Learn why a Consumer Proposal is typically your best option over credit counselling.
Learn why a Consumer Proposal is typically your best option over credit counselling.
When faced with both options, a lot of people are surprised to learn that a Consumer Proposal can be a better option for debt consolidation than traditional credit counselling and many don’t even realize that there’s a difference between the two.
The first thing that is so important to note is that while you’ll come across a number of different professionals when you Google “debt service providers”, such as debt settlement agents or not-for-profit credit counsellors, only a Licensed Insolvency Trustee (LIT) is legally supported by the federal and provincial governments.
During your search, you’ll come across many advertisements where these other debt service providers are offering you something that sounds very similar to a Consumer Proposal, but they are not the same thing at all. They are missing most of the main benefits that a Consumer Proposal and working with a LIT can offer you.
There are some significant differences between a consumer proposal which is filed by a Licensed Insolvency Trustee, and a debt management plan, which is what a credit counsellor or debt consultant can offer you. We can’t stress this point enough—a consumer proposal is a legally binding agreement that provides you protections from your creditors, while a debt management plan is completely voluntary. Your creditors don’t have participate and there is no protection against any legal action that has already been taken or that could be brought against you in the future.
So, let’s talk about the key differences between using a Consumer Proposal filed by a Licensed Insolvency Trustee, and using a non-profit credit counselling service.
Consumer Proposal
Credit Counselling
How much debt will I pack back?
Your total amount of debt is reduced
In most cases, the total debt is reduced by 70-80%
Typically, you’ll be required to pay back 100% of your debts
What happens to my interest payments?
Interest automatically stops on all debts once you’ve filed a consumer proposal, including CRA debts, student loans and ICBC debts
It’s possible to negotiate with some creditors to freeze interest on the debts, but many will not agree to this
Tax debts and student loans will continue to charge interest
Do all of my creditors have to agree to the plan?
If the majority of creditors vote to approve your consumer proposal, all creditors must abide by it
Any creditor can decide not to participate in a debt management plan, meaning you would have to pay full interest on the debt owed to them
How is my monthly payments determined?
Your monthly income and expenses are taken into consideration as well as your family size
A LIT cannot and would never advise you to file a Consumer Proposal that would cause you and your family financial hardship
Payments are typically lower because you’re not paying back the full amount owed
There are no set maximum payment amounts and no guidelines to follow when determining payments
Typically, payments are higher because 100% of the debt is being paid back
What are the fees associated with both?
All administration costs are included in the monthly payment that you and your LIT offer to your creditors
No hidden fees
Trustee fees are set and closely regulated by the federal government
It depends on the program you select, but generally there are monthly monitoring and consultation fees in additional to your monthly debt payment
Fees are not regulated by anyone or any governing body
How long will it take me to pay off?
Your consumer proposal must be completed within 5 years
24 – 48-month proposals are common
You can make additional lump sum payments at any time throughout the proposal with no penalties
Debt is typically paid off over 5 years
It’s dependent on the size of debt and the type of repayment plan
What happens with wage garnishments and other legal action?
Collection calls, wage garnishments and threats of legal action are legally required to immediately stop when a consumer proposal is filed
Only a Licensed Insolvency Trustee can cease a wage garnishment, asset seizure and/or other collection action by your creditors
Creditors that decide not to participate can continue to call you and seek legal action
Creditors who agree with the plan will often stop contacting you while the plan is in good standing, but there is no legal authority to enforce this
Can I include my CRA debt?
A consumer proposal (or bankruptcy) is the ONLY method for reducing Canada Revenue Agency (CRA) debt in Canada
A debt settlement plan/credit counsellor has no authority or means to settle tax debt for less than 100% of the owed amount
What are the professional qualifications of a LIT v. a Credit Counsellor?
Licensed Insolvency Trustees are licensed by the federal government
LITs are regulated by the Office of the Superintendent of Bankruptcy
A strict code of ethics and rules of professional conduct is upheld and all LITs must comply
There are no set qualifications that are required to present yourself as a Credit Counsellor
There is no governing body over the profession
Ultimately, it’s up to you to do your research and decide which debt relief options is best for you. Whichever option you choose, make sure you complete the process successfully. Debt relief of any kind can be very helpful, allowing for a fresh start and providing a sense of accomplishment when your debts have finally been paid off.
