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Are you currently working through a consumer proposal? While a consumer proposal provides borrowers with a great way to pay off their debt, their often long, lasting up to 5 years. But what happens if your income increases or you happen upon some windfall, are you able to pay of your consumer proposal early?

Can You Pay Off Your Consumer Proposal Early?

If you come across a financial windfall or your income improves at some point, you can use the funds to pay off your consumer proposal early without penalty. 

If you have the financial means to repay your consumer proposal off before it’s officially due for repayment, consider doing so. The sooner you complete your consumer proposal, the sooner you can start rebuilding your credit.  

How To Pay Off Your Consumer Proposal Early?

If you’re looking for ways to pay off your consumer proposal faster, consider the following tips:

Change your payment frequency 

While a consumer proposal generally involves monthly payments, you can also increase them to bi-weekly (one payment every 2 weeks). This will allow for one extra payment per month.

Increase your payment amount

One way to pay off your consumer proposal earlier than its original completion date is by increasing the amount of your payments. Just a few extra dollars per payment can make a significant difference over the long run and help you repay your consumer proposal early. 

Just make sure you’re certain that paying your proposal off sooner won’t compromise your budget.

Make lump sum payments

Another benefit to consumer proposals is that they allow you to pay in lump sums throughout your payment schedule. So, if you receive a work bonus or any extra income, you can put it toward your proposal and pay it off earlier. If you want, you can even pay off your total debt in one go.

Consider Selling Your Assets 

You can free up some extra money to repay your consumer proposal by liquidating valuable assets. The entire proceeds from the sale can be used to help pay off your proposal early.

However, be careful if the assets you’re considering selling are currently being used as collateral for secured debts. 

A consumer proposal only handles unsecured debts. As such, selling assets that are backing secured loans means you’ll have to pay off the secured debt in full from the proceeds of the sale first. If there is any money left over, then you can use it to pay off your consumer proposal. 

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Can You Pay Off Your Consumer Proposal With Your RRSP?

Yes, you can use the money in your RRSP account to repay your consumer proposal off before the completion date. However, there are a few reasons why this might not be the best route to take:

  • Tax implications. If you withdraw from your RRSP, you’ll need to pay taxes on the amount withdrawn. The point of an RRSP is to hedge against taxation. By withdrawing early from your RRSP, you’ll be subject to taxes.
  • Employer contributions may stop. If your employer offers a contribution plan, withdrawing from your RRSP might mean that your employer will no longer match your contributions.  
  • Retirement plans may be impacted. Another reason for investing in an RRSP is to ensure you have enough money to live on when you retire. By withdrawing money from your account, you could be left with less money during retirement.

Can You Use A Loan To Pay Off Your Consumer Proposal?

Technically, you can take out a loan and use the funds to repay your consumer loan early. There are some lenders who offer loans specially designed to pay off your consumer proposal faster. 

Some consumers may consider this option as a way to eliminate their consumer proposals sooner rather than later so they can start rebuilding their credit. Timely payments made towards paying off the consumer proposal loan can also help build your payment history. 

However, taking out a consumer proposal loan has its risks, such as the following reasons: 

  • High interest. Consumer proposal loans usually come with high interest rates of at least 20% or more. Consumer proposals are interest-free, which means the loan will be a lot more expensive.
  • Risk of high debt. The reason why you filed a consumer proposal in the first place is because of your troubles with debt. By taking out another loan, you’re just adding to the debt pile. This can put you at risk of drowning in too much debt that you may eventually be unable to repay. 
  • Extending your loan term. You may find yourself with a longer loan term compared to the length of time you’re given to repay your consumer proposal. You may find yourself repaying your debt for just as long – if not longer – than you would if you had just had the consumer proposal. 
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Can You Use Your Home Equity To Pay Off Your Consumer Proposal?

If you own a home and have built up some equity in it, you may be able to tap into it and use the funds to repay your consumer proposal early. 

However, it’s important to understand the potential ramifications of using your home equity for this purpose. 

  • More Debt – For starters, you’ll be adding more debt to the books. A high amount of hard-to-manage debt is the reason you filed for a consumer proposal in the first place. 
  • Defaulting Risk – In addition to the significant debt your home equity product and consumer proposal can cause, second mortgages are secured against your home. If you can’t afford both payments, it could, once again, lead to default. You could risk your home being foreclosed on.

