Debt Consolidation Vs Consumer Proposal: Which is Best Option for Debt Relief ?

Posted on May 31, 2023 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee
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Many Canadians struggle with debt and don’t know about different options for debt relief. In Canada Ontario there are two most prominent solutions for debt management are debt consolidation and consumer proposals.

In this guide, we will look at both debt relief options, debt consolidation vs consumer proposals to help you understand what they mean for you, with their benefits and drawbacks and which one is best to reduce your debt fast.

Side by Side Comparison

AspectDebt ConsolidationConsumer Proposal
DefinitionCombining multiple debts into one loanLegal process to negotiate debt repayments
EligibilityGenerally requires a good credit scoreAvailable to individuals with unsecured debts
Debt TypesCan consolidate various types of debtsPrimarily focuses on unsecured debts
Monthly PaymentsSingle monthly payment for all debtsNegotiated reduced monthly payments
Interest RatesMay have lower interest ratesNegotiated lower interest rates
Debt ReductionNo reduction in the total amount owedPotential to reduce the overall debt
Credit ImpactMay have a negative impact on credit scoreMay have a negative impact on credit score
Legal ProtectionNo legal protection against creditorsLegal protection from creditors
Repayment PeriodLonger repayment periodUsually completed within 5 years
Creditors’ ApprovalCreditors must agree to participateMajority of creditors must agree
Bankruptcy AlternativeNot considered a formal insolvency processAlternative to filing for bankruptcy

What is Debt Consolidation?

For many, debt consolidation is the first option to consider. In this solution, high-interest debt is refinanced into a lower-interest consolidation loan. This goal is to reduce monthly payments and interest rates, lowering your monthly financial burden.

Pros and Cons of Debt Consolidation

The most significant advantage of debt consolidation is that it will not negatively affect your credit rating if you continue making your monthly payments on time. It will also allow you to pay off the entire debt balance at reduced interest rates. If you have assets, such as real estate, you can use them to secure a consolidation loan.

On the other hand, debt consolidation also has significant drawbacks. For one, while you can reduce interest rates and face fewer individual creditors, a consolidation loan will not reduce your debt. You can also keep all credit cards and personal credit lines. What may seem like an advantage at first glance also means that the risk of accruing high-interest credit is high, which could result in dangerously high debt levels.

Depending on your credit rating, you may also not qualify for a consolidation loan in the first place. This may require either a significant asset as security or a co-signer. In these cases, if you fall behind on your payments again, the pledged assets could be seized, or payments might be collected from the co-signer.

Types of Debt Consolidation

There are various kinds of debt consolidation available to you. If you have a low-interest credit card, you can consolidate your high-interest credit card debt on that card via a balance transfer. If your credit rating qualifies you, you can also take out a personal loan at a lower interest rate to cover your high-interest debt. Or, if you have significant assets, such as real estate, you can also apply for a home equity loan.

When to Consider Debt Consolidation?

As mentioned above, debt consolidation can have significant advantages. It might be suitable if you can qualify for a consolidation loan and afford the payments.

Two significant benefits are that it will not negatively impact your credit rating and that you can pay back your original debt.

How Much Does Consumer Debt Consolidation Cost?

Debt consolidation technically doesn’t cost you anything per se, as you will likely deal with your bank or credit union unless you are dealing with a credit counseling agency. Typically, their interest rates for debt consolidation loans sit between 7% and 12%; with finance companies, these rates can fluctuate between 14% or more for a secured loan and up to 30% or even more for unsecured loans.

What is 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.

Learn More: What is a Consumer Proposal and How Does It Work

Pros and Cons of Consumer Proposal

The most significant advantage of a consumer proposal is that you can substantially reduce your outstanding debt by discharging up to 80% of your unsecured debt and eliminating all future interest from your debt. A consumer proposal will also stop all legal action against you, meaning that any wage garnishments or collection calls will cease immediately. And your assets are protected from liquidation, as opposed to declaring bankruptcy.

The biggest drawback of a consumer proposal is that it will negatively affect your credit rating for several years due to the discharge of a portion of your debt. This can make it challenging to be approved for new loans without assets or co-signers. A consumer proposal also only covers unsecured debt, such as credit cards, tax debt, personal loans or, depending on their age, student loans. A proposal cannot include any secured debt like mortgages or car loans.

How Does a Consumer Proposal Work?

The first step is to meet with a Licensed Insolvency Trustee, who will thoroughly review your financial situation, including all income and assets, debt, due dates, interest rates etc. Together with you, they will determine how much of your outstanding unsecured debt you can afford to pay back and prepare the proposal. Once a proposal is filed, all legal action and interest will cease immediately, and you will make monthly payments as agreed to in the proposal. After all payments have been made, the remainder of your debt will be discharged.

