Consumer Proposal vs Credit Counseling: Unveiling the Best Debt Solution

Posted on July 19, 2023 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee

There are many different debt solutions available, some of which you can try to do on your own, while others will require the services of a professional. If you have decided to get the help of a financial professional, you will likely face the question of consumer proposal vs credit counselling – what are the pros and cons?

In this blog, we’ll shed some light on the differences to help you make an informed decision.

Differences Between Consumer Proposal and Credit Counseling 

Before diving into more detail, let’s first look at the differences between credit counselling and a consumer proposal.

FeaturesConsumer ProposalCredit Counselling
Service providerLicensed Insolvency TrusteeCredit Counsellor
ProgramConsumer ProposalDebt Management Plan
Repayment AmountVariable, as little as 20%100%
Interest Charges0May be waived or reduced at the discretion of a lender
Included in payment
10%-15% plus sign-up fee ($50-$100)
Creditor ProtectionBinding for all unsecured creditors
Legal protection from creditor actions
Stops wage garnishments
Voluntary participation
Credit actions may continue
No legal protection

If you want to know more about consumer proposals, call Chande Debt Solutions today at 416-366-3328 or fill out our convenient online form.

Understanding Consumer Proposal

Let’s look at what a consumer proposal is and its benefits and drawbacks.

What is a Consumer Proposal?

A consumer proposal is a legally binding agreement between you and your creditors in which you negotiate a settlement for a portion of the debt you owe. Through the service of a Licensed Insolvency Trustee, you review your financial situation to determine how much of your debt you can afford to repay.

Advantages and Disadvantages of Opting for a Consumer Proposal as a Debt Relief Option

Like all other debt-relief options, a consumer proposal has distinct benefits and potential drawbacks.

Advantages of a Consumer Proposal

The most significant advantage of a consumer proposal is that you can reduce your unsecured debt by up to 80%, with the rest being discharged after the proposal is paid off. It also eliminates any future interest on any debt the consumer proposal includes.

Another considerable advantage of a consumer proposal is that as soon as it is filed, all legal action against you will cease, whether wage garnishments or collection calls. And unlike declaring bankruptcy, your assets also are protected from liquidation.

Drawbacks of a Consumer Proposal

The biggest drawback of a consumer proposal is its negative effect on your credit rating. The discharge of a portion of your debt will impact your credit score for 6 years from the moment the consumer proposal has been filed or 3 years after the final payment has been made, whichever comes first. Getting approved for new loans will be very challenging without assets or co-signers.

A consumer proposal also only covers unsecured debt, such as credit cards, tax debt, personal loans or student loans (only if you have ceased to be a student for at least 7 years), meaning that you cannot include any secured debts like car loans or mortgages.

When is a Consumer Proposal the Right Solution?

Several factors must be considered to determine if a consumer proposal is the right solution for you. For example, if you cannot afford the required payments or can’t get approved for a consolidation loan, a consumer proposal can be a practical option for debt relief.

Especially if your credit is already severely damaged, the negative impact of a consumer proposal on your credit rating may not be as severe as it might be otherwise. Consider a consumer proposal if you seek protection from wage garnishments, frozen bank accounts or legal actions by creditors or debt collection agencies.

Unveiling Credit Counseling

What is Credit Counseling?

If you choose credit counselling, you will enter into a consolidation program called a debt management plan (DMP), which is arranged through a credit counsellor. To qualify, you must be able to repay your total debt within five years.

Participation by your creditors is voluntary, and it is at the discretion of each lender if they might reduce or stop charging interest.

Advantages and Disadvantages of Seeking Credit Counseling Services

Benefits of Credit Counseling

The most significant benefit of credit counselling is that it will help you consolidate several payments into one, as you are still required to repay 100% of your debt. Working with a financial professional to set up a complete debt repayment plan can also help you build good habits that you might be able to benefit from even after the debt repayment plan is completed, allowing you to remain in calm financial waters in the future.

Drawbacks of Credit Counseling

Credit counselling comes with some significant drawbacks. While your credit rating is not affected, you still have to pay back 100% of your unsecured debt, which can be a challenge as you have run into some financial troubles to require the services of a credit counsellor.

You also are more limited in which debt you can include in a debt management plan as the debt can only be unsecured, such as credit cards or lines of credit and loans, meaning no secured debt can be included like mortgages or car loans, but even among the unsecured debts, you will not be able to include tax debt or student loans as government creditors will not accept debt management plans.

When is Credit Counseling the Right Solution?

Credit counselling is a good option if you have small debts of less than $10,000 or up to $20,000 if you have enough income to afford repayment and additional credit counselling fees of 10%-15%. It also is a good solution if you can afford your debt but need a break on interest or if you have too much equity in your home to be eligible to file for a consumer proposal but don’t qualify for a debt consolidation loan or a second mortgage.

Key Differences Between Consumer Proposal and Credit Counseling

Consumer Proposal Vs Credit Counseling: Eligibility Criteria

Who qualifies for a consumer proposal?

There are a few criteria you must meet to be able to qualify for a consumer proposal:

  • You must be an individual, not a business or corporation.
  • You are insolvent, meaning you cannot pay your debts as they are owed.
  • You must have unsecured debts to settle, like tax debts or credit card debt. (Note that you can’t include any secured debt such as a mortgage or car loan.)
  • Your debts must not exceed $250,000.
  • You must have a steady source of income to enable you to make your monthly payments.
  • You cannot have a prior consumer proposal that is still open.
  • You have a Licensed Insolvency Trustee to help you through the process.

Who can benefit from credit counselling services?

