Which Option Is Better In The Long Run?
Consumer Proposals and Debt Management Programs are often confused, but they have significant differences. When faced with a situation where one of these plans is essential, which of the two should you go for to get back on track? This article will go through the basics of both options, so that you’ll be a bit more equipped when consulting with a professional.
What Is a Debt Management Program (“DMP”)?
A DMP is offered by non-profit credit counselling agencies, and they will negotiate an agreement with your creditors for you to repay your debt, in full, through monthly payments over a period up to 5 years. The credit counsellor will negotiate a payment plan with your creditors often with reduced interest rates, making it easier to pay down and pay off the debt. A DMP may only be used for unsecured debts, such as credit cards and consumer loans or lines of credit. It does not include debts for student loans and income tax.
What Is a Consumer Proposal?
A Consumer Proposal is a legal process filed pursuant to the Bankruptcy and Insolvency Act (“BIA”). It is a written offer made by a debtor to his or her creditors in order to modify contractual payment obligations. It must be prepared on your behalf by a Licensed Insolvency Trustee (“LIT”). The LIT must then administer the Consumer Proposal in accordance with the provisions of the BIA. Each Consumer Proposal is tailored to the needs of the debtor seeking assistance. That being said, Consumer Proposals typically require a lower monthly payment than the payments required prior to filing the Consumer Proposal. As well, it is frequently possible to settle debts for less than the full amount owed and interest stops accruing. A Consumer Proposal must provide a better recovery to the unsecured creditors than the sum they would recover in the event of bankruptcy.
How Do the Two Options Compare?
A DMP can only assist debtors with the creditors that consent to work with them. Creditors can drop out of the program at any time and start collection activities. Further, debts owed to CRA for taxes and student loans will not be included in a DMP.
A Consumer Proposal is made to all unsecured creditors generally. This means that all unsecured creditors are included. Once the Consumer Proposal is approved by the majority (in dollars) of the unsecured creditors, and approved by the Court, it is binding on all parties.
Stay of Proceedings
A DMP does not legally protect the debtor from the creditors, should they wish to pursue the debtor for payment.
Immediately upon filing a Consumer Proposal, there is a stay of proceeding, which stops all collection calls, legal proceedings, wage garnishments and seizure of unencumbered assets.
For the creditors that agree to participate in a DMP, their principal debt must be paid in full, usually over 5 years. The only benefit to the debtor is a reduction of interest that would otherwise have to be paid.
In contrast, a Consumer Proposal payment is primarily determined by what the debtor can afford to pay each month. While each situation is unique, typically, total payments in a Consumer Proposal are only 30%, 40% or 50% of the principal owed. All interest is forgiven.
If you find yourself in a position needing to seek guidance regarding your options in resolving your debts, consult with a LIT to determine which option is best for your situation.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee based in Ottawa. We service Ottawa and most of eastern Ontario. We have helped thousands of individuals and couples successfully resolve their debt challenges since 2002. Its passion – its mission – is your health and well-being!