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What is a consumer proposal?

Find out how you can manage your debt with a consumer proposal before filing for bankruptcy.

If you’re struggling with debt and not sure where to turn, you might benefit from applying for a consumer proposal. This agreement is an alternative to bankruptcy, but it should be approached with caution because it can stay on your credit report for three or more years. Keep reading to learn more about whether a consumer proposal could be a good debt solution for you.

What is a consumer proposal?

A consumer proposal is a legal agreement that you enter into with a designated legal “trustee” to help wipe out your debt. With the help of this person or agency, you’ll come up with a proposal to submit to your creditors. If your proposal is accepted, all forms of debt collection including wage garnishment and late penalties will stop immediately.

Your debt will then be consolidated into one easy-to-manage monthly installment. You’ll usually have a maximum of five years to pay off your proposal and a record of it will stay on your credit report for three years after you pay it off. Your credit rating will also go down as a result, and you’ll need to work to rebuild your credit if you want to apply for future loans.

Is a consumer proposal worth it?

Whether a consumer proposal is worth it for you will depend on your unique set of needs and budget. If you want to protect your credit score, then you might like to look at another option like debt resettlement, which is less likely to impact your credit report.

If you’re more interested in making your payments more manageable and getting some relief from your creditors then a consumer proposal could be worth it for you. This will also be the case if you want to retain your assets and avoid paying interest on the amount you owe.

Will a consumer proposal help me save money?

Consumer proposals are designed to reduce the overall amount of money you owe to creditors and to extend the time you have to make your repayments. For this reason, these agreements can bring down your monthly payments significantly and clear out a portion of your debt with no strings attached.

The amount you can save will depend on how you structure your consumer proposal and what terms your creditors are willing to accept. If you’re lucky, you may be able to knock as much as 80% off what you owe. That said, what’s more likely is that you’ll have to make a couple of offers to your creditors until they accept your proposed repayment amount and schedule.

Pros of a consumer proposal

There are a number of benefits to taking out a consumer proposal if you’re swamped by debt:

  • Asset retention. You’ll get to keep all of your assets like your home, vehicle and furniture, which you might lose if you file for bankruptcy.
  • Debt repayment. You’ll be able to consolidate all of your debts into one easy payment, and you’ll only have to repay a portion of what you owe in some cases.
  • No interest. You won’t have to pay any interest on your debts while your consumer proposal is in place.
  • Set payments. Once you negotiate your repayments, they won’t increase and you won’t owe anything more than what’s outlined in your proposal.
  • Longer to repay. You may be able to negotiate a longer repayment term to decrease the amount of your payments.
  • Less damage to your credit. A consumer proposal damages your credit less than declaring bankruptcy.
  • No more action from creditors. Your creditors will not be able to garnish your wages or bring legal action against you as soon as your proposal is accepted.

Drawbacks of a consumer proposal

  • Lower credit rating. Your credit rating will go down to one of the lowest scores possible as soon as you apply for a consumer proposal.
  • Missed payments not allowed. If you miss three months’ worth of payments, your consumer proposal may be cancelled.
  • Secured debts aren’t covered. You won’t be able to negotiate a consumer proposal for debts that are secured by your assets.
  • Stays on your credit report. A consumer proposal will stay on your credit report for up to three years after it’s paid off.

Is a consumer proposal right for me?

Consumer proposals can help you save money because they can reduce the overall amount of money you owe and extend the time you have to make your repayments. They also allow you to retain your assets, which you would typically lose if you filed for bankruptcy. You won’t have to pay any interest on your debts while your consumer proposal is in place. You’ll also get some relief from your creditors, who won’t be able to garnish your wages or bring legal action against you as soon as your proposal is accepted.

You might want to avoid a consumer proposal if you don’t want your credit score to go down. This could be the case if you’re planning to purchase a home in the near future, or you want to get optimal rates on a loan. A consumer proposal can make it difficult to get financing because it brings your credit rating down to an R9, and it stays on your credit report for up to three years after it’s paid off.

You might also want to avoid a consumer proposal if you don’t think that you can make your payments on time. This is because if you miss three payments in a row, you’ll lose any money you’ve paid towards your outstanding balance. You’ll also be charged all of the penalties and interest that you would have had to pay on your debt if the consumer proposal hadn’t been put into place.

How will a consumer proposal affect my credit?

When you file for a consumer proposal, your credit score can go down to an R9 while you’re paying it off. This is the lowest possible score you can have and is the same score you’ll get if you file for bankruptcy.

