November 28, 2024
Both a consumer proposal and debt consolidation can assist someone with debt, but they aren’t the same. We look at their key differences here.
There are a variety of ways for people to manage their debt. Debt consolidation is one way that many of us have heard of as a way of handling debt issues. It’s something that many Canadians use each year to help them get back on track financially.
A consumer proposal is used in cases that are more complex than debt consolidation, but don’t require someone to file for bankruptcy. Both are effective tools to help people get out of debt, but each they function very differently.
Debt consolidation is a strategy that can help you regain control of your finances and simplify your debt repayment process. Debt consolidation essentially combines multiple debts into one single loan. This means that instead of having to keep track of various creditors and due dates, you only have to manage one loan payment each month.
Debt consolidation makes your financial obligations more manageable by securing a lower interest rate on the consolidated loan compared to what would apply to a credit card or other similar debts.
With a lower interest rate, more of your monthly payment goes towards paying off the debt, allowing you to save money in the long run and make progress towards becoming debt-free faster.
A consumer proposal is an official arrangement between you and your creditors that allows you to repay a portion of your debt. A consumer proposal allows you to:
You can only use consumer proposals to lower unsecured debts. Debt not backed by an asset qualifies as unsecured debt. You can include credit card debt, lines of credit, and personal loans in a consumer proposal as they are examples of unsecured debt. Debt from car loans or mortgages cannot be included because they are backed by the physical asset of the car or home.
A consumer proposal and debt consolidation differ in numerous ways, and each can help someone with debt issues depending on their situation.
Debt consolidation and consumer proposals will affect your credit in very different ways. For debt consolidation, the effect on your credit is minimal, if any. This is because you still pay the full amount you owe, just with less interest. If you make your monthly payments after doing debt consolidation, it’s unlikely you will see any drop in your credit at all. It’s a reason many who can afford the payments opt for debt consolidation.
Consumer proposals, on the other hand, do affect your credit. Credit ratings are done on a scale of 1–9; for these, R1 is the best and R9 is the worst.
Filing a consumer proposal will automatically drop your credit rating down to an R7; this shows you are making regular payments as part of a debt management plan.
A consumer proposal filing will also drop your credit score. Credit scores range from 300 to 900, with 900 being the best. How much your score drops when you file a consumer proposal depends on a variety of factors, such as your payment history and your overall credit usage.
So why do people choose to file a consumer proposal if it has such a negative impact on their credit? Firstly, not all debt issues can be solved by debt consolidation, and credit scores can be rebuilt. A drop in credit score is not permanent.
When considering debt relief options, it's important to note a key distinction between consumer proposals and debt consolidation: who can help you get them.
A Licensed Insolvency Trustee is the only professional legally authorized to file a consumer proposal on your behalf. You can’t get a consumer proposal through a bank. Licensed Insolvency Trustees are regulated by the federal government and are required to follow strict guidelines and ethical standards in their practice. They provide unbiased advice and assistance in developing a consumer proposal tailored to your financial situation.
On the other hand, debt consolidation loans can be obtained through major banks, credit unions, or financial institutions. This is partially because they aren’t for debt situations as complex as those a consumer proposal handles.
The biggest difference between a consumer proposal and debt consolidation is how they affect the amount you owe.
A consumer proposal can lower the amount you need to pay back by up to 80%. This large reduction in debt is not guaranteed; it may be closer to 30%, for example, but the amount you need to pay back is always lowered with a consumer proposal.
Debt consolidation does not have this feature. While it can combine multiple debts into a single payment, it does not lower the overall amount you owe. Its main attraction is the reduction of the overall interest rate.
As a consumer proposal can reduce the overall amount you have to pay back, that means you will also have a reduction in your monthly payments.
When you file a consumer proposal, a Licensed Insolvency Trustee works with your creditors to create a structured repayment plan based on what you can afford. A consumer proposal is tailored to your needs and what you can afford to pay.
When you consolidate your debts, it combines them all into a single monthly payment, simplifying your repayment process.
Debt consolidation also lowers your interest rate, which lowers your monthly payments, but not to the same amount as a consumer proposal because it doesn’t reduce the amount you need to pay back overall. It may help you save some money in the long run, but you’ll still be paying back the full amount you borrowed to begin with.
A consumer proposal offers a level of relief from creditors that debt consolidation doesn’t. When you file a consumer proposal, a stay of proceedings is initiated. This legal protection immediately halts all collection actions and legal proceedings by your creditors against you. This means creditors are legally prevented from pursuing collection actions or legal steps to recover debts.
This provides you with immediate relief from wage garnishments, debt collectors and legal actions such as lawsuits or asset seizures.
In contrast, debt consolidation does not come with these legal protections. If your wages are being garnished or debt collectors are calling, debt consolidation cannot stop them.
If you're unsure whether a consumer proposal or debt consolidation is right for you, consulting with a Licensed Insolvency Trustee is a good place to start. They can impartially assess your full financial situation, including debts, income, and assets, to provide a comprehensive overview of your debt relief options. They can explain the pros and cons of each strategy based on your unique circumstances, helping you make an informed decision that aligns with your financial goals and capabilities.
November 28, 2024
Both a consumer proposal and debt consolidation can assist someone with debt, but they aren’t the same. We look at their key differences here.
