Should I Pay Off My Consumer Proposal Early?

Once the payment terms have been set, you can always pay it faster than the proposal specifies. There are a few reasons why people might decide to pay off their proposal early:

• To rebuild credit faster: Once your proposal is fully paid off, it’s marked as “completed” on your credit report, which is a step toward improving your score. Even if your score hasn’t yet increased substantially, the fact that potential lenders can see you completed a Consumer Proposal may make them more willing to lend to you or offer you better interest rates.
• To reduce stress: Usually, unmanageable debt accumulates due to one or more difficult life events, and following those events people often struggle to pay the debt for a long period before they come to accept that they can’t pay it without the help of a Consumer Proposal. While the act of filing a Consumer Proposal often brings people an immediate sense of relief, they know they still have to get through the proposal before they can fully resolve their situation. Being done with your proposal may feel like you’re finally closing that chapter of your life.
• To eliminate monthly payments: If your financial situation has improved (new job, raise, inheritance), you may want to clear up the Consumer Proposal to free up room in your monthly budget for other goals.

There are, however, a few reasons why people might decide not to pay off their proposal early, even if they have the financial ability to do so:

• To save for other goals: If your financial situation has improved, rather than use the extra funds available to pay off the proposal early, it may make more sense for you to pursue other financial goals first. In particular, if you don’t already have an emergency fund it may be more prudent to have that in place before you pay off the proposal, so you don’t end up back in debt if something unexpected happens.
• To take advantage of the interest-free benefit: In most cases, no interest accrues while you are in a Consumer Proposal, so it is like restructuring to an interest-free loan. That means that every dollar you pay toward the Consumer Proposal directly reduces your debt load, which isn’t common in other debt re-payment scenarios. Paying the proposal off early therefore does not reduce the overall amount you have to pay. If you have extra funds, you could choose to invest them in something that earns interest, like a GIC, leaving you with more money overall.
• It May Not Be Worth The Credit Score Boost: While paying off your proposal early can help start the clock on credit repair a sooner, the improvement isn’t necessarily instant or dramatic. A completed Consumer Proposal still stays on your credit report (showing as a completed proposal) for up to three years after completion. Meanwhile, you may not be ready to access new credit anyway. You may need time to get used to living on a tighter budget without access to loans, or to save a down payment for a house or car. When you step back and look at the big picture, the earlier credit score boost may not be a major advantage, depending on your situation.

Using a Loan to Pre-Pay Your Consumer Proposal

The above analysis assumes you are considering pre-paying your Consumer Proposal using extra funds available due to an improvement in your financial situation. It is also possible to use a new loan to pay your Consumer Proposal, but that brings forth a new host of considerations. Please read our blog on this particular topic before considering this route.

Key Questions to Ask Yourself Before You Pre-Pay Your Consumer Proposal

Before you decide to use your extra funds to pay your Consumer Proposal off early, consider:

• How am I going to fund the early proposal payments? If you are considering using a loan, proceed with caution.
• Do I have a sufficient emergency fund in place to withstand an unexpected financial event?
• What are my financial goals? How would pre-paying my Consumer Proposal help me achieve these goals?
• Am truly I ready to access credit again?
• What is my plan for the extra funds in my budget as a result of no longer having to make Consumer Proposal payments?
• If I were to invest the funds in a safe investment instead, how much would I earn?
• Have I talked to my LIT about the decision?

That last point is a big one. If you are in a Consumer Proposal, you will already be working with an LIT. Your LIT is a great resource to help you make informed choices, not just at the start of your proposal but throughout the process. They can help you decide whether it makes sense to pre-pay your proposal.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the Alberta region. We regularly help individuals consider their options and , where appropriate, file a Consumer Proposal. If you'd like to explore your 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.