The Top 5 Pros and Cons of a Consumer Proposal

Pros:

1. Reduction of debt

For most people, the biggest advantage of a Consumer Proposal is that it often allows you to obtain agreement from your creditors to accept less than the amount owing. In other words, a portion of your debt can be forgiven through this process.

2. Protection from creditors / interest

When you file a Consumer Proposal, you get an automatic stay of proceedings, which means that your creditors are no longer allowed to pursue collection actions against you. Any interest they were charging also ceases to accrue. This provides the breathing room to allow your creditors to consider your proposal and negotiate if necessary. If the majority of your creditors accept the proposal (which usually avoids any new interest being charged), all of your unsecured creditors are forced to adhere to the new contractual agreement created by the proposal.

3. Support from a Licensed Insolvency Trustee

A Consumer Proposal must legally be filed with a Licensed Insolvency Trustee, a highly trained and carefully regulated professional. They help you prepare the proposal and act as a go-between with your creditors. You get the benefit of their advice and support throughout the process, and they handle the paperwork and the distribution of your payments to the creditors. They also provide financial counselling, offering a great opportunity to level up your knowledge about budgeting and managing credit, which will help you avoid future financial difficulties

4. You can keep all of your assets

Unlike bankruptcy, there is no requirement to turn any assets over to the Trustee. The proposal must factor in the value of assets that would otherwise be available to the creditors, but that value can be paid over a period of up to five years, so most people can afford to keep all of their assets while completing a Consumer Proposal.

5. Opportunity for a fresh start

A Consumer Proposal is an opportunity to start fresh with your creditors and negotiate a new arrangement that is both feasible for you and acceptable to them. This allows you a real chance to pay off your debt and focus on improving your finances going forward. And compared to bankruptcy, many people view this as a less drastic and more respectable solution for dealing with serious financial difficulties.

Cons:

1. Damage to credit score

A Consumer Proposal can have a major impact on your credit score. It’ll stay on your credit report during the period you are paying the proposal, plus an additional one to three years. This can make it challenging to obtain credit. However, you can begin taking steps to rebuild your credit score immediately after you start the proposal. In many cases, people end up with a better credit score after the process has ended than they had going into it.

2. Risk of failure

It’s important that you only offer your creditors a settlement you are confident you can afford. If you stretch yourself too thin and are unable to keep up with the proposal payments, your proposal may end up cancelled, which would allow your creditors to pursue you for full payment again. In some cases, creditors are not willing to accept a payment which is feasible for you, in which case other options will need to be explored.

3. Public record

A Consumer Proposal is a matter of public record, which means that anyone can access certain information about it. This can be embarrassing and uncomfortable. That said, it’s not publicly advertised, so someone would likely have to go looking for the information (and pay applicable search fees) to get it. And if people do find out, there tends to be less stigma attached to a Consumer Proposal filing as opposed to a bankruptcy.

4. More expensive than bankruptcy

Creditors typically will not accept a proposal unless if offers to pay them more than what they would get if you filed a bankruptcy. The Licensed Insolvency Trustee will calculate an estimate of what bankruptcy would look like for you and report to the creditors on how your proposal compares to that scenario, and will usually only recommend that creditors accept the proposal if it offers an increase compared to bankruptcy. That said, your proposal can spread the payments out over a period of up to five years (whereas often bankruptcy lasts between 9 months and 21 months in most cases), so, while you will pay more overall, you may have lower monthly payments in a Consumer Proposal.

5. Emotional toll

It can be scary and embarrassing to ask your creditors for a new, more forgiving, agreement. Just getting to the point of calling a Licensed Insolvency Trustee usually involves a lot of guilt, stress, and shame. However, most people that file a Consumer Proposal are successful in obtaining a new agreement with their creditors and getting out from under their debt. And for many, the feeling of relief starts the moment they take that step.

A Consumer Proposal can be a win-win for you and your creditors. But it’s important that you understand the pros and cons of the process so that you can make an informed decision about whether this option is right for you.

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 is the right option. If you'd like to explore this 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.