Dealing with financial challenges is never simple or easy, but one effective solution to excessive amounts of debt may be through consumer proposals. By working with an authorized expert in insolvency law, known as a Licensed Insolvency Trustee (LIT), to put together this official deal, you can settle some or all of what you owe in installments over an agreed-upon time frame or you can settle them all together in one go.
This is a serious step in managing your debts, so it’s important to know all the pros and cons of consumer proposal agreements. In this article, we’ll closely look at the main aspects of these deals, lending you a helping hand to make the right decision through tough times.
Consumer Proposal Pros
Let’s start with the positive sides of a consumer proposal.
Debt Relief
In 2023, global debt reached a record $307 trillion. This includes debt from governments, industries, businesses, and households. Debt relief is a key advantage of a consumer proposal. When you create an agreement that works for you and your creditors, usually it lessens the total amount that you owe. The reduction can sometimes be substantial, which makes your debt easier to handle.
The proposal provides a planned and organized method of returning the money, reducing anxiety about finances, and assisting you in taking back command over your financial situation.
Legal Protection from Creditors
After a consumer proposal is filed, it offers instant legal safeguard from creditors. This signifies that the collection of phone calls, salary seizures, and cases come to a stop.
Creditors must legally cease all activities related to collection, giving you peace of mind and allowing you to concentrate on paying back your debt without any disturbances or fear of court actions against you.
Avoidance of Bankruptcy
The majority of people prefer a consumer proposal instead of going bankrupt. In fact, bankruptcy can have serious effects in the long run like greatly reducing your credit score. But if you choose to make a consumer proposal, this lets you deal with your debt in an organized way without these kinds of outcomes.
Retention of Assets
Unlike bankruptcy, where you may be required to surrender certain assets, a consumer proposal typically allows you to retain your possessions. This means you can keep your home, car, and other valuable assets, provided you continue to make the agreed-upon payments. Retaining your assets can be a significant advantage, helping you maintain stability and continuity in your life.
Improved Credit Score Over Time
Once you get into serious debt, it’s inevitable to mess up your credit score. But, with a consumer proposal, it is usually not as serious as the impact of declaring bankruptcy. As time goes by and you keep making regular payments to meet the conditions of this proposal, your credit score might start getting better again.
When someone finishes a consumer proposal successfully, it shows they are responsible with money and dedicated to paying back what they owe. This responsibility can have a positive impact on their creditworthiness.
Consumer Proposal Cons
Like all legal agreements, consumer proposals also have some disadvantages. Yet, when compared to other financial alternatives, they usually sway toward the more manageable end of the spectrum, falling somewhere between neutral and negative in terms of their impact.
Long-Term Commitment
Choosing a consumer proposal is like saying yes to a plan for paying back your debts over the long run, usually lasting up to five years. This requires discipline and consistent financial management to guarantee all payments happen as they should be made—on specific dates or periods of time.
Not following the payment timetable could lead to the cancellation of the proposal, leaving you back at square one with your creditors and potentially facing bankruptcy.
Limited Access to New Credit
During the term of your consumer proposal, it will not be easy to get new credit. A lot of lenders are cautious about giving credit to people who are paying off a consumer proposal. This limitation can make it hard for you to obtain funding for big expenses like buying a car or house. Instead, you might have no other option but to use cash for financing things.
Fees and Costs
A consumer proposal involves fees that are paid to the LIT overseeing the process. These fees are typically included in your monthly payments but can still add to the overall cost of repaying your debt. It’s important to fully understand these costs and factor them into your budget when considering a consumer proposal.
Not Suitable for All Types of Debt
Not all types of debt can be handled through consumer proposals. Secured debts, like the ones tied to your mortgage or car loan, cannot be included in the proposal. Also, some kinds of unsecured debts such as student loans and child support arrears might not get covered either. Checking your financial condition with a LIT is necessary to establish if a consumer proposal can work for you.
Bottom Line
Opting for a consumer proposal requires careful thought and assessment of both its advantages and disadvantages. This debt relief option offers significant advantages, including debt reduction, legal protection from creditors, and the ability to retain assets. However, it also comes with drawbacks, such as a negative impact on your credit score, a long-term commitment, and limited access to new credit. By thoroughly assessing these key points and consulting with a Licensed Insolvency Trustee, you can make an informed decision that best suits your financial circumstances and goals.
