Debt consolidation versus consumer proposal

Debt consolidation vs. consumer proposal. What's the difference?

By Troy Tisserand

A common question our debt consultants often get asked is the difference between debt consolidation and a consumer proposal. What are the benefits of each? When you should choose debt consolidation versus a consumer proposal?

A consumer proposal is essentially an offer you make to all of your unsecured creditors. You agree to a single, fixed monthly payment.

A consumer proposal is helpful, as you will often only have to pay down a portion of your debt.

A few key benefits of a consumer proposal

A consumer proposal often reduces overall debt owing.
A consumer proposal stops collection action.
A consumer proposal stops all wage garnishments
The debt is often repaid with zero interest.
The debt is often repaid with no penalties

In contrast, debt consolidation involves taking out one big loan to pay off many small loans.

So debt consolidation is really about increasing your leverage with the primary goal of lowering your interest rate.

A few disadvantages of a consumer proposal

One of the big disadvantages of filing a consumer proposal vs. taking out a consolidation loan is that it will impact your credit and your relationship with your creditors.

This might seem like a minor point right now, if you are drowning in debt.

But it's a small world out there—and because major creditors are not being paid according to the original terms and conditions of the lending and with them usually accepting less than what they are owed, they may not do business with you in the future. In addition, the consumer proposal will be reported on your credit report as an R7 for 3 years from the date it is paid in full.

You must decide if the impact on your credit is worth getting out of debt and agreeing to a more affordable repayment plan with your creditors.

If you can afford the payments and have good enough credit to get a debt consolidation loan, then a debt consolidation loan may be the right answer.

When should I choose a consumer proposal versus debt consolidation?

A consumer proposal may be a better option than debt consolidation if you are in the following situations:

Your credit is already severely damaged.
You cannot afford the new proposed payment with a consolidation loan.
You cannot consolidate all your debt.
You are struggling to pay your bills on time.
You have creditors calling you and debts in collection.
Your wages are being garnished.
You have had creditor liens placed on your home.
You are one or more payments behind on your mortgage, car, credit card, line of credit payments.
You owe a lot of money to Revenue Canada – CRA – and they are aggressively trying to collect from you.
You have recently experienced a business failure and creditors are trying to collect from you.

When it comes to making a choice it is important to understand that each person's financial situation is different and how your decision will impact achieving your long-term financial goals.

A debt consolidation loan or consumer proposal may not be the right answer for you at all.

Please remember that the credit industry is designed to work for lenders and most of the information out there favours you paying back as much money as possible.

But consumers have more options and rights than they know. The difference between a consumer paying back $50,000 and $25,000 is a small blip on a bank's budget. But it can have lasting impact to your financial future.

So what should I do?

I know, I know. You want a clear course of action. It's hard with debt as there are so many different options and a lot of jargon to wade through.

If you have a specific question, feel free to drop us a line here.

Related resources on getting out of debt

Troy Tisserand is a managing partner with 4 Pillars Consulting Group. As a founding member of the company he is active in public speaking engagements, financial literacy initiatives, and building the 4 Pillars brand.