Because a consumer proposal is a negotiated debt settlement, how much you pay and for how long depend upon the agreement, or proposal, you put to your creditors. There are some conditions however.
The maximum period of time that you can offer to pay a consumer proposal over is five years. However, there is no minimum time frame. If you have the ability to offer to repay a portion of your debt as a one-time lump sum payment, you can do so.
Let’s look at an example of a debtor that has $50,000 in credit card debt. Let’s assume that their creditors agree to accept a consumer proposal of $20,000 as full settlement.
The debtor can offer the $20,000 as:
- 1 payment of $20,000;
- 20 payments of $1000;
- 40 payments of $500;
- 50 payments of $400 and so on.
Your trustee will review your circumstances and budget to help you decide which payment terms are right for you. There’s no right or wrong way to pay off debt in a consumer proposal. It all comes down to what you can afford, as well as your individual situation.
The advantage of offering payments over a shorter period of time might be that the creditors may be more willing to accept the proposal because it means that they will received money sooner rather than later. Not everyone has the ability to offer lump sum proposals or commit to high monthly payments so it’s understandable that this strategy might not suit everyone.
The advantage of offering payments over a longer period of time is that you build in more flexibility to your budget with a lower monthly payment and reduce the risk of the proposal not working as a long-term solution. The golden rule in a consumer proposal is that you cannot ever get three months behind, otherwise it would be automatically annulled, effectively putting you back to square one again. It’s harder to get three months behind if you’ve got a smaller more manageable monthly payment to make.
One important consideration is that if you initially offer a lower payment over a longer period of time, you’re not stuck with this time frame if your financial situation improve. There’s no rule in a proposal preventing you from paying it off faster if you have the ability to do so. If you originally offered a $20,000 proposal as 50 payments of $400, but during the proposal you found you had some extra cash in your budget (from working overtime, bonuses, tax refunds, windfalls), you can make extra payments at any time. As soon as you’ve repaid the total $20,000, you’re finished. Once the creditors agreed to the $20,000 they cannot re-nag on it or change their mind.
Another incentive to try and repay a consumer proposal as fast as possible is to begin rebuilding your credit sooner. The note put on your credit file that shows you’ve filed a consumer proposal stays there for 3 years after you’ve finished your proposal payments. Therefore, the faster you complete the payments, the faster it’s removed from your credit file.
If considering a consumer proposal as a debt solution, talk to a licensed consumer proposal administrator about your repayment options. We’d be happy to find a solution that suits you and your budget.