Credit counselling is a good option for people with smaller unsecured debts of less than $10,000 or, if there is enough income to afford the debt repayment and the credit counselling fees, up to $20,000. The same goes for anyone who can afford their debt but need some relief on interest or cannot qualify for a debt consolidation loan or a second mortgage.

At its core, credit counselling is more about teaching people better debt management and overall money skills to help them avoid getting into rough financial waters again once the debt management plan is fulfilled. 

Consumer Proposal Vs Credit Counseling: Process

Exploring the Process of Consumer Proposal and How it Helps in Debt Management

With a consumer proposal, you book a consultation with a Licensed Insolvency Trustee (LIT), who will carefully review your financial situation to determine if a consumer proposal is the best solution for you. If this is the case, they will prepare the consumer proposal, outlining the amount of debt that will be repaid together with the repayment details, such as monthly payment and for how many months the proposal will be.

The consumer proposal will be filed and sent to your creditors for approval. From this moment on, all legal action, such as collection calls or wage garnishments against you will cease. If your creditors agree, the proposal will come into effect immediately. You will make your monthly payment to your LIT, who will then distribute it among your creditors. Once all payments have been made, the remaining debt will be discharged.

The most significant benefit of debt management is that you can discharge up to 80% of your unsecured debt.

Exploring the Process of Credit Counseling and How it Helps in Debt Management

The credit counselling process begins with a meeting with a credit counsellor to evaluate your financial situation. To qualify for a debt management plan, you must be able to pay your entire debt plus the 10%-15% credit counselling fee.

A debt repayment plan can run up to a maximum of 60 months, and your credit counsellor will contact your creditors to negotiate a repayment plan for you. This will allow you to consolidate several payments into one. You will make this payment to the credit counselling company, which will divide it between your creditors.

Unlike a consumer proposal, interest will continue to accrue unless a freeze or reduction of the interest rate is negotiated.

Consumer Proposal Vs Credit Counseling: Cost

Cost of Consumer Proposal

During the review of your financial situation, the LIT will determine a monthly payment you can afford and propose it to your creditors. Depending on the reaction of your creditors, you might be able to reduce your unsecured debt by up to 80%.

There will be no payments above what has been offered to your creditors in your consumer proposal, and the costs for the consumer proposal itself are included in your monthly payment. They will be automatically deducted from the funds your creditors receive. The fees of Licensed Insolvency Trustees are regulated by a government-reviewed tariff that ensures complete transparency.

Cost of Credit Counseling

The monthly payments in a debt repayment plan can be pretty high as you must pay back 100% of your unsecured debt. Generally, you will have to pay a 10%-15% credit counselling fee to the company you are working with, some of which you may also be charged if the creditors refuse your settlement offer.

As credit counselling companies are not regulated, every provider can set their own service prices.

Consumer Proposal Vs Credit Counseling: Legal Implications

Exploring the Legal Aspects of Consumer Proposals and Credit Counseling

Consumer proposals and credit counselling have distinct differences from a legal standpoint that are critical to know.

A consumer proposal is a legally binding agreement between you and your creditors that, as long as monthly payments are consistently made, will run for the entire period outlined in the consumer proposal. Please note that all unsecured debt has to be included in this proposal.

Once the consumer proposal is filed, all legal action against you, such as collection calls or wage garnishments, will cease, and all future interest charges will also be eliminated.

When going down the credit counselling route, you will set up a debt repayment plan with your credit counsellor. It is important to note that participation in this plan is voluntary by your creditors, and even if they agree to participate, they can revoke their agreement at any time.

A debt repayment plan will also not stop collection calls or interest charges.

How Each Debt Solution Affects Your Financial Obligations

Both debt solutions will result in an R7 listing on your credit report, indicating that you have entered a scheduled repayment plan. This rating will remain on your credit report until 5 years after the proposal/plan has been filed or 3 years after the last payment, whichever comes first.

Consumer Proposal Vs Debt Counseling: Which One is Right for You?

The choice between a consumer proposal and debt counselling depends on several factors that must be carefully weighed, depending on the amount of debt you have, the kind of debt and if you can afford to pay your whole debt or only a part of it.

It is critical to consider all factors when deciding on a debt relief solution. After all, you want to be on the road to financial recovery and not set yourself up for failure. Carefully evaluate income, assets and debts to determine which solution is best suited for you.

The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal insolvency services. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well informed and don’t rush into any solutions. All of our consultations are free, without time limits.

Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.

Frequently Asked Questions

Is Credit Counseling the Same as a Consumer Proposal?

Credit counselling and a consumer proposal are two very different debt solutions. In the former, you create a debt management plan, which will include 100% of your unsecured debt in the program, while the latter is a legally binding agreement between you and your creditors that can reduce your unsecured debt by up to 80%.

Will a Consumer Proposal or Credit Counseling Affect My Credit Score?

Both consumer proposal and credit counselling will negatively affect your credit score with an R7 listing on your credit report.

How Long Does it Take to Complete a Consumer Proposal or Credit Counseling Program?

The maximum time to complete a consumer proposal or credit counselling program is 60 months.

Are There Any Fees Involved in Consumer Proposals or Credit Counseling?

Yes, both debt solutions involve fees. However, with a consumer proposal, the fee for the Licensed Insolvency Trustee is government-reviewed and will be included in the monthly payment for the consumer proposal. With credit counselling, each company can set its own fees, which will be on top of your monthly payments.

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Mihir Chande
Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee Mike, a Chartered Accountant, began his insolvency career in the Corporate Insolvency and Restructuring group at one of Canada’s largest insolvency firms. After gaining extensive experience, he founded Chande Debt Solutions to offer personalized and empathetic debt relief services to clients seeking an alternative to traditional solutions.

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