On Bended Knee: Why a Consumer “Proposal” Might Not Be The Perfect Match
Consumer proposal or CP. You have probably heard adds on the radio before (usually set to melancholy music) promising you ‘debt no more’ if you call this number.
Throughout my career I have been genuinely surprised by the number of people who have participated in a consumer proposal who didn’t really seem understand what they’d signed up for. So, what is a CP? I like to explain it to people in the simplest of terms as a “baby bankruptcy”. While it is not officially a bankruptcy, it is a legally binding agreement handled through a trustee who negotiates with your creditors and consolidates your balances into one payment. It is essentially a reduced repayment agreement with your creditor’s verses full fledged bankruptcy (in which you surrender your assets to eliminate your debts). But what many people don’t understand is that a CP is a specific credit status that reports on the credit bureau and one that can prevent you from obtaining further borrowings like a mortgage.
I’ve had people come to me saying they did a debt consolidation loan when in fact what they have done is a Consumer Proposal. A consolidation loan offered through a financial institution is basically a personal loan where the bank issues a lump sum amount at a set interest rate over a set period to pay out your other debts. With a debt consolidation loan, you can generally keep one (or some) of your credit accounts open (like your visa card) and nothing specifically reports to the credit bureau other than the new loan that appears. In a consumer proposal your creditors agree to receive a reduced amount from you, all your open credit accounts are closed, and the consumer proposal arrangement is reported to the credit bureau. The difference between the two is night and day.
So, what are the pros of a consumer proposal? This legally binding agreement gives you protection from debt collectors and stops wage garnishments, it can lower your monthly payments, and interest on your debt stops accumulating the day you file. In addition, you can keep your assets such as your home and vehicle. Also, a CP is on file with the credit bureau for only 3 years verses bankruptcy which is 6 years.
Consumer proposal and bankruptcy law exists for a reason and there are very real circumstances where it makes sense for borrowers. Perhaps a life event has had an enduring and long-term effect on your ability to earn income, perhaps it is an illness in the family or something unforeseen that caused your debts to spiral out of control. Maybe you are an entrepreneur whose business didn’t survive the impacts of a global pandemic. There are a lot of reasons that sitting down with a trustee is the right solution.
But there are just as many reasons that it might not be the right solution. For example, I met with a young man who was mid Consumer Proposal repayment and the reason he’d taken it was that he’d had a job loss that caused him to run up about $15,000 in debt on a high interest credit card. That said, he was a trades professional who was back to work in 6 months and once he was working, he had more than sufficient income to pay down the $15k. So why the CP? Basically, he heard the radio ad and called the number in a time of uncertainty when he didn’t know what else to do. The reality is if he had called the credit card company directly to explain his situation, they may have been able to work out a short-term solution. Or if he had someone in his life willing to co-sign, he could have potentially approached his bank for a lower interest consolidation loan to ride it out. Honestly, even if he had tried his best to pay the minimum payments over 5 months and missed a few here and there he would likely still be ahead in the credit game. As a broker I would have been able to easily explain a few month’s delinquency as an isolated job loss situation and as long as everything was up to date I could’ve set him up with a mortgage pre approval, but with a consumer proposal on the books there was nothing I could do - my hands were tied until 6-12 months after it had been paid in full.
Before considering a CP, ensure you have examined and exercised other options:
-switching your high interest credit card to a low rate card (subject to qualification)
-speaking directly to your creditors about your situation and inquiring about reduced payment workout options
-approaching your financial institution for a consolidation loan (if cash flow is a problem consider a co-borrower to support your application)
-speak to family about the possibility of a private loan to get you back on your feet
-consider connecting with not-for-profit credit counselling services (such as the Credit Counselling Society)
The most important thing to keep in mind about a consumer proposal, regardless of your reasons for considering one, is that the trustee preparing it for you is paid for their service and they are not part of a charitable organization. True, trustees in Bankruptcy are licensed by the Government of Canada, but they are not Government employees. Trustees collect fees FROM YOU for the work they do and not all trustees are created equally – so ensure that the company you’re dealing with isn’t using any persuasive or predatory tactics to get you on board.
Questions? Let’s talk.