Despite Montreal being one of the cheaper Canadian cities to live in, your expenses can still get ahead of you. Unfortunately, while a bit of debt isn’t the end of the world, a lot of it can cause lasting damage to your finances and credit. When that happens and simple methods of repayment aren’t working, more extreme measures might be necessary to prevent the situation from getting any worse.
One of the more drastic, but helpful debt management products available to consumers in Montreal is the consumer proposal.
Knowing When to File a Consumer Proposal in Montreal
A consumer proposal is a legally binding contract that can be struck between you and the creditors you owe outstanding debts to. If your creditors find the proposal acceptable, you’ll have the opportunity to pay back a large portion of what you owe, rather than the full amount. Before you choose this route, however, it’s important to be aware that a consumer proposal can have a significant negative impact on your financial profile.
It’s best not to consider a consumer proposal in Montreal unless:
- You are currently under so much debt that no conventional solutions will work (i.e. debt consolidation loan or program, debt settlement, etc.)
- You have a minimum of $5,000 and a maximum of $250,000 in consumer debt
- You have a steady source of employment and the ability to make payments on a monthly basis for what could be several years
- You’re trying to avoid declaring personal bankruptcy
- Your debts are mostly unsecured, such as:
- Credit card debt
- Unsecured loans
- Personal lines of credit
- Non-federal student loans
- Utility, internet, cable, and cell phone bills
The Effect On Your Debt
Once your proposal has been agreed upon, your repayment will be done via a series of monthly installments. The length of your payment schedule will vary depending on your debt amount and the current state of your finances.
However, as we mentioned, only unsecured consumer debt can qualify for the process. Most secured debt, that’s tied to collateral, as well as some forms of government debt will not be eligible. This includes (but isn’t limited to):
- Mortgage payments
- Car loan debt
- Unpaid home equity loans and HELOCs (home equity lines of credit)
- Child support and alimony payments
If all goes well, your outstanding consumer debt balance should be drastically reduced, hopefully, eliminated altogether. In order to stay on track toward your debt repayment goals, it’s essential to make all your payments on time and in full.
Click here to discover ways of conquering your high-interest consumer debt in 2019.
A Rundown of the Consumer Proposal Process in Montreal
Although you may now have an idea of what a consumer proposal is, we’ll give you a basic rundown of the actual process so that there will be no confusion on your part.
Here’s how a typical consumer proposal in Montreal may go:
- You’ll need to start by finding a licensed insolvency trustee; a government regulated professional tasked with providing solutions that discharge borrowers from unmanageable debt (this includes bankruptcies).
- Once you’ve hired a trustee, you’ll need to explain your debt situation to them and provide proof that you cannot possibly pay off your full outstanding balance.
- The trustee will then draw up an appropriate proposal and offer it to your creditors on your behalf.
- Your creditors meet to discuss the proposal and vote on whether it’s agreeable or not. They must accept or reject it within 45 days.
- If they accept, the proposal will be filed, making it a matter of public record under the Bankruptcy and Insolvency Act of Canada. During that time, all collection efforts, wage garnishment, mounting interest and penalties against you will stop.
- You’ll begin making monthly payments, each of which you’ll pay toward your trustee, who will send them to your creditors. The overall cost of the process will include a legal fee for your trustee’s services.
- The maximum time within with you must complete all your consumer proposal payments is 5 years in Canada. You may also be able to pay it earlier than that.
The Effect on Your Credit
Although a consumer proposal is an effective way of getting rid your consumer debt, it can also damage your credit.
Here’s what that damage might look like:
- Once the proposal goes through, the process will be reported to Canada’s two main credit bureaus (Equifax and TransUnion).
- Your credit rating will drop down to an R7, a category reserved for borrowers who are making payments toward a special debt settlement procedure.
- Your credit score will also decrease significantly, the margin of which is dependant on the credit bureau you’re looking at, as each holds a different version of your credit score.
- After your proposal is complete, a record of it will remain on your credit report for 3 years. If it took the full 5 years for you to finish your payments, this means that your credit will be affected for a total of 8 years.
While it won’t be impossible to get approved for a loan or other credit product during a consumer proposal, it will certainly be more difficult than for someone who has never gone through the process. That’s because when you apply, your potential lender may check your credit, see your consumer proposal and damaged score, and determine you’re not creditworthy.
Check out some fast ways of rebuilding your credit after a consumer proposal in Montreal.
Check out this infographic to learn more about credit scores. Consumer Proposal vs. Bankruptcy
A consumer proposal, while risky for your finances, is still a better option than declaring personal bankruptcy. Although both solutions involve a similar legally binding payment process, the overall outcome and financial result of each will be significantly different.
Similarities
- Declaring bankruptcy also involves hiring an insolvency trustee to file a motion toward the Court on your behalf, which will also be regulated under the Bankruptcy and Insolvency Act.
- If all goes well, your creditors will be legally obliged to cease their collection efforts against you.
- Your unsecured consumer debts will also be paid off through installments, over a payment schedule that can last several years.
- Your credit will also be damaged for a lengthy amount of time following the final bankruptcy discharge date.
Differences
- Although you must have a minimum of $1,000 of unsecured debt to be eligible, there is no debt limit when it comes to bankruptcy.
- Instead of going to your creditors, your trustee will send your payments directly to the Court. The cost of your bankruptcy may also be more expensive than a consumer proposal in Montreal.
- Depending on your gross monthly income, you may have to start making surplus income payments, in addition to your regular bankruptcy payments.
- If you have assets, such as your house, car, or RRSPs, you may have to surrender them as payment (which doesn’t happen with a consumer proposal).
- Your credit rating will drop to the worst level of R9. Your credit score is likely to decrease further than with a consumer proposal.
- A record of the bankruptcy will stay on your credit report for 7 years each time you have to file.
Even though it can be difficult to secure new credit during and after the consumer proposal process, the final result of bankruptcy will be far worse, making it next to impossible until you can restore your credit. Only consider bankruptcy when no other debt management product, including a consumer proposal, will help. Speak to a financial advisor to know when bankruptcy is appropriate for you.
Here’s how much it would cost you to file for bankruptcy for the second time in Canada.
Filing for a Consumer Proposal In Montreal
If you’re looking for information about consumer proposals in Montreal, don’t forget to reach out to Loans Canada. We’re always here to help you with your debt relief needs. Be sure to contact us today!
