The disadvantages of consumer proposals are outweighed by the advantages.
Understanding the Disadvantages of a Consumer Proposal
A consumer proposal is a legal process that allows individuals in Canada who are unable to repay their debts to come to a debt settlement agreement with their creditors.
While it can be a valuable tool for those facing financial difficulty, it’s important to understand both the advantages and disadvantages of this option.
One advantage of a consumer proposal is that it allows for a manageable repayment plan, but it can also have a negative impact on credit score which may not be a disadvantage as your credit score may only improve long term.
As insolvency trustees we believe that for many people the advantages of a consumer proposal far outweigh the disadvantages.
Advantages of Consumer Proposal
In a consumer proposal the biggest advantage is that your debt will be reduced up to seventy (70) percent, and:
- all lawsuits are stopped
- no further interest is added
- you keep all your possessions
- all collection calls are stopped
- wage garnishments are stopped
- you’ll be out of debt in usually 3-5 years
- there are no upfront cost to you to set up the proposal
- make one monthly payment to the proposal administrator
Where you have debt issues the benefits of filing a consumer proposal far outweigh any disadvantages.
Disadvantages of Consumer Proposal
The disadvantages of a consumer proposal are:
- Your credit rating will be affected
- If you miss 3 months payments the proposal can be cancelled,
- Does not cover secured debt credit/creditors
Secured debts are excluded unless you are turning over (returning) the asset back to the lender .e.g returning the car to the dealership.
Although there is a downside to filing a consumer proposal the benefits for those in overwhelming debt can far outweigh the negative.
★★★★★ I owed 42,000 in credit card debt and knew there was no way I would ever be able to pay it back. When I was told my paycheque was going to be garnished, I knew that I had to do something. I contacted Yanchdey, they were friendly and not judgmental and explained my options, we filed the consumer proposal and my debt went down to about 12,000, which I’ll have paid off in 4 years ($250/month), Dave S. Whitby
Your credit rating in a Consumer Proposal
When a consumer proposal is filed it comes off your credit rating three (3) years after the proposal is completed.
Most people if they are considering a proposal may already be in a situation where the credit rating has been affected or is about to be.
The advantage is that the proposal will give you a fresh start, while avoiding filing for bankruptcy which would affect your credit for seven (7) years.
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Missing Payments in Consumer Proposals
If you stop making or miss payments the proposal will be cancelled, the legal term is Annulled.
Where the debtor misses the equivalent of three (3) months payments the proposal will be automatically annulled.
Once there has been an annulment, the proposal is cancelled and:
- all debts are reinstated
- all interest and fees are reinstated
- the proposal cannot be reactivated without permission from the court
Consumer proposals can only be revived/reactivated within a very short time frame, if the creditors agree or with permission from the court.
In most cases where the debtor is unable to make payments the recourse left is to file for bankruptcy.
Consumer Proposals are only for Unsecured Debt
Unsecured credit is credit or loans that you receive where there is nothing to back it up or no security provided for the credit.
Examples of unsecured credit include;
- credit cards, company credit card cards and gas cards
- utility bills like electrical, water or gas bills
- cell phone or telephone bills
- personal loans, rent and medical bills
- student loans
Secured debt is secured by a tangible piece of property that can be seized if the debt is not paid. For example if you stop making payments on your car or home, then the loan or mortgage holder would come and seize the property.
Read more about Secured and Unsecured Debt >>