Once you pay your consumer proposal off, your score will go up to an R7 and this rating will stay on your credit report for up to three years. This means that if you take five years to pay off your consumer proposal, you’ll have a less than optimal credit rating for up to eight years.

This is why many people choose to pursue alternative debt solutions like debt forgiveness or consolidation before filing for a consumer proposal. Others apply for a consumer proposal to get their debt load reduced, and then pay it off with a loan so they can start rebuilding their credit as soon as possible.

What does my credit score mean?

Your credit score will be calculated by the credit bureau based on a complex formula that considers all of your debts and the frequency of your payments.

  • R1: If you have a credit score of R1, it means you have excellent credit and you make all of your payments on time.
  • R2-R6: You’ll get a rating between R2 and R6 if you’ve made several late payments or have a history of missing payments.
  • R7: This rating is typically used to identify people who have entered into consumer proposals or are working to resolve unmanageable forms of debt.
  • R8: You’ll get a rating of R8 if a lender has claimed whatever collateral you put up against a secured debt (such as repossessing your home or vehicle).
  • R9: An R9 rating is the lowest rating you can get and is typically used to identify people who have filed for bankruptcy or, in some cases, a consumer proposal.

How can I rebuild my credit after a consumer proposal?

If you want to build up your credit after filing for a consumer proposal, there are a number of steps you can take:

  • Make your payments on time. The best way to improve your credit score is to make all of your bill payments on time, even if you can only afford the minimum payment.
  • Review your credit report. Report any errors on your credit report to Canada’s major credit bureaus as these are common and can bring your score down.
  • Reduce your existing debt. Throw any extra cash you have onto your existing debts to try to pay them down so that you don’t have such a high debt-to-income ratio.
  • Avoid closing old accounts. Your credit score will be better if you can show that many of your credit accounts are long-standing.
  • Apply for secured credit. Build up your credit by providing a “security deposit” as a means to qualify for a secured credit card or a credit-builder loan.
  • Mix up your credit types. Build up your score by mixing and matching various types of credit (including loans, lines of credit, credit cards and more).
  • Use a credit builder loan. Credit builder loans are designed to help you build your credit score by reporting all of your on-time payments to the credit bureaus. They’re usually targeted towards people with bad credit or no credit history.

How do I file a consumer proposal?

To file a consumer proposal, you’ll need to meet the following eligibility criteria in most cases:

Eligibility criteria

  • Owe between $1,000 and $250,000 (excluding your mortgage).
  • Have a source of income to make your monthly payments.
  • Be unable to repay all your creditors in full with interest and have trouble getting a debt consolidation loan because your debts are too high.

What information will I need to submit?

If order to figure out whether a consumer proposal is the best fit for your needs, your trustee may need the following documents:

  • Debt-to-income ratio. You’ll need to list your debts and show proof of income to demonstrate that you can’t pay them off using your monthly salary.
  • List of assets. You’ll have to provide a list of assets and their values to demonstrate your overall net worth.
  • Outline of monthly expenses. You may be required to show how much you have to pay every month on regular bills in addition to the debts you owe.
  • Marital status. You’ll need to say whether you’re married as you may have to file a consumer proposal jointly with your partner.

Are there any other debt solutions?

If you don’t think a consumer proposal is the right fit for you, you might like to check out some of the following debt solutions:

  • Debt settlement. This option allows you to work directly with a debt settlement company to bring down the amount you owe with less negative effects on your credit.
  • Debt consolidation loan. You can use this type of loan to combine all of your debts into one easy payment, typically with better terms and lower interest rates.
  • Debt relief. Debt relief companies are designed to help you investigate your payment options and develop a plan of action to tackle your debt.
  • Borrowing from loved ones. Asking for a no-interest loan from family or friends could be a good option to clear out your debt if you don’t owe very much.
  • Bankruptcy. Filing for bankruptcy should be your last resort since it requires you to hand over all of your assets in return for having certain debts wiped out.
  • Debt relief. A debt relief company can help you understand what debt relief options are available to you, help you to create a plan to get out of debt and connect you with your lenders to settle your debts as quickly and smoothly as possible.

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Bottom line

Taking out a consumer proposal can help you reduce the amount of money you owe to creditors and help you pay off your debts faster. The downside is that this type of agreement will negatively affect your credit and make it more difficult to apply for loans in the future.

Want help managing your debt? Check out our guide on where to find free debt management help.

Frequently asked questions about consumer proposals

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