Are you struggling with debt and unsure of what to do?
With the many available debt solutions, choosing the right one isn’t always easy. Should you opt for credit counselling, or file a Consumer Proposal? The answer depends, as everyone’s situation is different.
So, our first piece of advice: speak with a Licensed Insolvency Trustee (LIT). LITs are debt experts who provide a range of solutions. They assess your finances and help determine whether credit counselling is the right option or if you need a more formal solution, such as a Consumer Proposal.
To help you make an informed decision with your LIT, let’s compare the pros and cons of credit counselling vs. Consumer Proposals. Use the info here to help find the right solution that fits your needs.
What is Credit Counselling?
Credit counselling can help you increase your financial literacy and learn strategies to manage your debt. For instance, your credit counsellor might teach you new finance management skills like how to budget or use credit.
In Canada, there are for-profit and not-for-profit credit counselling agencies. You can also find one-on-one counselling and group courses. Before meeting with a credit counsellor, research the company and the individual counsellor.
Debt Management Plans (DMP)
Some credit counsellors offer Debt Management Plans (DMP). A DMP is a debt consolidation program that allows you to combine your debt into one monthly payment.
Your counselor may negotiate on your behalf to reduce interest payments, lower fees, or extend your repayment period. However, in most cases, you will still need to repay the full debt amount.
If your creditors accept the DMP, you’ll make payments to your credit counselling agency, and they’ll pay your creditors according to your plan. Note: a DMP is not legally binding on the creditors.
Before you opt for a DMP, understand the costs and the fees. Fees can eclipse your program savings. A large fee is also often charged upfront that is not refundable and kept by the credit counseling agency—even if the plan does not work.
What is a Consumer Proposal?
A Consumer Proposal is a formal payment arrangement and legally binding process solely administered by an LIT. As part of the Proposal, you and your LIT will submit an offer to your creditors to repay a portion of your unsecured debt, extend the debt repayment period, or both. Once completed, a Consumer Proposal discharges 100% of your unsecured debt. Upfront lump-sum payments are rare, except for a filing fee charged by the Government of Canada and the first proposed monthly payment.
Your Proposal must indicate the length of time you plan to make payments. The Proposal cannot last longer than 5 years. You’ll also have to attend two financial counselling sessions provided by your LIT during that period.
Your Licensed Insolvency Trustee will submit your Proposal to your creditors for a vote. Creditors may propose changes to the terms of the Proposal. While you can agree to these modifications, once voted on – accepted or rejected – you cannot make any further changes.
If you are unable to reach an agreement with your creditors, Bankruptcy may be an option, as creditors do not get to vote in the process. While Bankruptcy is more complex debt settlement than a Consumer Proposal, it is typically faster and more affordable, depending on your financial situation.
When to Consider Credit Counselling
Assess your financial situation carefully. Credit counselling may be the right option if you meet all three of the following conditions:
- You can afford to repay your debt with reduced or eliminated interest charges.
- You can cover the credit counselling fees.
- You do not qualify for a Consumer Proposal.
When to Consider a Consumer Proposal
On the other hand, if the following two factors better fit your situation, a Consumer Proposal might be a better idea:
- You can afford to pay at least a portion of your debt.
- You own a non-exempt asset that would be sold in a Bankruptcy.
Credit Counselling vs. Consumer Proposal: Key Differences
Both credit counselling and a Consumer Proposal have benefits and drawbacks, especially as Bankruptcy alternatives. To make an informed decision, take note of the key differences between the two debt relief tools:
Debt relief
A Consumer Proposal can significantly reduce the debt you must repay compared to a Debt Management Plan. While a DMP may eliminate interest, you are still required to repay the full amount of your debt.
Credit score impact
A Proposal will stay on your credit report for three years after you pay off your debts or six years after signing your Proposal, whichever is sooner. A DMP stays on your report for two years after you complete the plan.
Fees
Fees for LITs are regulated by the Bankruptcy and Insolvency Act (BIA) to ensure transparency. Credit counselling fees are not regulated. Different agencies charge different fees.
Creditor actions
In a Consumer Proposal, creditors are required by law to stop any collection actions (e.g. wage garnishment or lawsuits). All unsecured creditors are included in the Consumer Proposal, even if a minority voted against it. In a DMP, creditors generally will stop collection actions but are not legally required to do so, and creditors who did not agree to it can continue collection actions.
Administration
A Licensed Insolvency Trustee is the only professional in Canada who can administer a Consumer Proposal. An LIT also offers financial counselling.
Credit Counselling vs. Consumer Proposal: Ask an LIT
If you have debt problems and don’t know what to do, an LIT can help. Licensed Insolvency Trustees are debt professionals with the knowledge and experience to help you overcome your financial issues.
Licensed Insolvency Trustees are the only professionals in Canada who can administer the entire range of debt solutions, from credit counselling services to Consumer Proposals and Bankruptcies. For a free, no-obligation consultation, call us at 204-925-6400, or complete our online appointment request.
Leigh C. Taylor, LIT
