Consumer Proposal: A Lifeline for Escaping Debt and Rebuilding Wealth

Consumer Proposal

Debt is bad and when you get a lot of debt, it is very bad. As discussed before in my post “Credit Cards”, debt can snowball and spiral out of control due to compound interest. Eventually one may not even be able to afford the minimum payments on their personal debt by ignoring their debt obligations. This is also known as burying their head in the sand or the Ostrich effect. One will ignore their debt for so long and not address or even face the reality that there is a problem, just like an ostrich burying its head in the sand. When one finally faces the music and realizes how dire their situation is, it may seem like bankruptcy is the only option, but in Canada there is another option.

A Consumer Proposal. Creditors are not fond of bankruptcy since they lose all of their money owed to them. So, insert a middle ground between drowning in debt and bankruptcy. A Consumer Proposal is a federal government program designed to help those with substantial consumer debt. It is administered by a Licensed Insolvency Trustee who works with your creditors to develop an offer (proposal) that can bridge the gap between bankruptcy and suffocation in debt. The creditors do not have to accept the offer but most likely there will be a deal made that can dramatically cut down on your debt obligations. For example, say you owed $80,000, a consumer proposal can reduce your debt by 80% or $64,000. The remaining $16,000 (20%) would be paid over the course of 5 years with interest free monthly payments of $266.67. The creditors get something, versus the nothing they would get if you declared bankruptcy and you get a greatly reduced debt with a consolidated payment. The fact you could declare bankruptcy gives the LIT negotiating power to find a solution that works for both parties making the most of a bad situation. The best part is you don't have to give up your vehicle or your house but you will have to keep up with your house and vehicle payments if you choose to keep them. If you are truly drowning you can sell your car back to the dealership, the dealership will put what they pay you for the car towards your outstanding car debt. The remainder then can be included in proposal.

Net Worth

A Consumer Proposal can increase your net worth immensely if one sticks to the payment planned negotiated in the proposal. In the example the individual would have gained (Forgiven) $64,000 which would take an average individual saving $10,000 a year 6.4 years to save. The offer can change the financial trajectory of an individual from doom to hope. Who wouldn’t want an extra $64,000 tax free. It's like winning the lottery. If you follow my Net Worth Calculator from, “Intro to Budgeting” you will see a large jump in the month you signed your consumer proposal if you are tracking your net worth.     

Credit Score          

It's not all sunshine and roses. The drawback to doing a proposal is the hit your credit score will take. You will be given the lowest possible score which will stay on your record for 3 years after you complete the proposal, or 6 years after you sign the proposal (whichever is sooner). This is a good deal since 6 years is not that long and a credit score is mostly just used to get a mortgage, which if you are using a Consumer Proposal means you don’t have spare cash for a downpayment anyways. You can always pay off the proposal early and start repairing your credit score and save for a downpayment if you really were eager to get into home ownership.

Debt doesn’t have to dominate your life. There are solutions that can alleviate financial struggles and A Consumer Proposal is a great option. It can turn a downward death spiral upside down and be the new beginning to wealth building. 

If you feel overwhelmed and are suffocating with debt, please email me at TaylorMckeeCoaching@gmail.com and I can get you in touch with a trusted Debt Specialist.