09 Feb What are the Pros and Cons of a Consumer Proposal?
In reviewing the Pros and Cons of a Consumer Proposal, you will note that there are many more Pros than Cons, however, all should be considered before a Debtor decides whether a Consumer Proposal (or “Proposal”) is the right option.
When Is a Consumer Proposal Relevant?
It is important to understand when a Proposal is relevant and what some of the other options are.
To begin, if someone is in financial difficulty, and they already have a bruised credit rating, they probably are not able to get a consolidation loan from a lender, or they can’t afford one anyway.
Filing a Consumer Proposal will allow you to keep your assets, compromise your unsecured debt for a lower amount, based on fixed monthly payments without interest.
Advantages of a Consumer Proposal
To illustrate its’ advantages, consider the following example:
A Debtor has $30,000.00 in unsecured debt- credit cards, lines of credit, etc.
- Consumer Proposal: Monthly $300/month for 60 months = $18,000
- Credit Counselling: Monthly $550/month for 55 months = $30,250
- Consolidation loan: Monthly $625/month for 60 months = $37,500
Note that credit counseling has 55 months max. and est. of $550 cost/m
Based on the above, it is easy to see the affordability difference in the Consumer Proposal for the Debtor.
Filing for Proposals Allow for Additional Payments to be Made
There are many other advantages of a Consumer Proposal as well. One advantage is the opportunity to make extra payments at any time during the Proposal, which would have the effect of shortening the Proposal for the Debtor. Examples include: tax refunds, work bonus, or even third-party money- e.g. from parents, or even an increase in salary or wages. Even an inheritance could occur which would allow for extra payments, if not pay the Proposal off completely. The important principle is that all of these sources of extra funds are allowed in a Proposal without any negative impact on the Debtor.
Most Proposals are funded through monthly payments- the Debtor makes one monthly payment to the Trustee or LIT, and eventually when funds accumulate the Trustee disperses these funds to the creditors.
However, in a Bankruptcy, these extra funds could result in not only extra money to be paid in, they may even extend how long the Debtor is Bankrupt.
Additional Perks of Filing a Consumer Proposal
There are many other important benefits to filing a Proposal, including:
- There is an automatic Stay of legal proceedings;
- It includes government debt, including income tax.
Only a Proposal or Bankruptcy can provide these benefits. In fact, we have seen many examples of Debtors being involved with an unprofessional financial consultant either on-line, or over the phone, and after paying them money for months, the creditors continuing to harass the Debtor.
Disadvantages of Filing for a Consumer Proposal
At this point, you may be asking: are there any disadvantages to a Consumer Proposal. There are, however, the good news is the disadvantages are few.
1 – Must Have Steady Income
Firstly, you must have steady income or a realizable asset or fund to pay for the Consumer Proposal- in other words, it has to be affordable. Otherwise Bankruptcy may be the best option.
2 – A Mortgage Renewal May Be Required
Secondly, you may have to renew your mortgage shortly, and can’t afford the bruise to your credit rating due to the filing of a Proposal. We usually recommend you renew the mortgage before you do a Proposal, however, there are many lenders that seem to be automatically renewing regardless, as long as you have made all your mortgage payments on time. We also suggest that these Debtors talk to a knowledgeable mortgage broker to be sure about this matter.
3 – A Consumer Proposal Can Be Reflected in Your Credit Rating
Thirdly, a Consumer Proposal will bruise your credit. This is especially relevant for Debtors who may be able to afford other options. However, this is most relevant for those who can pay their debts in full, but are having trouble organizing their many payments. However, credit counselling also bruises your credit rating as well.
In summary, for those who can afford a Consumer Proposal, but can’t afford full debt repayment, then a Proposal is a good option. This especially important if you have assets, such as equity on your home that you want to keep, and if you have creditors harassing you for payment or taking legal action to collect. It may not be the best option in certain situations, however, its’ unique advantages are certainly a good fit for many people in credit difficulty.
For further information regarding filing a Consumer Proposal, contact McLennan & Company Ltd., the debt consolidation experts in London, Ontario.