Debt Consolidation vs. Consumer Proposal

Debt Consolidation vs. Consumer Proposal: What’s The Difference?

If you are struggling with an insurmountable level of debt, you must look for a path to recovery.

With various options available to you, it can be difficult to know which is the right choice.

In this article, you’ll discover the key variables that you need to consider for two key recovery options.

Two of the main roads to recovery individuals consider when they are drowning in debt are consumer proposals and debt consolidation.

But which is the right choice for you?

To understand this, you need to know the key differences as well as the strengths and disadvantages of both options.

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Debt Consolidation And Consumer Proposals Explained

Debt consolidation is a loan.

You take out a bigger loan to cover the small loans that you already owe.

You’re then only left with the second larger loan to pay off.

The aim here is always going to be reducing the interest rates you’re paying while making the debt easier to manage.

Interest rates can be the real killer for smaller loans that need to be repaid.

With debt consolidation, you can, theoretically, erase your debt far more rapidly due to the new interest rate that the loan provides.

In contrast, a consumer proposal is an offer.

This is directed at all the unsecured creditors who you owe money too.

It can mean agreeing to anything from one payment to a monthly payment over an extended period.

With a consumer proposal, you can reduce the level of debt that you have.

A big benefit here is that unlike debt consolidation, you may only need to pay back a portion of your debt that is agreed with the creditors.

Consumer Proposals: The Good And The Bad

To fully understand consumer proposals, it’s important that we look at both the positives and negatives.

First, let’s take a look at the advantages so that you can better understand the bright side of consumer proposals.

The first advantage of a consumer proposal is that it will often reduce the overall debt owed.

On top of that, these proposals are usually repaid with zero interest, making the whole thing easier to pay off.

Due to the zero interest, the proposal ends up being repaid quicker, and not incurring any penalties against the person paying.

One of the biggest advantages is that you get to keep all of your assets because they are protected.

This will include any investments and tax refunds.

Another great advantage is that you don’t have to declare bankruptcy.

If you are willing to offer more than a creditor would receive from your bankruptcy, most will accept the proposal.

This keeps you safe, you keep what you have, and you can make your payments at a lower rate.

You can also be assured that a consumer proposal stops collection action, which also means that wage garnishments will stop.

As such, if this is something that you have experienced and struggled with, one of these proposals will put an end to this.

But what are the disadvantages?

The biggest one is that it is going to impact your credit rating quite severely.

If you’re hoping to maintain a healthy relationship with creditors, you’re going to be disappointed.

If you go through a consumer proposal, creditors are no longer going to be as willing to lend to you as they were before, so it’s important you keep this in mind.

As such, you shouldn’t take this lightly.

You need to think about the consequences and what this could mean for any future loans you might want or need.

This is going to be especially true if you try to get loans from the same creditors.

When you use a consumer proposal, what you pay back isn’t going to adhere to what was in the original terms and conditions.

Consequently, the creditor is likely accepting less than what you owe them, giving you a black mark in their books.

Even though this is the case, it might be possible for you to get a secured credit card, which isn’t going to help you find your way out of debt.

A final disadvantage is that an R7 note will be on your credit report.

For example, if your proposal lasts for 4 years, then the note will stay until between one and three years after completion.

An R7 looks bad on your credit report, so you have to be sure it’s worth it.

However, if you are struggling with debt, then your credit rating and any future loans might be the furthest thing from your mind.

But, you need to think about whether the cost of getting you out of debt is worth it.

If you already owe a lot of money, then it seems to make sense because your credit rating is going to be irrelevant if you’re stuck in debt indefinitely.

Is Debt Consolidation The Right Choice?

Debt consolidation can be the right choice for those with multiple debts to different creditors.

However, this is only going to be the case if you have a good credit score.

Remember, the main goal of debt consolidation is to reduce your level of interest.

You will only be able to access a loan with a good interest rate if you have a good credit score.

You also need to make sure that you can afford the payments on the new plan.

A key advantage of debt consolidation is that this won’t impact your credit rating.

Furthermore, you will be paying back the debt that you owe, but your interest payments will be significantly less.

A key point people often forget about debt consolidation is that it is still a loan.

So, if you choose the wrong debt consolidation plan, it can be completely counterproductive.

It can leave you in a worse state because the debt will build far more rapidly.

In some cases, due to the hidden fees, the amount you owe could potentially double.

Is It Worth A Consumer Proposal?

