What’s the Difference Between These Two Actions in Canada
Everyone makes purchases using credit. It’s a normal part of life. However, if you ever reach a point where your debt becomes overwhelming, and you are unable to make payments, things can become complicated. In Canada, there are a few different ways you can choose to deal with your debt. One option is a consumer proposal, and another is debt counseling. While both are viable options, there are situations where one may clearly be the better choice. At J. Bottom & Associates, we can help you understand the difference between these two debt solutions and help you through the process as you build a plan for a better financial future. Continue reading to learn more about your options, and feel free to reach out to us if you have any questions.
What Is a Consumer Proposal?
A consumer proposal is a process you can use as an individual debtor if you have become overwhelmed by your debt and cannot repay your creditors in full within the allotted time. Working with a Licensed Insolvency Trustee (LIT), you can create a consumer proposal, which extends an alternative offer to your creditors. In most cases, a consumer proposal will include an offer for you to pay your creditors a percentage of your debt owed, or to extend the repayment period, or a combination of the two. In this way, a consumer proposal can help you make a plan to get out of debt and build toward a better financial future.
What Is Debt Counselling?
Debt counselling is a way to help you deal with debt when you have adequate cash flow to repay your creditors in a reasonable amount of time. It is an informal process where you work with a credit counsellor to make a plan to repay your creditors over a maximum period of five years. Though the process is less formal than a consumer proposal, a licensed individual is still required to administer the plan you create with your counsellor.
How These Actions Differ
Though both credit counselling and a consumer proposal are a way to handle debt repayment in British Columbia, they each have some fundamental differences in how they are administered. J. Bottom & Associates serves clients in New Westminster, Port Coquitlam, & North Vancouver, helping individuals like you understand your options and how to move forward. Continue reading to learn the critical differences between a consumer proposal and credit counselling.
Qualifications of Advisor
Whether you choose to use a consumer proposal or credit counselling to manage your debt, you will need the help of an advisor. However, there will be different requirements for this advisor depending on which option you choose:
- Consumer Proposal: A consumer proposal must be administered by a professional licensed by the federal government. These professionals are known as Licensed Insolvency Trustees (LIT).
- Credit Counselling: In order to be accepted, your credit counselling must be administered by a professional who is licensed to provide such services in the province where they operate.
When you have a large amount of debt, you may face constant calls, emails, and letters about your past-due balances. This can become overwhelming and cause additional stress. Some debt relief solutions can grant you legal protection from these actions. However, these protections will vary depending on which solution you choose:
- Consumer Proposal: When you file a consumer proposal, you are granted legal protection from creditors. This will help to protect you from constant calling and wage garnishments by your creditors.
- Credit Counselling: If you opt to enroll in credit counselling to manage your debt, you will not be granted any legal protection from creditors. Your creditors will be free to continue actions against you.
Potential Effects on Credit Rating
Any time you need additional help or time to pay off debt, it could affect your overall credit rating. It’s important to understand these potential effects as they could make it harder for you to find housing, purchase a car, and more in the future. Our team can help you understand how your debt relief actions could affect you in the coming years. The effects on your credit will vary depending on which action you choose to take.
- Consumer Proposal: An R7 rating will be noted on your credit report for three years after the completion of repayment, or six years from the date of your original filing, whichever comes first.
- Credit Counselling: An R7 rating will be noted on your report for two years following the completion of your repayment.
Your creditors play a significant role in how your repayment is handled. You want to be sure you’re choosing a path that will be best for you in the long run. Our insolvency trustees can help you find the right solution that produces an agreeable outcome for you and appeases the creditors. The participation of creditors in your repayment plan will vary depending on if you choose a consumer proposal or credit counselling:
- Consumer Proposal: Once you file your proposal, your creditors will have the chance to decide if they agree to the terms. Your proposal will be put to a vote, where creditors will have the opportunity to vote to accept or reject it. If 50% or more of the voting creditors accept the proposal, then all creditors are bound by the terms of the agreement and will share the monthly payments you make. Working with a Licensed Insolvency Trustee to file a proposal is the only way to stop wage garnishment, asset seizure, and other collection actions by creditors.
