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Understanding the Possible Disadvantages of Consumer Proposal

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Advantages and Disadvantages of Consumer Proposal

A consumer proposal is a legal process that is designed as a way for people to pay a portion of the debt they owe rather than the full amount. Consumer proposals can only be administered by a Licensed Insolvency Trustee. If you are having trouble meeting your financial commitments and unable to pay the full amount of debt you owe, a consumer proposal could be a good decision for you. However, whether this is the right choice will depend on your circumstances. That’s why it’s important to understand all the advantages and possible disadvantages of a consumer proposal before you decide how you will proceed.

Every financial situation is unique. This means that the solutions to each financial problem is unique as well. There aren’t any “one size fits all” answers. To find the right solution for you, you’ll want to make sure you understand all the available options. You’ll then need to figure out how these options apply to your situation. This will help you find the right way to resolve your debt problem.

Sometimes, people who struggle with debt feel like there is no way out. This is an understandable feeling, but it’s also very rarely true. Depending on your situation, there may be several debt relief options available. Meeting with a Licensed Insolvency Trustee can help you learn what choices you may have. A trustee will take a look at your financial situation and give you details on the available options. It is then up to you to determine your next steps.

A consumer proposal may be one of the options. Before you decide if this option is right for you, you’ll want to understand the process. Knowing the advantages and possible disadvantages of the consumer proposal will help you decide if this process is right for you.

Potential Advantages of Consumer Proposal

One major advantage of a consumer proposal is that, in the vast majority of cases, you will only need to repay only a portion of the debt you owe rather than the full amount. Once your proposal is complete, your remaining debts are eliminated. This makes it a good option for those who are able to pay back some of their debt, but not everything.

Another advantage of a consumer proposal is that you do not have to convince each individual creditor to agree to the proposal. Once the trustee prepares the proposal, it is sent to all of your unsecured creditors. They will then vote on whether they wish to accept it. If those creditors that are owed more than 50% of the debt decide to accept the proposal, then it becomes binding for all. Once accepted,  even those that did not vote to accept it must abide by its terms.

This saves you from having to convince each individual creditor to agree with you.

Not only does the proposal process save you from having individual negotiations, but it also makes the payment process much easier than if you had to pay each creditor separately. You will only have one payment to make each month, and the amount will not change. This prevents the issue where people sometimes miss payments or pay the wrong amounts when they have a lot of creditors to deal with. A consumer proposal simplifies the process.

The fact that your consumer proposal payments do not change once the proposal has been accepted is a significant advantage, especially when compared to bankruptcy.

If you file for bankruptcy, rather than choosing to file a proposal, the cost of your bankruptcy will depend on your income and this cost will increase if you earn more money. Throughout the bankruptcy process, you are required to provide the trustee with monthly income statements. If you earn more than an amount set by the federal government for your family size, you may need to make surplus income payments. This is not an issue with a consumer proposal. You are, however, able to pay your proposal more quickly if it’s financially possible for you. There is no penalty for paying off your proposal early.

Another potential advantage of a consumer proposal when compared to bankruptcy is that you do not lose any assets when you file. With bankruptcy, depending on what you own and the province in which you live, you may lose some of your assets. With bankruptcies, each province and territory sets limits for how much you can keep when you file. In general, you are typically able to keep items that are required to live a basic lifestyle as well as tools of the trade which are necessary to earn an income. This is not something that you need to worry about with a consumer proposal. You are able to keep all of your assets when you file.

You also receive legal protection from your creditors when you file a consumer proposal. This means they can’t take any collection action against you and any actions that have already started, such as wage garnishment, must be stopped. All communication with your creditors must happen through the trustee.

Possible Disadvantages of Consumer Proposal

However, with every debt relief solution, there are potential downsides. While there are many potential advantages, it’s important to understand the possible disadvantages of consumer proposal processes before you decide if this is the right option for you.

One potential disadvantage that you will want to keep in mind is that a consumer proposal will be noted on your credit report when you file. This can make it difficult for you to get loans in the future.

Credit reports contain R ratings that refer to revolving credit. Revolving credit means accounts that allow you to carry a balance and pay a portion each month, such as a credit card. R1 is considered to be the best rating on a revolving credit account while R9 is used in cases where a loan is considered uncollectable or where a person has included the loan in a bankruptcy. If you file a consumer proposal, the loans included in this proposal will be classified as R7, which shows that they were included in a consumer proposal. This rating can be a problem if you hope to get new credit in the future.

Lenders who see that you have completed a consumer proposal may be less willing to provide access to credit. They may assume that, since you had to file a consumer proposal to deal with your debt in the past, you are a riskier person to loan money to going forward. This can mean that you may not be able to get certain loans or that you may pay a higher interest rate on any loan that you do get,.

However, while a proposal being noted on your credit report can make it more difficult for you to get loans, if you are in a position where you needed to file a consumer proposal, you may have already damaged your credit score.

If you missed payments, made payments late, or borrowed more than you could afford to repay, this will likely have negatively affected your credit score already. When you file a consumer proposal, it puts you in a situation where eliminating your debt is possible, rather than leaving you struggling with debt. Once you have completed your proposal and eliminated your debts, you will be able to rebuild your financial life, work on improving your credit score, and begin living a debt-free life.

Another aspect that some consider being one of the disadvantages of consumer proposal processes is that you still need to pay a portion of the debt you owe. While a proposal usually reduces your financial commitment, you will still be expected to pay a portion of the debt. If you are in a financial situation where you cannot pay even a portion of what is owed, you may wish to consider filing for bankruptcy rather than submitting a consumer proposal. This is another legal debt relief process that can be administered by a Licensed Insolvency Trustee.

Is a Consumer Proposal the Right Choice?

If you’re learning about the advantages and disadvantages of a consumer proposal and wondering if this option is right for you, it’s important to know that the answer of whether or not to consider a consumer proposal depends on your particular situation.

Meeting with a Licensed Insolvency Trustee can help you understand the options available to you so you can make an informed choice for your financial future. While trustees are the only professionals in Canada who can administer bankruptcies and consumer proposals, they are also bound by a strict code of ethics and are required to give information on all possible debt relief options.

When you meet with a trustee, they will review your situation and let you know what debt relief solutions are available. They will give details on all options, including those that they do not administrate. This is different than some other financial professionals who may only provide details on those options with which they are the most familiar. A trustee will never try to encourage or convince you to choose one option over another. The decision is always entirely up to you.

Once you have the information you need, you can decide which option is right for your situation. Most trustees offer this consultation and review at no charge.

Understanding the potential advantages and possible disadvantages of a consumer proposal is an important part of the debt relief process. The more information you have, the better the decision you will make for your financial future.

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