Pros and Cons of Filing a Consumer Proposal: What You Need to Know

Understanding Consumer Proposals

A Consumer Proposal is a legal process in Canada, designed as an alternative to bankruptcy for individuals unable to pay their debts. It allows debtors to make a proposal to their creditors to modify their payment terms, which usually includes paying back a portion of the debt over a specific period. While it can offer a much-needed lifeline for those struggling with debt, it’s important to weigh the pros and cons before deciding if it’s the right option for you.

Pros of Filing a Consumer Proposal

Immediate Protection from Creditors

Once you file a Consumer Proposal, you receive immediate protection from your creditors. This means that all legal actions taken against you, such as wage garnishments and lawsuits, must cease immediately. This can provide a significant relief and breathing space to reorganize your finances.

Reduction in the Amount Owed

One of the most appealing aspects of a Consumer Proposal is the ability to negotiate the total debt owed. You may only be required to pay back a portion of your debt, potentially saving thousands of dollars and making your debt load more manageable.

Fixed Monthly Payments

With a Consumer Proposal, you’ll make fixed monthly payments for a period of up to five years. This predictability can make budgeting easier and eliminate the stress of unexpectedly high bills or changes in interest rates affecting your repayments.

No Loss of Assets

Unlike bankruptcy, filing a Consumer Proposal allows you to keep your assets, such as your home or car, as long as you continue to make the agreed-upon payments to your creditors. This can offer peace of mind and stability during a financially turbulent time.

Cons of Filing a Consumer Proposal

Impact on Credit Rating

Filing a Consumer Proposal will negatively impact your credit rating, registering as an R7 and remaining on your credit report for three years after your last payment. This can make obtaining loans, credit cards, and sometimes even renting property more challenging in the future.

Not All Debts Can Be Included

It’s important to note that not all types of debt are eligible to be included in a Consumer Proposal. Debts such as secured loans, alimony, child support payments, and some types of student loans are excluded. This limitation could leave you with significant financial obligations outside the proposal.

Cost

While a Consumer Proposal can reduce the overall debt you need to pay, there are costs involved in setting up and administering the proposal, including fees payable to the Licensed Insolvency Trustee who facilitates the process. These costs should be considered when evaluating your options.

Duration of the Process

The process of completing a Consumer Proposal can take up to five years, during which time your financial flexibility will be limited. This long-term commitment requires careful consideration, especially if your financial situation is likely to change.

Conclusion

Deciding to file a Consumer Proposal is not a decision to be taken lightly. While it offers undeniable advantages for those struggling to manage their debts, including relief from creditor actions and potentially reducing the debt owed, there are significant downsides. These include the impact on your credit rating, limitations on included debts, and the costs associated with the process. It’s essential to fully understand both the pros and cons and consider seeking advice from a financial professional or Licensed Insolvency Trustee to make an informed decision tailored to your personal financial situation.