So what is a consumer proposal anyways? A consumer proposal is a Canadian court-approved program through which your outstanding debts are renegotiated with lenders by a third party. Though a consumer proposal will help immediate financial problems by lowering monthly payments and reducing debt, it will hurt your credit score. A consumer proposal will stay on your credit report for three years, but you can begin improving your credit score immediately by removing inaccurate information from your credit history and reestablishing positive credit.
For example, you could propose that you will pay a reduced amount each month, but over a longer payment period. Or you could propose that your creditors be paid only a percentage of what you owe them through a consumer proposal. Depending on the circumstances, this percentage could be as low as 20% to 30% of the total debt outstanding. A proposal can also consist of a single lump sum compromise payment to be made either by a third party contributor (e.g. family member or friend) or from the liquidation of an existing asset.
The Advantages of a Consumer Proposal
Besides the obvious advantage of not having to file for bankruptcy, Consumer Proposals also offer additional benefits such as:
- A consumer proposal allows you restructure and/or reduce your financial obligations and also avoid bankruptcy at the same time.You only need the support of 50% plus $1.00 of the dollar value of unsecured voting creditors in order for the proposal to be accepted and binding on all your unsecured creditors.
- It is an effective alternative to bankruptcy from the aspect of its effect on your credit rating: with a proposal your credit rating is not as adversely affected as in a bankruptcy.
- Your unsecured creditors will no longer be able to take legal steps to recover their debts from you (such as seizing property or garnisheeing wages) unless the proposal is withdrawn, rejected or annulled.
Risks, Eligibility, Credit Implications and Conflicts of Interest
Consumer proposals are without doubt an extremely valuble option at the hands of the Canadian consumer. They do have some risks though, and certainly some limitations.
Risks
One of the biggest risks is that your request for consumer proposal could be declined. Why is this a risk you ask? Well, if it is declined, your credit report will still reflect that your attempted request for proposal which will be a red flag for lenders in the future. This is also what will happen if your proposal is accepted. The reflected R7 Orderly Payment of Debt Program that is reflected on your credit bureau will be dropped from your report three years from the time you make your last payment. Most lenders will not even know you went through a proposal at that time.
Another risk to a consumer proposal is that your ability to obtain any unsecured credit will be removed completely. During your proposal, the best course of action would be to apply for secured credit to improve your credit standing.
What is the Criteria for a Consumer Proposal?
Consumer proposals are based on surplus income, as per federal standards. Although a client may feel that they have no surplus at all, by federal standards they may have a significant amount of surplus income. If it is determined that you have surplus income, you will not be accepted for a consumer proposal. Another factor that is considered is if the client holds equity in a home or other assets. If you do have equity in a home or other assets, you will likely also be disqualified for a consumer proposal. To be accepted, you must legally be insolvent meaning that your debts must out-weigh your assets.
Things to Consider Before Applying for Consumer Proposal
Be sure to consider any conflicts of interest that may arrise from either work-related policies, corporate or co-signed liabilities. Co-signed accounts are an especially key area of concern as the co-signer of that account may be affected in the same manner as the applicant, if no prior arrangments are made. Much in the same way as credit counseling, all unsecured credit must be included in a consumer proposal, no exceptions.
Conclusion
If your debt load has gotten out-of-hand, the best piece of advice we can give you is to seek professional advice and help before making a decision. Yes, consumer proposal is a good tool to help relieve you of your debt load and help you manage your repayments, keep it mind that it will limit your ability to get unsecured credit (credit cards, auto financing) and your own mortgage.
Very good article. Lots of very good information here. I just want to add that before you decide to go down the path of bankruptcy or consumer proposal, educate yourself. There are plenty of resources (like this) that will help you make the right decision for you. Both can be good options if you are at the end of your rope, but they can also have their downfalls.
My wife and I just went through a bankruptcy and find it hard to get people to look at us the same way as before. I did not really know that consumer proposal could be for me. Is it easier to get good credit with consumer proposal?
Manny – best way I know to start back on the path to recovering your credit rating is to start with a secured credit card. There are lots of credit card companies who can help you with this if your home bank will not. Start small.
Very true Wilson. One of the best ways to re establish your credit is with a secured credit card. Best way to maintain your credit is to not get any other credit cards! LOL
Very informative! Good advice, everyone who is thinking of going that route should read this article.
I was in a tough debt situation about three years ago and was faced with the decision to go the route of consumer proposal or bankruptcy. Although they are good option to wipe debt clear or reduce it, they do take a toll on your credit score and your reputation from a credit standpoint. A good friend of mine who is a mortgage broker gave me the advice to call my creditors directly and negotiate my payments with them. He told me to mention that I was considering a consumer or bankruptcy. I did and 90% of my creditors worked with me to lower my payments monthly. I managed to get out of all of my debt in the three years since through hard work and determination. My credit score is very good now and I can respect myself for working through my credit situation on my own. No more back patting. My point is that if you never call your creditors, you will never know if they will be willing to work with you. Afterall, they want to get paid and will do what it takes to help you pay them back. My credit score was too important to me to take the easy road.