More Canadians are filing a Consumer Proposal as a way to manage their debt—without the…

Consumer Proposal vs. Debt Consolidation: Which is the Best Debt Solution for You?
Managing debt is a challenge. But it’s even more difficult with high interest rates that add to your principal and make it hard to lower your balance. What can you do when so many payments make your debt overwhelming?
Consumer Proposals and debt consolidation are the two most popular debt relief options available to Canadians. While these alternatives will set you up to better manage your debt, they are different in process and have unique pros and cons. So let’s do an debt relief comparison: Consumer Proposal vs. debt consolidation. Which option is best for you?
What is a Consumer Proposal?
A Consumer Proposal is a formal agreement between you and your creditors (the individuals or organisations you owe money to). With the help of a Licensed Insolvency Trustee (LIT), you offer to your creditors to repay a part of your debt within a certain period, usually up to five years.1 With a set plan you pay only a portion of what you owe, based on how much you can pay. If the majority creditor stake with more than half of your debt agrees, the proposal is considered in effect.
Pros of a Consumer Proposal:
A Consumer Proposal involves several advantages that can help overwhelmed debtors:
- Debt reduction: Most of the time, you only have to pay back part of your total debt, which can save a significant amount of money.
- Legal protection: Once the Consumer Proposal is accepted, there is a legal protection wherein all collection actions from creditors must immediately stop. That includes phone calls, wage garnishee, and court action.
- Bankruptcy avoidance: A Consumer Proposal is considered a wise alternative to Bankruptcy as you can keep your assets while reducing debt.
- Fixed payments: Your monthly payment is fixed and predictable, which lets you budget and plan accordingly.
Cons of a Consumer Proposal:
Despite the many benefits, there are a few drawbacks to consider with a Consumer Proposal:
- Effects on credit: Filing a Consumer Proposal will reduce your credit score. It also reflects on your credit report from three or six years (depending on the agency and debt type).2
- No instant approval: Creditors have to agree with the terms, and it’s not always approved.
- Long-term commitment: Payments are spaced over a couple of years, requiring commitment to fixed payments that may last up to five years.
What is Debt Consolidation?
Debt consolidation, or credit consolidation, combines various debts into a single loan. You take out a loan to pay off all smaller debts with one single monthly payment. Most of the time, you do this via banks or credit unions, but other types of lenders will do it as well. If you can qualify for such a loan, it often has a lower interest rate, thus becoming more manageable.
Pros of debt consolidation:
Debt consolidations offer several advantages that better fit those in situations of good credit with high-interest payments:
- Simplicity: Debt consolidation simplifies the process because many different debts are combined into one manageable payment.
- Lower interest rates: If you qualify for a low-interest consolidation loan, you can save on interest and pay off your debt faster.
- Credit score protection: As long as you make payments on time, debt consolidation doesn’t harm your credit score the way a Consumer Proposal would.
Cons of debt consolidation:
While ideal for those with no immediate insolvency risk, there are some drawbacks and barriers to consider with consolidation:
- Requires good credit: A low-interest consolidation loan normally requires a good credit score. If your credit is low, this may not be an option.
- Doesn’t reduce debt: Unlike a Consumer Proposal, debt consolidation does not reduce the amount that you owe in any way. You will need to continue paying back the whole amount.
- Risk of additional debt: Because debts are gathered into one loan, it may seem like you don’t have as much debt as you thought. That can lead to the temptation to borrow more.
Key Differences Between Consumer Proposal and Debt Consolidation
When considering Consumer Proposal vs. debt consolidation, there are a few key differences that distinguish the two options :
- Debt relief: With a Consumer Proposal, you pay only a portion of the debt. That may be a big relief when you are in financial distress. Debt consolidation only collates all your debts; you still owe the whole amount.
- Credit impact: A Consumer Proposal will impact your credit score. Debt consolidation, if well-managed, can improve your credit since it collates your payments and keeps you up to date.
- Interest rates: Interest on all unsecured debts are frozen upon acceptance of the Consumer Proposal and can save you lots of interest over time. Debt consolidation may also decrease your interest if you qualify for a good rate, depending on your credit score.
- Creditor protection: A Consumer Proposal offers full creditor protection. Once your proposal is approved, there are no possible collections, garnishments, or legal actions by the creditors anymore. Debt consolidation does not offer that legal protection, so collectors could still take action against you in case of missed payments.
- Eligibility and accessibility: A Consumer Proposal is available to anyone having unsecured debt, such as credit cards or personal loans, up to $250,000, excluding a mortgage.1 Debt consolidation typically requires good credit, decent income, or assets to qualify, making it less accessible if you have issues with your credit.
Consumer Proposal vs. debt consolidation: which is better for you?
The debt solution that best works for you depends on your specific financial position, credit rating, and overall goals.
- Large debts: In cases of unsecured debt and an inability to make payments, a Consumer Proposal will be much more advantageous. It cuts down on the amount that you owe and protects against creditors, which can be a real plus if you are subjected to aggressive collections.
- Good credit and steady income: Debt consolidation might be a good option if you have high credit and your income is stable, with the top priority being to reorganise payments without any effect on your credit scores. You can help clear up your finances using low-interest consolidation loans and avoid the negative credit impact of a Consumer Proposal.
- Consumer Proposal vs Bankruptcy: A Consumer Proposal is often considered an intermediary between paying all your debts and declaring Bankruptcy. In any case, you might consider a Consumer Proposal that can give you debt forgiveness with less harsh implications than filing for Bankruptcy.
Other Debt Management Strategies
While Consumer Proposals and debt consolidation are popular options, there are a couple other debt-relief options you might also want to consider:
- Credit counselling: Credit counselling may help you understand how personal finances work, support better budgeting, and assist with a repayment plan. Credit counselling is often free or at a low cost.
- Debt settlement: Debt settlement is an informal agreement with your creditors where you pay a reduced amount to your debtors. While debt settlement may reduce what you owe, it may harm your credit and does not offer the legal protection of a Consumer Proposal.
Choosing the Right Option for Debt Relief
Consumer Proposals and debt consolidations are ways of dealing with debt. Each fits a different financial situation. When you need to reduce your debt and legally protect it from creditors, a Consumer Proposal would come in handy. If you can manage your debt and need to restructure with better terms, then debt consolidation is a good choice.
It is never easy to choose between a Consumer Proposal or debt consolidation. If you feel unsure of your next move, book an in-person consultation with a Licensed Insolvency Trustee. An LIT can present your options clearly and discuss the best course of action for your situation. They are professionals bound by a licence issued by the federal government to administer Consumer Proposals and Bankruptcy filings in Canada. They can also give you insolvency advice and assist in determining the best method of debt settlement.
At Adamson & Associates Inc., we are proud to be a trusted Ontario Licensed Insolvency Trustee and Consumer Proposal Administrator, recognized for our commitment to professional and compassionate insolvency services. We understand that navigating Bankruptcy can be overwhelming, so our priority is to guide clients through each step, offering clear information to ease their stress and provide peace of mind about their financial future.
Take a little time to learn about your financial recovery options before making any decisions. Speak to a Licensed Insolvency Trustee who can provide insight and help you make the best choice. Call 519-310 JOHN or fill out our online form for a free consultation.