Consumer Proposals vs. Debt Consolidation: What’s Right for Me?

If you’re dealing with unmanageable debt and are looking to reduce it, you might consider consolidating your debt or filing a consumer proposal. These two debt solution approaches are different, and we’ll go over each of them, so you can determine which is right for you on your journey to becoming debt-free.

What is debt consolidation?

If this is the first time you’ve found yourself in a debt situation like this, consolidation is a good place to start. This is a way of reducing monthly payments. If you start this process before you owe too much, some lenders may choose to refinance your higher interest loans into low interest loans. 

However, debt consolidation isn’t for everyone. If your debt is too big, you may not be able to pay the monthly payments even after refinancing. Additionally, if your credit score is too low, you may not qualify for this process. Regardless of the size of your debt, any loan you take out will need collateral. A Licensed Insolvency Trustee (LIT) can help you determine if consolidation is the right move for you, and if you’d have capacity to make the payments.

When you consolidate debts, you may lower your amount owing and save some money each month, but your credit rating could be temporarily impacted. There are often high upfront fees, which can be a turn off for some people. Your creditors do not have to accept your settlement offers, and collection actions may carry on as a result. In some cases, the first settlements can take up to six months to complete.

What is a consumer proposal?

With a consumer proposal, you negotiate a settlement with your creditors. These agreements are legally binding. Through this process, you also reduce your monthly payment. You wind up repaying only some of your debt, it eliminates interest, and it reduces your overall outstanding amount owed. 

There are a few advantages of going the consumer proposal route, beyond the fact that you don’t have to pay back every cent you owe. Wage garnishments halt, collection agencies and creditors stop contacting you, and your assets are safe.

There are also some downsides to be aware of. Consumer proposals aren’t confidential—these agreements are public records. Creditors also have some power, since they don’t have to agree to the terms in your proposal. An LIT will help with this process. 

There are several rules around what consumer debts you can include. For instance, you can’t include student loans that you’ve had for less than seven years from the date of filing the proposal, nor can you include any secured debts. If you miss three payments, you face an automatic annulment, meaning you’d need to file for bankruptcy.

An LIT must file a consumer proposal. In order to qualify for one, you must owe an amount of debt between $1,000 and $250,000 to creditors. This includes consumer debts like credit cards, but excludes mortgages. 

What’s the biggest difference between the two?

The biggest difference between a consumer proposal and debt consolidation comes down to interest. A consolidated loan reduces high interest rates, while the consumer proposal eliminates interest.

A consumer proposal will bring down the overall amount you owe, and a consolidated loan combines several smaller debts. 

How do I decide which debt solution is best for my situation?

A consumer proposal may be a better option if you want to protect yourself from debt collectors, wage garnishments, or potential lawsuits. It’s also a good route to take if you have a stable income and are wanting to reduce your overall debt load.

Debt consolidation might be the approach to take if you’re able to pay down those existing debts with a lower interest rate.

Everyone is in a unique situation when dealing with their debt. An LIT can help you determine which makes sense for you. Book a consultation! We can evaluate your income and current debt situation to help you choose the appropriate approach and support you through the process.