Taking on some debt is often necessary when you’re a credit user. However, it can also be difficult to get rid of when you take on more than your income and savings will support. This is the case for many residents of Charlottetown since household debt levels in PEI have been climbing in recent years. If you’re one of those residents, don’t panic, as there are many debt relief options available to you.
One of the most helpful, albeit one of the most drastic solutions is the filing of a consumer proposal. Curious to know how this is done and if the process is right for you?
What is a Consumer Proposal?
A consumer proposal in Charlottetown is a legal procedure that must be conducted by a Licensed Insolvency Trustee. This proposal acts as an agreement between you and the creditors that you have overdue debts with.
Read this for an explanation of Canada’s Bankruptcy and Insolvency Act.
Once you’ve proven that you can’t possibly pay your full outstanding balance, your Trustee will propose a deal that allows you to repay a substantial portion of what you owe. The amount you end up paying will be based primarily on the size of your debt, the state of your income, and the value of any assets, or other properties that you may own. The creditors that hold a majority share of your debts will then congregate to discuss the terms of the proposal, wherein they can choose to accept or reject it.
Generally, most creditors would rather receive a partial payment than pursue a lawsuit against you, which could cost them more time, money, and resources than your debt is worth. If they approve the proposal within 45 days, you and your trustee will set up a payment plan that allows you to settle your remaining debt through monthly installments. While you’ll have a maximum of 5 years to finish the plan, you can also pay your proposal early by sending your Trustee larger or more frequent payments.
Check out this article for more information about paying back your consumer proposal early.
Knowing When a Consumer Proposal is Necessary
Living with debt is not easy, especially when you have trouble keeping track of all the sources and the due dates of your bills. As such, it can also be challenging to know when such a drastic legal action is necessary. While you should also consult a financial advisor as soon as your debts begin to worry you, there are several key warning signs that will point you in the right direction.
A consumer proposal in Charlottetown could be necessary when:
- The amount of consumer debt you’re carrying falls between the designated limits. Generally, having a minimum of $5,000 and a maximum of $250,000 of debt will make you eligible.
- You have a dependable source of employment and would not be overwhelmed by the cost of your upcoming payments, as well as any legal fees that may be added.
- You can provide evidence that supports the claim that you cannot pay 100% of what you owe. This can include your recent paychecks, bank statements, and valuation of any assets in your name.
- None of these less drastic alternatives are possible or effective:
- Debt consolidation loan
- Debt consolidation program
- Debt settlement
- Credit counselling
- Applying for a HELOC or home equity loan
Check out this infographic for a full breakdown of how credit scores are calculated.The Change to Your Credit
All this being said, it seems like a consumer proposal it has no downsides. You’ll have an expert guiding you the whole time, any collection efforts will cease, and you won’t even have to pay back the entire amount you owe. Then again, it’s important not to get ahead of yourself and remember that there are reasons why this solution is so drastic. If you don’t make your payments responsibly, further debt problems will occur for you. However, perhaps the most negative effect will be to your credit rating and credit report.
Your Credit Rating
When you make payments toward your proposal, your creditors should report them to Canada’s two major credit bureaus (Equifax and TransUnion). Your report contains records of all your credit accounts, including the ones that are in the midst of a consumer proposal in Charlottetown. Any credit rating for an account involved in a consumer proposal will become an R7. This is the third lowest rank, reserved for borrowers making payments toward some kind of debt settlement arrangement. That rating will last until your proposal is complete.
Your Credit Report
Evidence of the proposal will also remain on your report for 3 years, even after all your payments have gone through. Until you manage to improve your credit, potential creditors may not trust you with any new loans or other credit products that you apply for. If you do manage to get approved, it probably won’t be with a bank or other prime source, and will likely come at a hefty price due to the higher interest rate your new creditor will charge you for the risk they’re taking.
For more information about how a consumer proposal affects your credit, click here.
Avoiding Bankruptcy
While a consumer proposal in Charlottetown is a drastic debt relief product, it’s still a safer choice than declaring bankruptcy. Although both procedures are legally binding and similar in many ways, a consumer proposal doesn’t involve quite as much financial turmoil as a bankruptcy.
For example, with a consumer proposal, none of your assets will be seized to compensate your creditors. While your credit rating may drop significantly, you can still gain approval for credit products through private, alternative, and bad credit sources. And, as we mentioned, the negative effect on your credit should only last for 3 years.
For more differences between a consumer proposal and a bankruptcy, click here.
Although 3 years might feel like a long time and a rating of R7 might seem harsh, it’s nothing compared to the credit damage that occurs when you declare bankruptcy. Not only will your credit rating descend to the lowest rank of R9 during this process, but a record of it will also stay attached to your credit report for 7 years every time you file. During that period, new credit will be almost impossible to access, as most lenders won’t trust someone who had such trouble paying their debts that bankruptcy was their only solution.
Read this to find out what a second bankruptcy filing could cost you.
The financial toll of bankruptcy also outweighs that of a consumer proposal. Although you won’t have to pay your creditors directly, your assets (house, car, etc.) may be seized and sold to cover part of the debt you owe them. Even the funds that you’ve already invested in your RRSP could be drained. In addition, you might be required to make surplus income payments if your income is over a specific threshold.
How Unsecured Debt is Treated
Now that you know what happens to your debt during a consumer proposal in Charlottetown, let’s discuss which kinds of debt are eligible for the process. That’s right, there are some debt types that cannot be covered by a consumer proposal.
Unsecured Debt
Much of the consumer debt that you’ll take on as a credit user is going to be unsecured, meaning it’s not backed by collateral. This is common with credit cards, non-government student loans, personal lines of credit, and other loans where you haven’t offered security. Any of these debts can be included in a consumer proposal. Luckily, some debts that don’t relate to credit will also be eligible, such as bills from utility, internet, and cell-phone companies. Unpaid income taxes and overdue rental payments can also qualify.
Is bankruptcy the answer to your student loan debt? Find out here.
Secured Debt
On the contrary, you can make a debt secured by allowing your creditor to hold temporary ownership over one of your assets. Offering security can help you access larger amounts of credit and more favorable interest rates because you’re lessening the risk on your creditor by giving them something they can sell in the event that you default. This is common with mortgages, car loans, home equity loans and HELOCs (home equity lines of credit).
Unfortunately, since the creditor technically owns the rights to your asset, any debt involved will not be eligible for a consumer proposal in Charlottetown. This also goes for any debts that you accrued through legally or federally related events, such as lawsuits, traffic tickets, child support payments, and government-granted student loans.
For additional information about secured and unsecured debt, take a look at this.
Is a Consumer Proposal Right For You?
If your debts are too cumbersome to manage and you’re now considering a consumer proposal in Charlottetown, don’t hesitate to speak with Loans Canada. We can provide you with information about the consumer proposal process, as well as solutions that will help you avoid it altogether.
