Suffering from financial stress can be overwhelming, and when you find yourself with unmanageable debt, options such as a consumer proposal may seem like the only way out. A consumer proposal is a legally binding agreement between a debtor and their unsecured creditors, where the debtor agrees to pay a portion of their debt over a specified period, usually up to five years. But what if you could shorten this timeline and pay off your consumer proposal early? This article explores the various methods and strategies on how to pay off a consumer proposal early.
Understanding a Consumer Proposal: A Quick Recap
Before diving into the methods of early repayment, it’s essential to understand what a consumer proposal entails. A consumer proposal is a debt relief option that allows you to repay a portion of your debt, often up to 80%, over a fixed period (maximum of 60 months or five years). The proposal’s primary objective is to provide a debtor with a manageable repayment plan that does not strain their budget.
Why Pay Off a Consumer Proposal Early?
There are several reasons why one might consider paying off their consumer proposal early. Let’s delve into some of these motivations.
Accelerated Credit Repair
The primary reason for early repayment is to expedite credit repair. Once a consumer proposal is filed, it is reflected on your credit report, affecting your credit score. The sooner you clear this debt, the faster you can start rebuilding your credit and improve your chances of securing loans in the future.
Home Purchases
You might also wish to pay off your consumer proposal early if you’re planning to buy a house. This is because most banks and financial institutions require mortgage insurance for home purchases where less than a 20% down payment is made. However, institutions like the Canadian Housing and Mortgage Corporation (CMHC) typically do not insure the mortgage of a buyer who is less than two years clear of a consumer proposal or bankruptcy.
Reduced Risk of Annulment
Paying off a consumer proposal early also minimizes the risk of annulling the agreement. If you miss three months’ worth of payments, your proposal could be nullified, and you’ll be back to square one, with the same debts to repay.
The Satisfaction of Completion
Sometimes, the desire to pay off a consumer proposal early is simply because it feels good. The circumstances leading to a consumer proposal are often stressful, and the five-year payout period can seem like a long road ahead. Paying it off early allows you to put the proposal in the past and start anew.
How Can You Pay Off Your Consumer Proposal Early?
There are several ways to expedite the consumer proposal process. Let’s explore some of these options.
Increase Payment Amounts
If your financial circumstances improve during the course of your consumer proposal, you may consider increasing your monthly payments. This will reduce the duration of your proposal, leading to an earlier payoff date.
Make More Frequent Payments
Another strategy to reduce your proposal duration is to make more frequent payments. If you switch from monthly to bi-weekly payments, you can trim down the time it takes to complete your proposal.
Make a Lump-Sum Payment
If you come into a substantial amount of money, such as an inheritance or a large tax refund, you could consider making a lump-sum payment towards your consumer proposal. This will significantly reduce your remaining debt and shorten your repayment plan.
Selling Assets
Selling assets is another effective solution to pay down your consumer proposal faster. This could be an option if you’re already planning on selling an asset, like downsizing your home or selling a vehicle. The proceeds from the sale can be used to make a substantial payment towards your consumer proposal.
Options to Reconsider
While the urge to pay off your consumer proposal early can be strong, certain options should be approached with caution as they could be riskier or end up costing you more.
Using an RRSP
While it is possible to use your Registered Retirement Savings Plan (RRSP) to pay off your consumer proposal early, this is not generally recommended due to the potential short-term and long-term financial consequences.
Taking Out a Loan
Taking out a loan to pay off your consumer proposal early can also cause several problems. Most notably, you’re likely to face high-interest rates, which would essentially be trading one form of debt for another – often at a higher cost.
Remember: Your Consumer Proposal is Interest-Free
Key to understanding how to pay off a consumer proposal early is remembering that your consumer proposal is interest-free. This means that the total cost of your proposal will be the same whether you pay it off early or stick to the original five-year plan. Therefore, borrowing to pay off your proposal early (especially with interest) will ultimately cost you more.
Consult with a Licensed Insolvency Trustee
If you’re considering paying off your consumer proposal early, it’s essential to consult with a Licensed Insolvency Trustee (LIT). They can provide you with personalized advice and help you navigate the process efficiently, ensuring you make the most financially sound decision.
In conclusion, while paying off a consumer proposal early can provide several advantages, it’s crucial to weigh these against the potential risks and cost implications. By carefully considering your options and seeking professional advice, you can make the best decision for your financial future.