Filing for a consumer proposal is meant to help you eliminate all your debts. Once you complete your consumer proposal, you’ll need to deal with these additional secured debts, along with the interest and risks of repossession if you fail to keep up with the payments.

Instead, you’d be well-advised to dedicate your finances to paying off your consumer proposal without taking on additional debt.

Pros And Cons Of Paying Your Proposal Early

Yes, it can certainly be beneficial to pay your consumer proposal ahead of schedule. However, before you try it, make sure you understand the potential consequences. While we’re going to list some of those consequences below, always discuss the idea with your insolvency trustee before you make your decision.

Pros

  • There is no penalty for making a lump sum or advanced payments.
  • Your payment schedule will be shorter, so you won’t be stuck in debt as long.
  • Since your proposal will be over earlier, you can start dealing with your 3-year bad credit situation faster.
  • Fewer payments mean less chance that you’ll default in the future.

Cons

  • Paying your proposal early means you’ll be spending more money with every payment. This could make it harder to afford your other regular expenses.
  • If your income doesn’t support these larger payments, it can lead to you defaulting on both your proposal and your other outstanding debts.

When Should You Pay Off Your Consumer Proposal Early?

There are a few situations where it might make sense to pay off your consumer proposal early, including the following.

  • You Can Afford It – There could come a time when your finances might drastically improve. For instance, you might get a raise from work, win the lottery, or be named a beneficiary for an inheritance. Whatever the case may be, you can use the extra money you come across to pay off your consumer proposal early by either making bigger installment payments or paying the proposal off with one lump-sum payment.
  • You Want to Build Your Credit – The earlier you pay off your consumer proposal, the sooner you can take steps to repair your credit score. In fact, rebuilding credit is one of the biggest reasons why consumers pay off their proposals early.
  • You’re Afraid Of Your Proposal Being Annulled – You may be worried that your consumer proposal may be annulled due to missed payments, which would put you right back at square one with all your debts. This is certainly a possibility if you miss 3 payments on your consumer proposal. If you find that you cannot remember to make your payments and have trouble managing your proposal, paying it off early will eliminate this extra payment and the risk of your proposal being annulled.

Consumer Proposal vs. Bankruptcy

As we mentioned, a consumer proposal is one of the most drastic debt elimination steps you can take. Nonetheless, it is still less harmful to your finances than declaring personal bankruptcy

Bankruptcy 

In the case of a bankruptcy, you’ll also be filing a legally binding agreement, as well as making scheduled debt payments to an insolvency trustee. Additionally, you need to be at least $1,000 in debt and any collection efforts, mounting interest, penalty fees, and wage garnishments should cease.

Consequences Of Declaring Bankruptcy

  • If your debt is large enough, your assets may be seized as payment.
  • Any credit accounts associated with the bankruptcy will be frozen.
  • You may have to make surplus income payments if your regular income exceeds a certain amount.
  • You’ll be given an R9 credit rating and a record of it will show up on your credit report for 7 years. During that time, it may be very hard for you to be approved for any credit products.

Bottom Line

In many cases, it might be a good idea to pay off your consumer proposal early. You can start rebuilding your credit sooner and eliminate one more payment. However, be careful about taking out a loan to repay your proposal sooner, as it could come with financial risks.

Consumer Proposal FAQs

How does a consumer proposal affect your credit?

A consumer proposal is noted on your credit report when you file. The rating on your credit account will drop to an R7. This rating will remain for 6 years from the filing date, or 3 years after your consumer proposal is completed. So, the faster you pay off your consumer proposal, the faster the R7 rating will be removed from your credit report.

What is a consumer proposal?

A consumer proposal is a legally binding agreement between you and your creditors in order to rectify a particularly bad debt situation. You should only consider filing for a consumer proposal if you have little to no chance of consolidating your debt using standard methods, you’re being pursued by collection agencies, and/or having your wages garnished. 

What happens If I miss a consumer proposal payment? 

If you miss 3 payments (2 missed payments is not recommended, but acceptable without penalty), your proposal will be annulled and you’ll have to start the process all over.

Are there any fees associated with paying off your consumer proposal early? 

No, paying off a consumer proposal early does not come with any early repayment fees, unlike most loan types. 

Can I roll my consumer proposal into my mortgage?

Yes, you can cover your consumer proposal costs by refinancing your mortgage. With a mortgage refinance, you can free up extra funds to cover other expenses, including a consumer proposal. 
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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