How Does Consumer Proposal Compare to Debt Consolidation?
Our Financial Experts in New Westminster Give Insight
If you’re struggling with debt and serious about getting out of it, you might be exploring your options and wondering what the advantages of different solutions are. The experienced financial trustees at J. Bottom & Associates Ltd. want to help you explore debt reduction strategies if you live in New Westminster, Port Coquitlam, or North Vancouver, BC. We have extensive experience in creating personalized solutions for all our clients to help them restore freedom and financial confidence.
Below, we are going to go over the biggest differences between consumer proposals and debt consolidation so you can better understand how they provide financial relief. The important differences between these two debt reduction solutions are that a consumer proposal reduces your outstanding debt, eliminates interest payments, and provides relief from collection agencies reaching out to you. You enter into a legal agreement that gives you the ability to repay a portion of your debts that you can afford through a trustee.
Debt consolidation doesn’t reduce your total debt balance, but it decreases high-interest rates and combines several smaller debts into one lump sum. A consumer proposal combines your unsecured debts into a single fixed monthly payment, but it also removes interest charges and reduces your outstanding balance by 75 percent or more. If you’re not sure which option is right for you and your specific situation, speak to the licensed insolvency trustees at J. Bottom & Associates Ltd. today so we can help you make the right decision.
What is a Consumer Proposal?
A consumer proposal is a legally binding agreement that’s allowed under the Bankruptcy and Insolvency Act to help people find relief from their personal debts. Known for affordable fixed monthly payments and flexibility, consumer proposals are an increasingly popular choice for Canadians seeking debt management solutions. Although there are advantages and disadvantages to each of the solutions we outline, consumer proposals can have many benefits over debt consolidation. It is a great way to get creditors to stop calling while maintaining control of your finances and avoiding bankruptcy.
While filing for a consumer proposal, individuals pay a fixed amount of the total debt owed in a specified number of months, with a maximum repayment period of five years. The creditors will then decide if they want to either accept or reject the proposal. A consumer proposal can help you pay off almost all unsecured debts, including those from:
- Credit cards
- Certain types of student loans
- Payday loans
- Bank loans
Do I Qualify for a Consumer Proposal?
If you don’t have the income to support paying your entire debt balance back plus interest, a consumer proposal will most likely make more sense than debt consolidation for your situation. A consumer proposal might be a good choice for you if:
- You have a stable income but find yourself unable to pay all your debts in a reasonable time
- You are insolvent or have too low of a credit rating that debt consolidation isn’t possible
- You need to reduce your debt
- You want protection from wage garnishments, lawsuits, and other means of debt collection
It can be difficult to know whether you would qualify for a consumer proposal or not. Our team will help you determine whether you qualify for a consumer proposal based on the Bankruptcy and Insolvency Act, as well as help you decide which choice would be the best for you. As a primary guide, a consumer proposal could be the right option for you if you meet the following criteria:
- Your debts total more than $5,000 but do not exceed $250,000 (excluding your mortgage)
- You are unable to repay all the debt in full
- You are unable to qualify for debt consolidation because your debts are too high
- You can afford to make a payment each month, even if it is a small one
- You want to avoid filing for bankruptcy
What Are the Benefits of a Consumer Proposal?
A consumer proposal is beneficial when you have reliable income to continue making fixed, reduced payments and want to avoid filing for bankruptcy. Filing for bankruptcy is usually a last resort used in the most difficult financial situations. If you’re feeling overwhelmed by your debts but can still pay a monthly payment, a consumer proposal is most likely the best option for you. This debt relief solution is a good choice in Canada for several reasons, including:
- Retain Your Assets: If you file for bankruptcy, you’ll have to surrender most of your assets. Consumer proposals don’t require this. You’ll be able to control all your assets, including your home and car.
- Fixed Payments: While bankruptcy requires you to make payments based on your income, a consumer proposal offers an agreed fixed monthly payment that will never change throughout the terms of the agreement. This is beneficial because the more you earn, the more you will be expected to pay back.
- Lower Repayment Total: A consumer proposal requires you to pay a smaller percentage of the total amount of debt you owe. It’s not uncommon for a consumer’s debts to be reduced by as much as 75 percent of the original amount.
- Protection from Creditors: Are your creditors constantly calling you and demanding payment? As part of a consumer proposal, creditors are legally required to stop contacting you regarding repayment. This means the constant calling will finally come to an end, as will wage garnishments.
While there are several advantages of filing a consumer proposal, there are some disadvantages that make it a poor choice for some debtors. These are some things to consider and discuss with your financial trustee at J. Bottom & Associates Ltd.. Some of the disadvantages of filing a consumer proposal include:
- It will also affect your credit rating
- Future borrowing rates will be higher because you’re considered high-risk
- Student loans that are less than seven years old won’t be included
What Are My Options for Consolidating My Debt?
If you’re looking for a way to consolidate your debt, as well as your monthly payments, debt consolidation might be right for you. It’s often one of the first things debtors consider when they’re in an unfavorable financial situation. Debt consolidation is a simple way to combine several loans into one single monthly payment, saving you time, frustration, and money. If you consolidate your debts before they grow too large, lenders will be willing to refinance your high interest loans into lower-interest consolidation loans.
However, debt consolidation isn’t available or an appropriate solution for every debtor. If your credit score is too low, you won’t qualify for refinancing. There are important advantages to debt consolidation that make many debtors choose this option. The main benefits of pursuing debt consolidation include:
- You can secure consolidation loans with assets like real estate
- Your credit rating won’t be damaged
- You’ll reduce the interest payments on your existing debt
- You can better manage one payment vs. several
It’s important to understand your own specific situation when pursuing a consolidation loan. If you enter into a debt consolidation agreement that isn’t affordable in the long run, you’ll only delay creditor collection efforts to a later time.
Cost of Consumer Proposal vs. Debt Consolidation
If you are able to secure a consolidation loan with an interest rate that is less than what you are paying on your current debts with reasonable repayment terms, consolidating your debt will often save you more money overall. You may also save money because your monthly payments are often lower. It’s also much more manageable to organize one monthly payment rather than several across different types of debt.
Break the Cycle of Debt With J. Bottom & Associates Ltd.
The financial trustees at J. Bottom & Associates Ltd. are here to help you break the vicious cycle of debt. When you’re in a difficult financial situation, it’s important to let a team of experts guide you to find the best solution for you. We can help you explore all the options to better manage your debt in the most stress-free way possible. Whether you’re in over your head in debt from student loans, car payments, or credit cards, there are options available in New Westminster, North Vancouver, and Port Coquitlam, BC.
Our experienced trustees are here to help answer any questions you might have, and there’s no such thing as a silly question to us. Our proven strategies have helped many of our clients get out of debt and gain back their financial freedom. Contact us today to get started with your free consultation! We look forward to hearing from you.