Are Consumer Proposals Good or Bad? Disadvantages of Consumer Proposals

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A consumer proposal is the best debt relief option for Canadian residents. But, filing a consumer proposal in Canada has its consequences. But is a consumer proposal good or bad? Under what occasions does a consumer proposal work as a way out of debt? When do the benefits overpower the downsides?

A consumer proposal affects your credit score.

When you file a consumer proposal, it affects your credit score for a short period. It will show an R7 rating and remains on your credit report for three to six years. 

A consumer proposal cancels any lines of credit.

Since you are reimbursing your debts via consumer proposal, you will not have access to those credit accounts. Creditors will close your accounts, and you must quit using your credit card and line of credit. Your LIT will also ask you to give back or cut up your cards. 

A consumer proposal does not involve secured debts.

A consumer proposal has unsecured debts. Secured loans, like a vehicle loan or mortgage, cannot be included in your consumer proposal. If you can afford the monthly payments on these assets, you can continue to pay the secured lender and keep those assets. But, if you cannot afford your car or mortgage payment, you can surrender these assets to the secured creditor, and they can file a claim in your proposal for any shortfall after selling the asset to pay back the loan.

Your creditors can reject your proposal.

Creditors have 45 days to vote on your proposal, and the significance of their vote depends on the amount you owe. A consumer proposal can be rejected if more than 25% of your creditors request a meeting and more than half of the creditors’ claims vote against it at the meeting.

You cannot file a consumer proposal if you owe more than $250,000.

Consumer proposals have a debt limit. You can file a consumer proposal only if you owe less than $250,000 in debts, which does not include the mortgage on your primary residence. If you owe more than the consumer proposal debt limit, you have to file a Division I proposal. 

Large creditors demand higher payment.

As the vote for creditors depends on their claims’ dollar value, creditors with huge balances demand a higher pay-out percentage. To get your consumer proposal accepted, you must offer more to one of these creditors if you owe a significant amount. 

Certain unsecured debts are not qualified for a consumer proposal.

Consumer proposals do not discharge all unsecured debts. A consumer proposal cannot discharge certain debts, like debts due to fraud, child sponsorship or maintenance payments, and court fines. You cannot include student loans if you have been out of school for seven years.

If you miss three months’ payments, your consumer proposal seems annulled.

A consumer proposal is a legal contract between you and your creditors where you consent to a settlement amount with a fixed payment schedule. Your consumer proposal is deemed annulled if you fall behind three monthly payments. When your proposal is rejected, your debts return, and you lose the benefit of the stay of proceedings provided in a consumer proposal that stops collection activity. 

So, is a consumer proposal suitable for you? Talk with a Licensed Insolvency Trustee about a consumer proposal if you are struggling with debt. Remember that only a Licensed Insolvency Trustee can legally file a consumer proposal for you. Our Dana MacRae Licensed Insolvency Trustee professionals are glad to answer any further questions about consumer proposals and help you determine the best debt solution for you.