A consumer proposal is a reliable and safe way to escape the “debt trap” but it can also be one of the most affordable when it comes to monthly payments. A consumer proposal offers 2 main benefits over other debt repayment solutions:
- Interest-free repayment period, and
- Debt forgiveness
To explain this, we have to consider a typical debt scenario and compare the financial implications of 4 different methods to get rid of debt, including a consumer proposal. A consumer proposal focuses on non-collateralized loans and reduces your recurring monthly payment significantly.
For instance:
- John owes $30,000 in consumer debt, a reasonable amount for the average borrower.
- His monthly minimum payments average $600 a month.
- John is single and earns $1,600 a month after taxes.
- John does not own any assets that can be used as collateral to secure the debt.
In all repayment plans, we assume that John would prefer to be debt-free within a period of 5 years.
Repayment Options
Repay on his own – pay at least $800 a month for 5 years.
If John wants to get rid of his credit card debt within 5 years, he will have to up his monthly repayments to at least $800. That figure is equal to half his monthly salary. He will have to pay this amount every month for the entire duration of 5 years. Furthermore, he will not be able to take up any other loans during this period as this will raise his interest payments significantly.
Debt Management Plan – pay at least $500 a month for 5 years.
A debt management plan, filed via a debt or credit manager, requires that you settle all your debts. You can get interest savings, which is why John’s monthly payments in our example reduce by $300 a month. However, the total principal payments that you must make remain the same.
Personal Bankruptcy – cost $285 a month for 21 months.
Bankruptcy costs are not determined by the amount of debt you have, but rather what assets you own and how much you make plus a fixed contribution to cover the value of administrative costs and non-exempt personal belongings. With a higher income, John would need to pay higher income payments of roughly $285 per month, assuming his income stays the same. As a first-time bankrupt with additional income, his bankruptcy would last for about 21 months, after which his debts would be cleared, and he would be considered completely debt-free.
So in the case of John’s bankruptcy, he would be debt-free sooner rather than later, and he would pay significantly less when compared to a debt management plan.
Consumer Proposal – cost $120 – $175 a month for 5 years.
In John’s case, he wanted to be completely debt-free within 5 years. He is required to file bankruptcy as soon as possible if he is to achieve his goal, but if he wishes to lower the monthly cost of eliminating his debt, he has to consider a consumer proposal.
A consumer proposal is a proven method of negotiating a payment arrangement with your credit to repay some of your debt and spread the payments into monthly installments that are paid over time. The cost of this arrangement is determined by how much you can afford to pay and how you negotiate with your creditors. Creditors often expect to get more money from you than they would if you filed for bankruptcy because you will be making small payments over an extended duration of time.
Moreover, some creditors expect to recover a minimum amount of money on their loans. Some big banks (such as CIBC and RBC) usually plan to recover at least 30 cents for every dollar they lend out. While every case is different, considering everybody is paid different and creditors differ, in our example, John would likely be able to negotiate a repayment schedule costing between $120 and $175 a month for 5 years.
Obviously, this is a significantly lower amount that what he would have paid with any other debt management program. It is because of this that most debt relief programs have a success rate of just 43%.
By picking a consumer proposal over bankruptcy, John would be choosing to forfeit getting out of debt sooner in order to reduce his monthly repayments. In doing so, his overall costs over the entire period will be higher when compared to bankruptcy, but they will still be much lower when compared to a debt management plan.
This example proves that in most situations where debtors have huge debts, the debt forgiveness coupled, with an interest-free repayment duration, make a consumer proposal the best solution to get rid of your debt in an affordable manner.
The fact is that a consumer proposal may not be ideal for everybody, but if you are serious about getting rid of your debt, it’s definitely worth considering.