The Truth Behind Common Misconceptions about Consumer Proposals

Compared to bankruptcy, consumer proposals are a lesser-known debt relief solution, which has resulted in a lot of misconceptions being spread around.

But consumer proposals are actually the debt relief solution of choice for many Canadians since they help reduce the debt owing, avoid bankruptcy, and get debtors closer to being debt-free and rebuilding their credit faster.

So, to help you better understand consumer proposals, here’s a look at some of the many false myths that are circulating along with the actual truth about consumer proposals.

What Is A Consumer Proposal?

A consumer proposal is a debt settlement agreement between you and your creditors that allows you to, in most cases, pay back a fraction of the debt that you owe – interest free – over an agreed upon period of time. A Licensed Insolvency Trustee will file your consumer proposal and help you negotiate the terms of the proposal to find a payment plan you can afford while also having reasonable repayment terms for the creditors.

Common Myths About Consumer Proposals

Here are some of the most common myths about consumer proposals, along with the actual facts.

A Consumer Proposal Is the Same as a Debt Settlement Agreement

A consumer proposal provides many benefits that a debt settlement or debt consolidation agreement cannot. Unlike debt settlement agreements, consumer proposals:

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• Provide legal protection from creditors, which will stop phone calls, legal action, wage garnishments, and seizure of property
• In most cases, pay off a reduced amount of your debt over a period of time with reasonable payment terms
• Do not require each creditor to agree to the terms of the proposal—only the majority of  the dollar value of the creditors claims need to accept the proposal.

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A Consumer Proposal Doesn’t Help with Government Debt

A consumer proposal is actually one of your only options—along with bankruptcy—to reduce or settle government debts. Consumer proposals deal with most unsecured debts, including government debts such as student loans—if you have been out of school for seven years—and tax debts owing to the Canada Revenue Agency.

And unlike consumer proposals, credit counselling cannot help you with either of these government debts.

Consumer Proposals Are Expensive

Consumer proposals allow you to repay what you can afford. And if you work with a  Licensed Insolvency Trustee, you will not have to pay an extra fee to file your consumer proposal. In fact, debtors do not have to pay the trustee an extra fee because the trustee gets paid from the payments  that are paid into the consumer proposal. So, a portion of the funds  that are paid towards the consumer proposal will be paid to the trustee.

They will receive the first $1,500 in proposal payments to cover administration costs. And then your trustee will earn an additional 20% of your payments.

If you were to go to an unlicensed debt consultant, they might charge you a fee for service to prepare the documents on top of the payments you will make to the creditors. But remember, you should never pay for advice or help with filing a consumer proposal.

A Consumer Proposal Will Ruin Your Credit Rating

While a consumer proposal will remain on your credit report for three years after you complete the proposal, in Ontario, a bankruptcy will stay on your credit report for six years (Equifax) or seven years (TransUnion) after being discharged, as will repossession and seizure of property. Late payments and collections activity will remain on your credit report for six years as well.

A consumer proposal is also no worse for your credit than working with a credit counselling agency for debt management and debt consolidation. But gaining control of your finances with a consumer proposal is better for your credit in the long run by eliminating your outstanding debts (along with the potential for late payments) that are hurting your credit score.

It allows you to rebuild your credit while making the consumer proposal payments. And paying less each month in a consumer proposal will give you more money to save so you can rebuild your credit much faster than with other debt-relief options.

You Aren’t Eligible if Your Income Reaches a Certain Threshold

Eligibility requirements for consumer proposals are based on the amount of debt owing, not your income. High-income earners can also run into financial hardships that make paying off debt difficult.

To qualify for a consumer proposal, you must have a debt owing between $1,000 and $250,000 (or $500,000 for couples), that doesn’t include your mortgage and be insolvent.

Your Spouse Will Be Affected

A consumer proposal will only affect your spouse if they file for one as well. Otherwise, it will only affect your financial obligations and credit report, not your spouse’s.

But if you have joint credit accounts—such as credit cards, bank overdrafts, lines of credit, and co-signed loans—your liability for this debt will be included in your consumer proposal, and your spouse will still be responsible for the debt.

You Will Have to Sell Your Assets

In most cases, in a consumer proposal, you’ll be able to keep your assets as long as you can keep up with your monthly payments—such as your mortgage and car loans.

In fact, the main advantage of a consumer proposal over bankruptcy is that you can keep all of your assets. And filing a consumer proposal can help you afford your secured debt payments since you’ll eliminate other unsecured debt payments and free up more monthly cash flow.

You Have to File for Bankruptcy If You Cannot Make Payments

If you fall behind by a total of three payments of your consumer proposal, you do not have to file for bankruptcy. When you fall behind by three payments, your consumer proposal will be deemed annulled, and you will be back to where you were before you filed your consumer proposal—owing debts to your creditors.

If your consumer proposal is annulled, there is a 30-day window, during which your proposal can be revived. If you are unable to revive your consumer proposal, you can make an application to Court for approval to file a new consumer proposal.

Creditors Often Reject Proposals

Creditors accept the majority of consumer proposals since they will result in a more favourable outcome for all parties than if you filed for bankruptcy. If your consumer proposal is rejected, the creditors may have counter-offers, and the terms can still be negotiated between the debtor and the creditors.

With so many myths, misconceptions, and unknowns surrounding consumer proposals, it’s important to consider the facts. Also, be sure to speak with a Licensed Insolvency Trustee to answer any of your questions so you can better understand how this debt-relief solution might benefit you.