How A Consumer Proposal Is Like A Consolidation Loan… And How It Is Different

They are both types of debt restructuring, a formal agreement with creditors to materially change the terms of your agreement with them. Debt restructuring can involve reaching out to each of your creditors one-by-one and making an arrangement with each of them, but a more fulsome approach such as a consolidation loan or a Consumer Proposal is usually not only more efficient, but more effective at getting all of your unsecured creditors onside. Here is a quick summary of each option:

A Consumer Proposal is a legally binding agreement, filed with a Licensed Insolvency Trustee (LIT), to repay your creditors a portion of what you owe (based on what you can afford), over a period of up to five years, in exchange for forgiveness of any amount left over. The LIT helps you negotiate the offer, and as long as a majority of your creditors accept the offer, all of your unsecured creditors are bound by the agreement. Payments are made through the LIT, who then pays the creditors on your behalf.

A consolidation loan is a single loan that is used to pay off multiple debts. The borrower takes out a personal loan and uses the money to pay off their existing unsecured debts. They then make a single monthly installment payment on the consolidation loan, which usually has a fixed term and fixed interest rates, until the loan is fully paid off.

Both of these options help people consolidate their debt into a single, more manageable payment plan. By combining multiple debts into one payment, you can simplify your finances and reduce the stress of managing multiple bills.

They also both provide a structured plan for paying off debt, providing a clear plan which helps people to stay on track. In a consumer proposal, the debtor typically agrees to pay a set amount per month over a specific period of time. The LIT collects the payments and ensures that the creditors are paid according to the terms of the agreement. With a consolidation loan, the borrower agrees to make a set monthly payment to the lender for a specific period of time.

There is also an opportunity to reduce the overall amount you will have to pay. In the case of a Consumer Proposal, you can often offer less than the amount you owe, and there is no interest charged. In the case of a consolidation loan, you have to pay the full amount, but you may be able to obtain a lower interest rate than what was being charged on your old debts, and your fees may be reduced.

One of the main differences between these options is that a consumer proposal is a formal insolvency filing. This can have negative impacts: a Consumer Proposal gets reported to credit agencies and can have a big impact on your credit score, and there is some stigma associated with a Consumer Proposal filing. On the other hand, the formal nature of a Consumer Proposal can have major benefits: it is legally binding on all unsecured creditors, even the minority who vote against accepting your offer. And it provides a legal stay of proceedings, which stops your creditors from taking any legal action against you. For example, filing a Consumer Proposal immediately stops any wage garnishment actions.

Another major difference is the extent to which they can reduce the amount you have to pay overall. As previously mentioned, a consolidation loan only has the ability to minimize interest and fees on the amount of the debt you’ve accumulated. On the other hand, a Consumer Proposal can allow you to obtain forgiveness of a significant portion of the debt you’ve accumulated, depending on what you can afford. Often, people cannot afford to pay their debt in full even if they obtain interest relief or more time. In that case, a consolidation loan may not be a viable option.

There are also differences in who can qualify for each of these options. A Consumer Proposal is only available to individuals who are insolvent (meaning they cannot meet their obligations as they become due and/or the value of their assets is less than the amount of their debt). On the other hand, consolidation loans often are not available to people who have a poor credit rating or have low income, and even if a person if offered a consolidation loan, they may not be able to get a low enough interest rate to make a difference if they don’t have a spotless credit history.

Lastly, there can be a difference in the long-term effects of these options. If you’ve managed to keep a good credit rating, a consolidation loan should not negatively impact that credit rating as long as you are able to keep up with the payments. This may allow you to pursue your other financial goals sooner than a Consumer Proposal. On the other hand, debt consolidation is usually a bad idea if you continue to use your old debt accounts. It is not uncommon for a person to pay out all of their credit cards with a consolidation loan, only to rack up more debt on those cards, often eventually doubling the amount of their debt. If you file a Consumer Proposal, you must hand in your credit cards and will be unable to incur more debt on them.

Consumer proposals and consolidation loans are two common debt management options for individuals who are struggling to pay off their debts. Both of these options are designed to help consumers consolidate their debt into a single, more manageable payment plan. While they have some similarities, they also have distinct differences that make them unique. If you aren't sure which is right for you, you should talk to a Licensed Insolvency Trustee for a review of your situation and discussion of your options.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals review their options for dealing with overwhelming debt, including determining whether a Consumer Proposal or a consolidation loan is the right option. If you'd like to explore these options, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.