The Downside of a Consumer Proposal: An Overview
Despite its benefits, a consumer proposal is not without its downsides, and it’s crucial to understand these before making a decision. Here, we’ve highlighted eight potential disadvantages:
Impact on Credit Score
When you file a consumer proposal, a note is added to your credit report, which can temporarily lower your credit score. The note can stay on your report for a maximum of six years. However, it’s worth noting that high levels of debt can also hurt your credit rating. Thus, it’s a trade-off: short-term pain for long-term gain.
Surrender of Credit Cards
Upon filing a consumer proposal, you will need to surrender all credit cards, and any lines of credit you have will be canceled. This means you will temporarily lose access to credit facilities. However, there’s a silver lining: new credit cards can be obtained within a year of filing a consumer proposal, depending on your credit rating at the time of filing.
Inability to Address Secured Debt
A consumer proposal only covers unsecured debts. Secured debts, such as car loans and mortgages, cannot be included. While this might seem like a downside, it can also be an advantage if you can afford your monthly payments and keep your assets. Conversely, if you can’t afford these payments, you can choose to surrender these assets.
Possibility of Proposal Rejection
Your creditors have a say in whether or not they accept your consumer proposal. The proposal can be rebuffed if a certain percentage of your creditors object. However, if a creditor does not agree with your initial offer, they will usually make a counteroffer, which can be negotiated with the help of a Licensed Insolvency Trustee (LIT).
Debt Limit
Consumer proposals come with a debt limit. You can only file one if you owe less than $250,000, excluding your primary residence mortgage. If you owe more, you’ll have to file a Division I proposal, which carries more risk.
Influence of Large Creditors
In a consumer proposal, creditors’ votes are weighted by the value of their claims. This means that creditors to whom you owe a significant amount can demand a higher repayment percentage. This could potentially result in higher monthly payments.
Exclusion of Certain Unsecured Debts
Not all unsecured debts can be included in a consumer proposal. Debts due to fraud, alimony or child support payments, court fines, and specific student loan debts are not eligible.
Risk of Proposal Annulment
If you miss three months’ payments, your proposal can be annulled, meaning your debts return, and collection activity can resume. Keeping up with payments is crucial to avoid this downside of a consumer proposal.
Weighing the Pros and Cons
While the downside of a consumer proposal can seem intimidating, it’s essential to weigh them against the benefits. A consumer proposal can provide debt relief faster, legally bind all your creditors to the same settlement plan, prevent collection actions like wage garnishment, and preserve your assets. Moreover, it generally provides lower monthly payments than other debt consolidation options.
Seeking Professional Advice
Before deciding to file a consumer proposal, it’s essential to seek advice from a Licensed Insolvency Trustee. They can guide you through the process and help you understand if a consumer proposal is the right choice for you.
In Conclusion
Navigating the complex world of finance is no easy task, and understanding the downside of a consumer proposal is part of this journey. By examining each downside in detail, you can make an informed decision that will guide you towards financial stability.
