The Advantages And Disadvantages Of A Consumer Proposal

Advantages:

1. Debt Reduction: Depending on your financial position, creditors will often agree to settle for a fraction of the original debt.
2. Debt Consolidation: Typically, a Consumer Proposal allows you to deal with all of your unsecured debt in a single monthly payment. As long as a majority of your creditors vote in favour, those who voted against it are bound by it.
3. Legal Protection: Immediately upon filing a Consumer Proposal, you get legal protection from your creditors, meaning they can't take legal action or garnish your wages.
4. Interest stops: Creditors cannot charge any more interest when you file a Consumer Proposal, unless the Proposal calls for interest (usually, it doesn’t).
5. Predictability: Both you and your creditors will have a clear understanding of how much you will pay, the time period, and when the process will end.
6. Assistance from a Licensed Insolvency Trustee: You don’t have to file the documents, negotiate with the creditors, or manage the distributions to creditors. The LIT handles all of this, and the LIT’s fee comes out of the pot of money you create for the creditors, so you don’t have to pay them separately.

Disadvantages:

1. Credit Score Impact: A Consumer Proposal will negatively affect your credit score. It will be on your credit report for several years and, depending on your situation, this may make it more difficult to access credit during that time.
2. Not Always Feasible: Not everyone can afford payments that are acceptable to their creditors, and you must be able to provide evidence that you can afford to keep up with the proposed payments. If your income fluctuates substantially, it may be hard to commit to a regular payment plan.
3. Potential for Rejection: Creditors have the power to accept or reject a Consumer Proposal (a majority of your creditors must vote in favour). If the proposal is rejected, you may need to explore other debt relief options, such as bankruptcy.
4. Potential for Default: Getting your creditors to accept a new payment plan is only the first step. You will have to comply with the terms of the plan, which can last up to five years. If something changes and you are unable to keep up with the payments, the proposal will be annulled, and you may have to explore other options, such as bankruptcy.

The importance of each of these advantages and disadvantages is highly dependent on your personal situation. Therefore, it's essential to consult with an LIT (the only party who can legally provide a Consumer Proposal) before deciding whether to pursue a Consumer Proposal.

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, and where appropriate we support them through the filing and completion of a Consumer Proposal. If you'd like some advice about a Consumer Proposal or other 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.