Can a Consumer Proposal Increase Cashflow: A consumer proposal is a very attractive way for debtors trapped in debt to get their finances under control. In addition to providing debt forgiveness, and allowing for a debt repayment plan that is interest free, in some situations it is also the cheapest way to get out of debt.

For some debtors, going bankrupt is the cheapest method, but in other cases, a consumer proposal is the cheapest avenue for getting out of debt.

While you cannot include secured debt in a consumer proposal, you can include all of your unsecured debt and repay this debt at a reduced rate.

When you enter into a consumer proposal with your creditors, you are cutting the payments on your unsecured debt by up to 70%, which allows you to free up cashflow to make secured debt payments more affordable and to allow you to start saving.

The easiest way to illustrate this is to look at an example of a debtor who would like to be out of $30,000 in unsecured consumer debt in 5 years.

The debtor, Joe, owe’s $30,000 to his unsecured creditors and makes $3,500 a month after taxes.

What Debt Repayment Options Does Joe Debtor Have?

Joe Debtor has 4 main debt repayment options – He can repay his debt on his own, enter into a debt management plan, file personal bankruptcy or make a consumer proposal to his unsecured creditors.

These examples assume Joe wants to be out of debt in 5 years, and that he does not incur any new debt during this 60 month period.

Can a Consumer Proposal Increase Cashflow? Repaying His Debt on His Own – $762 a month – $45,708 Total

If Joe chooses to repay the debt on his own, he will have to pay $762 a month for 5 years. He will repay $45,708 over 5 years, and he would have paid $15,708 in interest payments over the 5 years.

Can a Consumer Proposal Increase Cashflow? Debt Management Plan – $525 a month – $31,500 Total

Joe also has the option of entering into a debt management plan with his creditors. He will need to use the services of a credit counselling company to enter into a debt management plan. Under a debt management plan Joe will have to pay $525 a month for 5 years. He will pay a total of $31,500 for the debt repayment plan. The credit counsellor will charge a fee to enroll Joe in the debt management plan and he will repay 100% of his debt, although he won’t pay any interest.

The main benefit of a debt repayment plan is you will not pay interest over the life of the plan.

Personal Bankruptcy – $706 a month for 21 months – $14,826

Joe can also file for personal bankruptcy. As Joe makes $3,500 a month and has no dependents living at home, he will be required to make surplus income payments. Joe is also filing bankruptcy for the first time, so he will only be required to pay for 21 months, after which he will receive his automatic discharge (assuming he completed all his duties as a bankrupt.)

Joe’s monthly payment if he were to file bankruptcy in Canada is $706 a month. He will pay $14,826 to his Trustee for distribution to his creditors. Joe owes $30,000 so he will pay 50% of his debt back in a bankruptcy filing.

Joe wanted to be out of debt in 60 months, so filing personal bankruptcy will get him out of debt much sooner, and for a cheaper cost than a debt management plan or if he attempted to repay his debt on his own.

Consumer Proposal : Monthly – $175 Total – $10,500

The last option that Joe can explore for paying off his debt is to file a consumer proposal with his creditors. A proposal is a legal settlement with your creditors to repay a portion of what you owe.

The cost of filing a consumer proposal is based on the amount of debt you have and what you can afford. Every situation is unique, although your creditors will except to receive about 30 cents on the dollar in a consumer proposal.

As Joe owed $30,000, his creditors agreed to a proposal of $10,500, paid monthly over 5 years. Joe’s consumer proposal payment will be $175 monthly for 60 months.

The cost of Joe’s Trustee’s fees and all other fees are included in this monthly payment.

Joe’s best option for getting out of debt is to file bankruptcy or a consumer proposal.

As Joe’s debt repayments on his own would be $762 a month, he can increase his cashflow by $587 a month by agreeing to a proposal of $175 a month for 5 years.

Joe also has the option of going bankrupt, which means he will be out of debt much sooner than in a proposal, although if he was concerned about increasing his cashflow his best option is to file a consumer proposal.

Although Joe will pay more in a bankruptcy, a consumer proposal will have a much lower monthly fee, allowing Joe to have much more free cashflow for other expenses, such as making payments on secured debts more manageable or starting a savings plan.

A consumer proposal or filing bankruptcy results in significant cost savings for Canadian consumers trapped in debt.

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