, such as stopping interest on your debts, reducing unsecured debt and keeping all your assets. By weighing these factors, you can decide how to manage your debt best and achieve financial stability.
If you are considering filing a consumer proposal, Litvack Group as a Licensed Insolvency Trustee, would be happy to have a Free Consultation to discuss your financial situation and circumstances and review your options for debt relief. Contact us today!