Consumer Proposal Consequences

Understanding the Consequences of a Consumer Proposal

When it comes to dealing with unmanageable debts, individuals often consider different debt relief options, one of which is a consumer proposal. However, like any other financial decision, it’s important to understand the consumer proposal consequences before choosing this route. This article delves into the disadvantages of consumer proposals and provides a comprehensive understanding of how they impact your financial standing.

1. Impact on Your Credit Rating

One of the most significant consumer proposal consequences is the effect it has on your credit score. By initiating a consumer proposal, you are essentially admitting to your creditors that you are unable to repay your debts in full. This acknowledgment is noted on your credit report and can temporarily harm your credit score.

A consumer proposal stays on your credit report for a maximum of six years. However, it’s worth noting that a proposal also helps you eliminate debt, and high debt balances can impact your credit rating negatively. Therefore, getting out of severe debt is a crucial step towards rebuilding your credit.

2. Credit Cards and Lines of Credit

When you settle your debts through a consumer proposal, you will no longer have access to your existing credit accounts. As such, your creditors will close your accounts, and you are required to stop using your credit cards and lines of credit.

Once a consumer proposal is filed, it is possible to acquire a new credit card within a year. Depending on your credit rating before filing, you may qualify for an unsecured card or may need to apply for a secured credit card.

3. Secured Debts and Consumer Proposals

Another crucial factor to consider is that a consumer proposal only covers unsecured debts. Secured loans, like a car loan or mortgage, cannot be included in your proposal. This can be both a disadvantage and an advantage.

If you can afford the monthly payments on your car or house, you can continue to pay the secured lender and keep those assets. However, if you cannot afford your car or mortgage payment, you can opt to surrender these assets back to the secured creditor.

4. Potential Rejection by Creditors

One of the consumer proposal consequences to be aware of is the potential for rejection by creditors. Creditors have 45 days to vote on your proposal, with the weight of their vote measured by the amount you owe them.

If more than 25% of your creditors (by dollar value) ask for a meeting, and at the meeting, more than half of the creditor’s claims vote against your proposal, it can be rejected. However, rejections are rare, and most proposal terms are accepted as filed.

5. Debt Limits in a Consumer Proposal

Consumer proposals come with a debt limit. A consumer proposal can only be filed if you owe less than $250,000 excluding the mortgage on your primary residence. If you owe more, you must file a Division I proposal, which comes with the added risk of automatic bankruptcy if rejected by the creditors.

6. Influence of Large Creditors

Large creditors can dictate higher payment terms in a consumer proposal. Their votes are based on the dollar value of their claims, and creditors with larger balances can demand a higher payout percentage.

Most major bank creditors have a minimum percentage they expect before voting yes on a proposal. If you owe a significant amount to one of these creditors, you may need to offer more in your proposal for it to be accepted.

7. Ineligible Debts in a Consumer Proposal

Not all unsecured debts are eligible for discharge through a consumer proposal. Debts due to fraud, child support or alimony payments, and court fines cannot be released through a consumer proposal. Additionally, student loan debt cannot be included if you have not been out of school for seven years.

8. Annulment of Consumer Proposal

One of the most critical consumer proposal consequences to be aware of is the possibility of annulment. A consumer proposal is a legal agreement where you agree to a settlement amount with a fixed payment schedule.

If you fall behind three monthly payments, your consumer proposal is deemed annulled. When your proposal is annulled, your debts return, and you lose the protection from collection activity that a consumer proposal provides.

9. Is a Consumer Proposal Right for You?

A consumer proposal is an alternative to bankruptcy. It is intended to help you pay off debt faster by making an agreement to repay less than you owe. It legally binds all your creditors to the same debt settlement plan, providing creditor protection against collection actions like a wage garnishment or lawsuit.

However, given the potential consumer proposal consequences, it’s crucial to evaluate whether a consumer proposal is the right choice for you.

10. Seeking Advice from a Licensed Insolvency Trustee

Before deciding on a consumer proposal, it’s recommended to get advice from a Licensed Insolvency Trustee (LIT). Only a LIT can legally file a consumer proposal for you.

Our team is here to answer any questions you may have about consumer proposals and help you decide the best debt solution for you. Contact us for a free virtual or in-person consultation.

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