When you see debt piling up and struggle to repay a loan or make regular credit card payments, a critical first step is learning about debt relief options.
The first thought is to try and pay it all off, but sometimes that’s impossible. In these cases, debt consolidation or a consumer proposal might be the best idea for you. And it could even be beneficial for your creditors.
This blog will examine the benefits and drawbacks of a consumer proposal vs debt consolidation.
Comparing Your Debt Management Options
When considering debt consolidation or a consumer proposal, the outcome is the same – to manage and eventually eliminate your debt. However, there are some significant differences between them to consider.
In many cases, debt consolidation is the first option debtors consider. High-interest debt is refinanced into lower-interest consolidation loans, reducing the monthly payments and interest rates.
However, some severe drawbacks to debt consolidation are mostly connected to your financial situation. If your credit score is too low, you will not qualify for a refinancing loan, and if your total debt is too high or your income has been reduced, you might not be able to afford the monthly payments even after refinancing your debt.
A consumer proposal has the same underlying principle of negotiating a settlement with creditors to reduce monthly payments. The critical difference, though, is that with a consumer proposal, you not only lower the monthly payments but also reduce your debt, eliminate interest payments and grant relief from collection efforts from creditors and collection agencies.
With a consumer proposal, you enter into a legal agreement allowing you to repay only a portion of your debts that you can afford.
What is the Difference Between a Consumer Proposal and a Debt Consolidation Loan?
As mentioned above, while debt consolidation loans and a consumer proposal are tools to manage your debt, a loan will not reduce your total debt but only combine several smaller debts into one consolidated loan at lower interest rates.
On the other hand, a consumer proposal will combine all of your unsecured debt into one single fixed monthly payment. It also eliminates all interest charges and reduces your total outstanding debt by up to 75%. Another positive effect of a consumer proposal is that it will stop all legal action against you, including collection calls.
Speak to a Licensed Insolvency Trustee at Risman Zysman today at (416) 222-4600 or fill out our convenient online form to learn more about the right debt management option for your financial situation.
When Does Debt Consolidation Make Sense?
Debt consolidation has clear advantages if you can pay off your debts at a reduced interest rate. Different options are open to you, such as consolidating several high-interest debts, such as credit cards, into one lower-interest loan or getting a secured loan with real estate as collateral.
To determine if a debt consolidation loan is right for you, you have to honestly analyze your financial situation and long-term income with questions such as
- Can your debts be included in a consolidation loan?
- Do you have the credit rating or assets to secure a consolidation loan?
- Will the new loan’s monthly payments be affordable?
- How important will your credit rating be in the future?
Advantages of Debt Consolidation
Many debtors choose the option of debt consolidation due to some significant advantages, such as
- You will pay the entire balance of your debts.
- Your credit rating will not be negatively affected by discharged debts.
- You can secure a consolidation loan with assets such as real estate.
- You will reduce the interest payments on your debt.
Disadvantages of Consolidation Loans
Debt consolidation also comes with some significant drawbacks. A consolidation loan will not reduce your actual debt but help you manage it better with reduced interest rates and fewer individual creditors.
It also will allow you to keep credit cards and personal credit lines with high-interest rates. This means that the risk of continued use of these high-interest credit lines is high and could result in you again finding yourself in the same situation with unsustainable debt levels.
Some consolidation loans also require a co-signer or a significant asset as security, like real estate. If you cannot keep up with the monthly payments in the future, the payments may be collected from the co-signor, or the pledged assets can be seized to cover the balance.
And finally, if you can’t afford the consolidation loan(s) in the long term, you will face creditor collection action again as well.
Debt Consolidation and Your Credit Rating
One of the most significant benefits of debt consolidation is that your credit rating is not affected as heavily as the total debt amount remains unchanged. As long as you make your payments on time, your credit rating will not be damaged, making it a good choice for debtors that can afford the payments for a consolidation loan.
Eligibility for a Debt Consolidation Loan
Your financial situation is the biggest hurdle to eligibility for a debt consolidation loan. Generally, your creditors or a new lender will only offer terms for a loan acceptable to them, which can have fairly stringent criteria. They will look at your credit score, income-to-debt rating and if you have valuable assets like real estate or a co-signer with sufficient income. If you don’t meet the conditions set out by the creditors, they will not offer you a consolidation loan with lower interest rates.