- Credit Counselling: With credit counselling, each individual creditor has the ability to accept or reject your repayment plan. If one or more creditor does not accept the plan, you must continue to repay them separately. Creditors who are not in agreement with the program may continue to take legal action or attempt to collect the money you owe. Creditors who accept the plan will likely stop their actions against you, provided that you hold up your end of the deal and follow the agreement. However, there is no legal protection for you, and the creditors can decide to resume their collection actions if they choose.
Interest rates on many types of debt can be incredibly high, creating a sort of snowball effect when you can’t make your minimum payments. This only pushes you further into debt and can make it seem impossible to overcome it. The interest charges that accrue on your debts will differ depending on whether you choose to pursue a consumer proposal or credit counselling:
- Consumer Proposal: Once the proposal is accepted, all debts included in the agreement will be frozen, meaning they will not earn any additional interest. This will help to stop the snowball effect and make it easier to pay off your debts.
- Credit Counselling: With credit counselling, the decision to freeze interest charges is up to each creditor. Depending on your standing with them, they can either choose to continue letting your accounts accrue interest or freeze them, so you only have to pay back the current amount owed.
Amount of Debt to be Repaid
Neither a consumer proposal nor credit counselling is enough to completely relieve you of your debts. However, you may be able to reduce the amount you have to repay depending on the solution you choose. You can expect the following differences in the amount to be repaid:
- Consumer Proposal: If your creditors accept your proposal, the amount of debt you repay will likely be significantly reduced. You may see as much as a 70 to 80% reduction of total debts. Interest accruement will be automatically frozen, even on tax debts and student loans.
- Credit Counselling: Even with credit counselling, you are generally required to pay 100% of the debts you owe. You may just have more time to repay them. While creditors are not required to freeze interest, you can negotiate with them to stop interest accruement. However, tax debts and student loans will continue to charge interest.
Monthly Payment Amounts
You want to ensure your debt repayment plan isn’t setting you up for failure. It’s important that your monthly payments are manageable with your current income and that you can still provide for yourself and your family. The requirements for monthly payments will be different depending on which debt solution you choose:
- Consumer Proposal: A Licensed Insolvency Trustee cannot legally file a consumer proposal that would result in undue hardship for you. When building your proposal, your LIT will take your income level and family size into account to ensure you can make payments toward your debt and still be able to afford the necessities.
- Credit Counselling: Since credit counselling is a voluntary act, there are no set guidelines on payments or a maximum payment cap. Your payments will typically be higher with this solution because you’ll be paying back 100% of your debt instead of just a portion.
You may be concerned that you’ll bury yourself in legal fees when you try to minimize your debt with a consumer proposal or credit counselling. However, these services are meant to help you, not pile up additional fees. That being said, there is a difference in the fees you’ll have to pay depending on which debt solution you choose.
- Consumer Proposal: All administration costs are included in the payment amount proposed in the agreement. There are no hidden fees. All Licensed Insolvency Trustee fees are set and regulated by the federal government.
- Credit Counselling: When you choose credit counselling, you may be responsible for paying monthly monitoring and consultation fees in addition to the monthly payment that is going toward your debt. All chargeable fees for credit counselling are unregulated.
Contact Us to Understand Your Debt Relief Options
If you are currently struggling to pay off your debt, it’s important to know you don’t have to face this problem alone. J. Bottom & Associates is a Licensed Insolvency Trustee in British Columbia, and we can help you understand what your options are for debt repayment. If you choose to file a consumer proposal, we can help you draft an agreement that works for you and will also attempt to appease your creditors. We serve clients throughout the province, including New Westminster, Port Coquitlam, and North Vancouver. Please reach out to us to discuss your situation.