A consumer proposal is often contrasted with a program provided by credit counselling agencies known as a debt management plan. While both alternatives can help you reduce your debts sooner, there are some very significant differences. We’ll look at how each program affects you.
How Much Do You Repay?
In a debt management plan you pay your debts in full, but generally at zero or reduced interest.
With a consumer proposal you will generally pay less than the full amount owing often between 25% and 50% of the amounts owing. In most circumstances if you are unable to repay your debts, you payments will be less in a consumer proposal. This is because while both options allow you to make payments for up to 5 years, only a consumer proposal allows you to repay less than the full principal outstanding.
Who Do You See?
A consumer proposal is prepared by a consumer proposal administrator licensed by the federal government. A debt management plan is prepared by a credit counsellor, who has no government license, but they are members of a professional organization and are subject to annual accreditation reviews.
To be eligible to file a consumer proposal your total debts must be between $1,000 and $250,000 per person, not including the mortgage on your principal residence. There are no limits in a debt management plan.
What Is Included?
You do not lose your assets in either process. If you receive a tax refund you may keep it in both procedures.
Standard bank debts and credit cards are included in both processes, but only a consumer proposal will include government debts, payday loans and other debts not eligible under a debt management plan. If you have outstanding debts with Canada Revenue Agency a proposal will be your best option. Certain other creditors, including payday loan companies, will not agree to a debt management plan but are automatically included in a consumer proposal.
A consumer proposal settles all unsecured debts. In a debt management plan you can choose which creditors to include and which to exclude.
In a consumer proposal if the majority of your creditors agree, all creditors are bound by the agreement. In a debt management plan any creditor can opt out and pursue you individually.
What Can Your Creditors Do?
A consumer proposal offers full legal protection. When you file, your creditors are immediately subject to a stay of proceedings, preventing them for taking legal action against you, or continuing legal action. If your bank or credit card company is garnisheeing your wages, the garnishment is suspended when you file. The creditors have 45 days to approve your filing, and if they do, the garnishment is permanently stopped, provided you make your payments as agreed.
A debt management plan does not offer any legal protection. Creditors may agree to the plan, but there is nothing legally preventing them from changing their mind part way through the process.
What Happens To Your Credit Rating?
In both procedures your credit rating becomes an R7. A consumer proposal remains on your credit report for 3 years after your final payment; a debt management plan is purged two years after your final payment.
There is no monthly reporting required in either process.
Choosing The Right Option
Both processes can give you peace of mind, knowing that your debts are being dealt with, but there are advantages and disadvantages to both procedures. Generally speaking a debt management plan makes sense if you have a small amount of credit card debt or a bank loan that you can repay if you have more time and can stop new interest from being charged. A consumer proposal works better if your debts are larger or complicated (you have tax debts or several debts).
As Consumer Proposal Administrators we can help you understand the differences so you can make an informed decision. Contact a Consumer Proposal Administrator today to ask which option might be best for you.