Why a Consumer Proposal is a Better Choice than a Debt Management Program
In Canada, one of the most common, if not the most common, debt relief program is a Consumer Proposal. There are many advantages to filing a consumer proposal in place of using other debt repayment programs. The most beneficial advantage of a consumer proposal is not only suspending interest charges but having the ability to compromise or reduce your debt as well, including government debt.
Other debt relief programs, commonly referred to as Debt Management Programs, (“DMP”) or Debt Consolidation Programs, typically do not reduce debt. You are still required to pay your debts in full. The only thing these programs can do is reduce or suspend ongoing interest charges. In other words, a DMP is in fact an interest relief program, not a debt reduction program.
It’s important to understand that a consumer proposal and a debt management program are not one and the same. A consumer proposal is a totally transparent process in how to deal with debt. Benefits to a consumer proposal include knowing exactly what the fees of the LIT are, and to know that the LIT is regulated not only by the Office of the Superintendent of Bankruptcy but by its professional association as well, the Canadian Associations of Insolvency and Restructuring Professionals.
The table below outlines the differences of the two programs and highlights the advantages of a consumer proposal.
| Consumer Proposal | Debt Management Program | |
|---|---|---|
| Legally Binding | A consumer proposal is a legally binding process. In order to have a proposal accepted by your creditors, creditors holding more than 50% of the debt must approve the proposal. | A DMP is not a legally binding process. It is a voluntary agreement with your creditors. They are not required to accept it and do not have to cooperate. |
| The Parties | A consumer proposal can only be administered by a Licensed Insolvency Trustee. | A DMP can be administered by anyone who calls themselves a Debt Advisor/Credit Counsellor or the like. |
| Do all creditors have to follow the plan? | As long as the majority of the creditors vote to approve your consumer proposal, all creditors must abide by it. Even the ones who didn’t want to accept it. | Any creditor can decide not to participate in a DMP, or can opt out at any time. You would have to pay full interest on the debt owed to them |
| Government Debt | Any government debt owing for taxes, student loans or employment insurance are included in a proposal. | Government debt cannot be included. |
| Ongoing Interest Charges | No more interest. All of the debts covered by your proposal are frozen, this means interest is no longer accrued. | It’s possible to get your interest rates reduced or frozen, depending on what your creditors agree to. |
| Ongoing Collections | You are automatically protected from collections by your creditors. There is a “Stay of Proceedings” put on your accounts; this means that your creditors must stop all collection action against you, including the CRA. | DMPs are not legally binding therefore your creditors do not have to cooperate. DMPs are a voluntary agreement. A DMP cannot stop a garnishee. |
| Assets | You will keep all your assets. | You will keep all your assets. |
| Amount Repaid | You may only need to pay back a portion of the amount of owe. | You need to pay back all of your debt. |
| Payment Schedule | Single monthly payments based on your financial situation are most common. Can be tailored to allow for seasonal income. | Most, if not all, DMPs require monthly payments. This may depend on your program. |
| Fees | Trustees’ fees are set by the Federal Government and are included in your monthly payment. No additional fees beyond your monthly payment. | There is no set fee or any published fee. Additional fees are common and vary widely. You pay a premium over and above your payments and the creditors also pay something to the DMP company. |
| Repayment Period | Cannot be greater than 60 months but can be paid sooner without penalty or discount. | Debt is usually repaid in 4 to 5 years. |
| Credit Counselling | Credit counselling is mandatory. You are required to attend two sessions. | Credit counselling is optional. |
| Credit Rating | A consumer proposal remains on your credit report for 3 years after the proposal has been completed or 6 years from when it started, whichever is sooner. | A DMP remains on your credit report for 3 years after your debts are repaid in full. It will show up as a R7 rating |
Why a Consumer Proposal is a more beneficial choice.
A person would be better off filing a consumer proposal than a debt management plan for a number of reasons:
- In our view, it has less of an impact on your credit report than a debt management program;
- A DMP generally has no interest charges going forward provided the creditors agree to it– a consumer proposal never does; and
- In a consumer proposal you repay a portion of what you owe – in a DMP you repay the entire debt. In almost all cases, you will pay less in a consumer proposal than you would in a DMP.
It plain and obvious to see why a consumer proposal is a better solution than a debt management plan.
Lastly, there is a lot of misinformation on the internet about dealing with debt. There are firms who say they can help you file a consumer proposal and will take your money and not complete the work. Eventually, you will end up with a Licensed Insolvency Trustee at the very end (who you have to pay again). You never have to pay a middleman to be referred to a Licensed Insolvency Trustee.
If you would like to explore how a proposal can eliminate debt and lower your monthly payments.
Call us. It’s not too late!
Phone: (604) 605-3335
Toll Free: (888) 850-6585
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