An important first step to take when struggling to pay off a credit card balance or pay back a loan is to learn more about your debt relief options. At first you may think the best solution is to simply buckle down and work to pay off all your outstanding debts in full, but that isn’t always the case. A consumer proposal or debt consolidation may actually be a better option for you, your family and even your creditors.
A consumer proposal is an agreement you make with your creditors with the help of a Licensed Insolvency Trustee (LIT). It acts as both an organized payment plan and a form of debt forgiveness. A consumer proposal can include most unsecured debts, but not secured debts like a mortgage or auto loan.
When you meet with an LIT, they’ll help you figure out your income, assets, liabilities, and expenses. This will determine how much of your total debt you can afford to pay. With this information, your LIT will create a consumer proposal that outlines your monthly payments and your repayment period, which can be as long as five years. The total value will almost always be less than your original debt. Once you pay it off, the rest of your debt will be forgiven, so long as you agree to attend two debt counselling sessions to help you stay on track.
Your LIT will present this agreement to your creditors on your behalf. If they agree, all interest charges will stop, debt collectors will stop contacting you, any wage garnishments will be lifted, and you’ll keep your home, car and assets.
A consumer proposal is helpful if you’re overwhelmed by the number of monthly payments you have. Instead of paying creditors individually, you make a single payment directly to your LIT. They’ll distribute the money to each of your creditors until you meet the terms of your proposal. Then you’ll be debt free.
For more information about consumer proposals, please visit our consumer proposal FAQ page.
While the two are similar, your experience paying back a debt will feel very different. Instead of going through a Licensed Insolvency Trustee, a debt consolidation loan is offered by a financial institution, like a bank. The financial institution will pay off your outstanding debts and open a new loan for the combined value.
Like a consumer proposal, you make your payments to a single place, instead of constantly worrying about making minimum payments to different lenders at different times. Unlike a consumer proposal, a debt consolidation loan lets you start accumulating debt again, while you’re repaying your loan. This can often result in more debt than you had before, and one step closer to dealing with a debt collector.
The biggest difference between the two solutions is that you will pay back 100% of your debt plus interest with a debt consolidation loan, meaning you’re paying more, compared to a consumer proposal. The upside is that a debt consolidation loan won’t negatively affect your credit. In fact, paying down a large loan can benefit your credit score if you make your payments on time.
Since a consumer proposal is a form of debt forgiveness (which means you don’t compensate your creditors for everything you owe), it stays in your credit report for six years (or three years from when you pay it off). This can affect the creditors that will work with you, the size of the loans they’d be willing to give you, and possibly the interest rate as well.
Consumer proposals are still worthwhile because, even though they stay on your credit for a period of time, it gives you the opportunity for a fresh start. Consumer proposals cleanly put an end to your current debt so you can start rebuilding your credit.
Besides bankruptcy, the two most common choices are debt settlement and debt management. These also have similarities to both a consumer proposal and debt consolidation, but it’s alright to feel confused. Here are the key differences to help you decide which option is right for you.
A debt management plan is a voluntary agreement to pay the full value of your debt, arranged by a credit counsellor. But it provides less legal protection and doesn’t prevent wage garnishing or keep debt collectors from harassing you.
A debt settlement is a one-on-one negotiation with each of your creditors to eliminate your debt with a single payment or plan. A consumer proposal, debt consolidation and debt management plan let you deal with multiple creditors at once. Debt settlement companies are often private, so you should be cautious when hiring them.
Since debt settlement usually amounts to a single lump sum payment, you should also be aware of what you agree to. If you negotiate paying 75% of your total debt, be ready to pay it all at once. Depending on your finances, this can be much more difficult than a payment plan designed by a credit counsellor or Licensed Insolvency Trustee.
Debt can feel like an isolating experience, but you don’t need to handle it on your own. The first consultation with a Licensed Insolvency Trustee is free, and they can help you choose which debt relief option best suits your unique situation.
If you have any more questions, reach out for a no-cost consult with an LIT today.
Call 1-855-BDO-Debt or fill out the form below. Your story is more than your debt and we’re here to help.
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