Options to Pay Off Your Consumer Proposal Early

Exploring Options to Pay Off Your Consumer Proposal Early

Facing insolvency can be daunting, and it often pushes individuals to seek various debt relief solutions. A consumer proposal stands as one such potent strategy that comes with the promise of relief from unsecured debts. This legal agreement between you and your creditors allows you to repay a portion of your total owed debt, usually up to 80%. However, the process can be lengthy, taking up to five years to complete. So, what if you want to expedite this process? Let’s delve into the nitty-gritty of the various options to pay off your consumer proposal early.

Understanding the Basics of a Consumer Proposal

A consumer proposal is an alternative to bankruptcy, providing you with the capability to clear your unsecured debts, such as credit cards, payday loans, and personal loans. This solution carries multiple benefits over bankruptcy, including the retention of your assets and the assurance that your payments won’t increase even if your income does. However, the duration of a consumer proposal typically exceeds that of a bankruptcy.

A consumer proposal is a formal, legally binding process that is administrated by a Licensed Insolvency Trustee (LIT). An LIT will develop a “proposal”—an offer to pay creditors a percentage of what is owed to them or extend the time you have to pay off the debts, or both.

Can You Settle a Consumer Proposal Ahead of Schedule?

Yes, indeed! This flexibility is one of the many advantages that set a consumer proposal apart from bankruptcy. While consumer proposals are typically structured to comprise five years of manageable monthly payments, the Bankruptcy and Insolvency Act in Canada does not stipulate a minimum term for a proposal. Hence, if your financial circumstances change for the better, you can either increase your payments to achieve an earlier pay-off or pay off the proposal entirely with a lump sum at any time.

Why Consider Paying Off a Consumer Proposal Early?

While everyone paying a consumer proposal would love to do away with these payments, some reasons might give you the impetus to settle your consumer proposal ahead of time. Let’s examine some of these:

Fast-tracking Your Credit Repair

Credit repair emerges as the most common and practical reason for desiring an early pay-off. The moment you file a consumer proposal, Canada’s credit bureaus add a notation to your credit report, causing the ratings on your individual credit accounts to fall. This notation usually lasts for three years after you complete your consumer proposal. Therefore, the sooner you pay off your proposal, the quicker your credit report will carry no evidence that it ever occurred.

Planning for Home Purchase

Paying off a consumer proposal early is particularly attractive if you’re contemplating a home purchase. This is not just because you’d like to repair your credit sooner to secure a preferred mortgage rate, but also due to the requirement for mortgage insurance from the Canadian Housing and Mortgage Corporation (CMHC). Most banks and financial institutions demand mortgage insurance (usually from CMHC) for home purchases with less than a 20% down payment. However, CMHC typically does not insure the mortgage of a buyer who is less than two years clear of a consumer proposal or bankruptcy.

Preventing the Risk of Annulling the Proposal

Many people paying out a consumer proposal are apprehensive about accidentally causing their proposal to be annulled. An annulled proposal means you will revert to your initial debt situation. However, keep in mind that you must be three payments in arrears to cause your consumer proposal to be annulled. It’s pretty rare for anyone to miss three payments accidentally. If you fear this, and it’s possible for you, you may wish to pay off your proposal early.

The ‘Get It Done’ Desire

Lastly, you may desire to pay off your consumer proposal early simply because it will feel good to do so. The situation leading up to a consumer proposal filing is typically stressful, and the usual five-year payout period may seem like a long journey. When an opportunity to pay off early occurs, many people will go ahead simply to put the proposal into the past.

Options to Pay Off Your Consumer Proposal Early

If you’re looking to expedite the repayment of your consumer proposal, you have several options at your disposal. Let’s take a closer look at the different ways to achieve this:

Increase Your Payments

At times, an individual’s circumstances can change during the course of their consumer proposal, resulting in more money becoming available in their monthly budget. In such cases, simply increasing your monthly payment into the proposal can shorten its term, bringing your pay-off date closer.

Make More Frequent Payments

A consumer proposal can also be designed for (or shifted to) payments that are more frequent than once-a-month. If you pay your proposal every four weeks instead of monthly, you stand to shave a few months off its term.

Make a Lump-Sum Payment

At any point during your proposal, if money becomes available to you, you can use it to make a lump-sum payment towards your proposal. This money could be from the sale of an asset, a large tax refund, a work bonus, or even a surprise inheritance. This can significantly reduce your debt total and shorten your repayment plan.

Options to Exercise Caution With

While the urge to pay off a consumer proposal may be strong, you need to exercise caution with certain options that may be riskier or end up costing you more than sticking with your proposal payment schedule.

Borrowing Loans

Although you can find companies offering loans specifically for paying off consumer proposals, these loans are high-risk for both the lender and you. For the lender, because you have a lower credit score and you’re amidst an insolvency proceeding, and for you, because you’re jumping back into consumer credit – and expensive consumer credit at that!

Withdrawing from RRSPs

While possible, using your RRSPs to pay off your consumer proposal isn’t a recommended solution due to the costs and complications. Early withdrawal from an RRSP is taxed, and if your employer matches your contributions, withdrawing from your RRSP may cancel that program.

Remember: Your Consumer Proposal Is Interest-Free

While the idea of paying off your consumer proposal early might seem appealing, it’s essential to remember that your consumer proposal is interest-free. Whether you pay it off early or stick to the five-year plan, the total cost remains the same. Borrowing with interest to pay it off will essentially end up costing you more.

Conclusion

While the prospect of paying off your consumer proposal early might be enticing, it’s crucial to consider all aspects before taking the plunge. From understanding why you might want to pay early to exploring the different methods to do so, this guide provides a comprehensive look at the various options to pay off your consumer proposal early. Remember, it’s always wise to consult with your Licensed Insolvency Trustee before making any final decisions.

Further Support

If you’re considering a consumer proposal to address your debt troubles, a Licensed Insolvency Trustee is the professional best qualified to assist you with your questions. Trustees are knowledgeable about all consumer debt solutions and can guide you towards the options that work best for you. Don’t hesitate to reach out to a Trustee in your area today. Your first meeting is free and confidential.

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