In some cases, it is going to be worth taking the consumer proposal route rather than debt consolidation.

If your credit is already extremely damaged, then it’s going to be the right move.

Also, if you can’t afford to pay the new payment, even using a consolidation loan, then a consumer proposal will help you.

It is sometimes the case that you can’t even consolidate all of your debt, and if this happens, then this is your best bet.

We also mentioned how one of these proposals will stop wage garnishment, so if this is currently happening to you, then this could be your way out.

If it has gotten to the point where you are struggling to pay your bills, not just your debt, then other debt management tactics might not work.

This includes things like mortgage repayments, car loans, and even your general household bills.

If you choose a consumer proposal, all of these things become easier to manage.

What Will You Need To Pay For A Consumer Proposal?

It’s worth noting that a consumer proposal is exactly as labelled.

It’s an offer, which means that the creditors must accept.

They are entitled to refuse and may not want to be part of the proposal at all.

The amount you pay per month or even in one fixed payment is going to depend on numerous variables.

This includes:


  • The total amount that you currently owe;
  • Whether you are currently in employment;
  • What expenses you have;
  • What assets you own;
  • The length of the proposal.


Furthermore, there will also be fees to pay.

When you do use a bankruptcy trustee, the fees are part of the consumer proposal.

So, they are a percentage of what you will agree to pay back to your creditors.

So, is a consumer proposal worth the cost you’ll pay and the potential damage to your credit rating?

If you are struggling in debt, a consumer proposal can be the right choice.

Although there are fees to pay, it will provide immediate relief.

This can help you if you are suffering from debt stress and will instantly make your debt far more manageable.

It can also ensure that you will be able to recover from debt within several years rather than, potentially, an entire decade.

However, the benefits you gain will largely depend on the trustee that you choose.

It’s important to note that trustees represent the creditors.

They are not there to help you and will not work to get you the best settlement possible.

All consumer proposals will need to be filed through a Licensed insolvency trustee.

If you are unsure of which trustee to use, then it can be worth consulting with an expert.

They will be able to ensure that you make an informed decision.

Remember, professional support services can also guarantee that you are aware of all the different options available to you, including debt consolidation.

What Happens After The Consumer Proposal?

It can take a few years, but eventually, a consumer proposal will help you get out of debt if you stick with it.

While you’re getting out of debt, it’s important that you use this time to start building up a good credit rating.

There are a number of ways that you can start doing this such as getting your bad debts settled, getting a contract cell phone rather than a prepaid, keep a variety of accounts in the clear, and check for any errors on your credit report.

Remember that a prepaid card does nothing for your credit rating, so this isn’t going to be beneficial in rebuilding your score.

These are just some of the things that you can do, and it’s important that you take rebuilding your credit score seriously.

Otherwise, the consumer proposal will have been for nothing, as you will end up back in debt again.

Remember that the R7 note doesn’t last forever, and it will be cleared so it won’t impact you for the rest of your life.

We know that getting out of debt doesn’t mean the battle is won because staying out can sometimes feel even harder.

Do your best to follow the steps and rebuild your credit as best you can to avoid finding yourself back in the same position in a couple of years.

Other Factors To Consider

One of the big disadvantages of a consumer proposal is how it can impact your credit score.

Some people may think that if they pay off the proposal earlier than they can avoid this issue completely.

However, unfortunately, this is not the case.

Regardless of whether you pay the consumer proposal off early, it will remain on your credit report for the length it takes you to pay it off as well as an extra three years.

This doesn’t mean that there isn’t a benefit of managing to pay it off early.

This will provide you with the ability to improve your credit far more rapidly.

As well as this, the consumer proposal does provide other benefits.

For instance, you might find that after your proposal is accepted, and during the payment plan, your income increases.

As long as you are making payments on time, an increase in income won’t impact the agreed contract.

You can still pay the same amount previously stated, even if you are in a stronger financial situation.

This is a significant advantage of a consumer proposal when compared with bankruptcy.

When you file for bankruptcy, your income is carefully monitored.

If your income increases during the bankruptcy period then the period can be extended and you can be forced to pay more money.

Get More Help Now

Are you still struggling to decide which debt plan could be the right choice for you?

If so, then we can help.

Our team of experts has helped more than 100,000 citizens find the debt relief they need, and we’re confident that we can help you too.

You can get in touch with us now on the phone, or fill out an evaluation form.

We’ll quickly respond and provide the right advice based on your individual situation.

Information on Consumer Proposals

Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal

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