When to Consider a Consumer Proposal?

There are several situations in which a consumer proposal could be a better option to consider. First and foremost, if you can’t be approved for a consolidation loan or cannot afford the required payments, a consumer proposal can be an effective 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. You may also want to consider a consumer proposal if you seek protection from wage garnishments, frozen bank accounts or legal actions by creditors or debt collection agencies.

How Much Does a Consumer Proposal Cost?

The cost of a consumer proposal is very specific to your situation. Your monthly payment, which is the amount you had agreed to pay as per the agreement with your creditors, depends on your income, your ability of how much you can reasonably afford to pay per month, the overall amount of debt you owe and for how long the proposed agreement will be active for.

What Are the Differences Between Debt Consolidation and a Consumer Proposal?

To make an informed decision, it is critical to know the details, so what are the differences between debt consolidation and a consumer proposal?

Criteria for eligibility

A debt consolidation plan does not require any agreement from your creditors, as you are not proposing a reduction of the debt you owe. However, a bad credit rating or the lack of assets to use as collateral for a consolidation loan could severely restrict your ability to be approved.

On the other hand, the biggest hurdle for a consumer proposal is that your creditors have to accept the proposed agreement, as it will include a discharge of up to 80% of your total debt.

Impact on Your Credit Score

For as long as you can make your payments, a debt consolidation plan will not negatively impact your credit score; it actually can help you improve it by consistently making monthly payments.

Due to the discharge of large portions of your debt, a consumer proposal will affect your credit score for up to several years.

Repayment Terms and Interest Rates

In the case of debt consolidation, your repayment terms and interest rates will be determined by the terms of your consolidation loan. If you opt for a consumer proposal, you will decide with your Licensed Insolvency Trustee how much you can realistically pay back every month. A consumer proposal will also eliminate any additional interest accrual on any debt included in the proposal.

Flexibility and Control Over Debt Repayment

With both debt relief options, you are bound by the respective agreements for the monthly payments. While the consumer proposal gives you some initial flexibility while determining how much you can afford to pay back every month, once the proposal has been accepted, you must make these monthly payments consistently.

You can pay off a consumer proposal early through the money you save with the lower payments, help from family or friends, tax refunds, bonuses, or other windfalls. The same goes for a consolidation loan, but some lenders may charge a prepayment penalty. 

You May Also Like: Bankruptcy vs. Consumer Proposal: What’s The Difference

Debt Consolidation Vs Consumer Proposal: Which Option is Right for Your Financial Situation?

There are many different factors to consider when deciding on a debt relief option. One of the main factors is how much you can realistically pay every month. If, for example, you have enough income to make monthly payments on a consolidation loan, then debt consolidation could be an excellent option. The same goes for if you have more secure than unsecured debts.

A consumer proposal excludes any secured debt, such as a mortgage or car loan, so it makes more sense if the debt you are struggling with is unsecured. 

However, if you are struggling to make payments or have a large debt, the prospect of discharging up to 80% of your total debt in a consumer proposal can be a very attractive option.

You must weigh all factors to determine the best option for your situation. 

If you have sufficient income or assets like real estate that you can use as security, then a consolidation loan is a good option as it will not damage your credit rating, and you pay off your total debt. On the other hand, the risk of accruing high-interest debt remains as you can keep all credit cards and personal credit lines, and you are not protected from collection initiatives if you fall behind on your payments.

In the case of a consumer proposal, you can discharge up to 80% of your total debt and are protected from any legal action by creditors or collection agencies. You also can keep your assets and will not accrue any additional interest on your debt owed. On the side of consumer proposal disadvantages, you can only include unsecured debts in a proposal, and your credit rating will take a hit.

To determine more clearly and answer every doubts which option is the best for your specific situation, we recommend speaking to a Licensed Insolvency Trustee at Chande Debt Solutions. Our experienced experts can assess your financial situation and weigh the pros and cons to help you make an informed decision. 


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 are serious matters, 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.


Can I still get a loan if I have a consumer proposal or debt consolidation on my credit report?

Yes, it is possible to get a loan while having a consumer proposal on your credit report. However, it will be difficult as your options may be limited and will likely come with higher interest rates. Due to the consumer proposal, lenders could view you as a financial risk.

Which option is better for me, debt consolidation or consumer proposal?

As every financial solution is very case-specific, giving a clear answer without knowing the details is difficult. Call us today at 416-366-3328 or fill out our convenient online form for a free consultation to determine which option is the best for you.

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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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