Consolidating Debts with a Consumer Proposal
Another way to consolidate unsecured debt into one affordable fixed monthly payment is a consumer proposal. In this option, you discuss your financial situation with a Licensed Insolvency Trustee who will then negotiate a reduction of the total debt balance with your creditors and agree to pay off the remainder of the balance in monthly payments for up to five years.
Debt Relief Through a Consumer Proposal
Where a debt consolidation loan focuses on combining smaller loans into one larger loan with lower interest rates, a consumer proposal also consolidates your unsecured credit. Still, its goal is to reduce the debt you have to pay back in the process.
What Debts Can a Consumer Proposal Consolidate?
Any unsecured debts like credit cards, personal credit lines, student loans or other debt not secured with assets can be included in a consumer proposal. It is designed for debtors who have accrued too much unsecured debt but still have sufficient income to pay back a portion.
When Should You Consider a Consumer Proposal?
If your income is insufficient to pay back your total combined debt plus interest, a consumer proposal is an excellent option compared to debt consolidation. If you have a steady income and want to avoid the liquidation of your assets, it also may make more sense than declaring bankruptcy.
Generally, a consumer proposal might be better than a consolidated loan if:
- Are you insolvent, or your credit score is too low, so you don’t qualify for a consolidated loan.
- You have a stable income but find yourself insolvent and unable to pay all your debts reasonably.
- You need to reduce your debt load.
- You want protection from wage garnishments, lawsuits, and other means of debt collection.
Advantages of a Consumer Proposal
The advantages of filing a consumer proposal include the following:
- Discharge of up to 75% of your total unsecured debt
- Full creditor protection
- An interest-free repayment plan
- Keep your assets protected from liquidation
Disadvantages of a Consumer Proposal
The main disadvantages of a consumer proposal are the debt that is eligible for it and the effect on your credit rating.
Secured debt, such as auto loans or mortgages, is not eligible. A consumer proposal can only include unsecured debts such as credit cards, personal loans, tax debts, and student loans (depending on their age).
It will also severely affect your credit rating for several years due to the discharge of part of your debt. It is not as long-lasting as filing for bankruptcy, but it will severely affect your ability to obtain new loans without securing them with assets or co-signers.
Filing a Consumer Proposal After a Consolidation Loan
Even if you have taken out a consolidation loan, it is still possible to file a consumer proposal. Any unsecured debts like personal loans, credit card debt and tax debts qualify for a consumer proposal.
It is critical for you to seek professional advice when you notice that you are having increased problems managing your finances and see debt starting to pile up. A professional can analyse your financial situation and advise you about all available options for debt recovery. They have the experience and expertise to find the best solution for you.
Risman Zysman has over 45 years of experience providing quality debt solutions. Our team of professionals understands the fears and frustrations of individuals facing financial difficulty. At Risman Zysman, we present each client with a full range of options and guide them to make the right choices so they can move forward.
To find out how we can help you, call us at 416-222-4600 and get a free, confidential, no-obligation consultation today! Risman Zysman can help you on the road to financial recovery.
Frequently Asked Questions
What are your other debt-relief options?
There are several other options, not just bankruptcy. The two most common choices are debt settlement and debt management. Here are the main differences to help you determine which option is best for you.
What is the difference between a debt management plan and a consumer proposal?
In a debt management plan, you speak with a credit counsellor who will arrange an agreement to pay the entire balance of your debt. It is a voluntary agreement, provides less legal protection, and does not prevent collection calls or wage garnishments.
Please note that credit counselling agencies are not government regulated, so you should exercise caution before hiring one.
On the other hand, a consumer proposal is a legally binding agreement that allows you to reduce your debt by up to 75% and prevents any legal action against you such as wage garnishments, frozen bank accounts or collection calls.
What is better: debt settlement or consumer proposal?
For a debt settlement, you negotiate with each of your creditors individually for a single payment or plan for your entire debt balance.
In comparison, a consumer proposal, debt consolidation and debt management plan allow you to deal with multiple creditors simultaneously.
With debt settlements, payments are usually in one lump sum, so you should be aware of what you agree to. Even if you manage to negotiate the debt down to 75%, for example, you must be ready to pay it all in one payment. This can be far more difficult than you think. A payment plan designed by a credit counsellor or Licensed Insolvency Trustee can make things easier.