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If your debt feels overwhelming, finding debt relief will be a priority. Two popular choices for managing debt are Consumer Proposals and credit counselling. The intention of each is to help make your debt manageable, which they both can accomplish. However, they are not the same. Understanding the differences between a Consumer Proposal vs. credit counselling will help you make the right choice for your situation.
How Debt Relief Helps
Life often becomes stressful when repaying your debt. Sometimes, you need help with budgeting or financial education to get back on track. In other cases, your income might not be enough to cover your payments and living expenses. Both a credit counsellor and a Licensed Insolvency Trustee offer debt options. Your circumstances will determine which one is most helpful.
Consumer Proposals and credit counselling address unsecured debt, including credit cards, lines of credit, personal loans, and payday loans. Tax debt and student loans can be included in a Consumer Proposal, but NOT in a credit counselling program.
Choosing the best debt solution
Before you decide between a Consumer Proposal vs. credit counselling, you’ll need to determine your goals. Some questions to ask yourself are:
- Can I manage repaying 100% of my debt if the payments are reasonable?
- How much can I afford to repay each month?
- When do I want to be debt-free?
- How important is it to maintain or rebuild a good credit rating?
Knowing what you want to accomplish will help you choose the right option.
Consumer Proposal
If you find yourself unable to repay what you owe, a Consumer Proposal can be the best debt relief option. To initiate a Consumer Proposal, you’ll need the expertise of a Licensed Insolvency Trustee (LIT). These trustees, licensed by the federal government and overseen by the Office of the Superintendent of Bankruptcy, are responsible for putting your Consumer Proposal together and will work with your creditors on your behalf.
Filing a Consumer Proposal offers stressed borrowers many advantages:
- It can reduce your debt by up to 80%.
- It stops interest/penalties, legal action from creditors, and wage garnishments.
- It is legally binding.
- Your creditors can no longer contact you.
- You have up to five years to repay the remaining amount you owe, including the fees, in a single monthly payment.
- You keep all your assets.
Once your LIT has filed the proposal on your behalf, your creditors will have the opportunity to vote on whether to accept it. If the creditors who hold 51% or more of your debt agree to your proposal, it will be put into effect. This process ensures that the creditors who hold the majority of your debt agree to your debt solution.
The biggest drawback of a Consumer Proposal is the effect it has on your credit rating. Your credit rating will drop to an R7 and remain at that level for three years after you complete your Consumer Proposal or six years from the date you filed it, whichever comes first.
A Consumer Proposal is ideal if:
- You can’t manage a repayment plan that includes 100% of your debt.
- Creditors are harassing you by contacting you or starting legal action against you.
- You don’t want to rely on your creditors to participate in a repayment plan voluntarily.
- Your debt includes tax debt to the Canada Revenue Agency or student loans.
Filing a Consumer Proposal offers a manageable repayment plan, stops creditors from contacting you, and provides a debt solution to help you become debt-free.
Credit counselling
The primary goal of credit counselling is to help you better understand your finances. A credit counsellor guides you through budgeting and debt-repayment strategies, helping you regain control of your financial situation.
If your budget allows, your counsellor may suggest a debt management plan, which:
- Combines all payments into one.
- Reduces or eliminates interest on your debt.
- Aims to make you debt-free within 5 years.
This plan is ideal if you owe less than $20,000, can repay your debt plus fees, don’t qualify for a consolidation loan, and are okay with a negative impact on your credit score. If you debt is higher, a good credit counsellor will often refer you to a LIT.
Your counsellor negotiates with creditors to reduce interest in exchange for the original loan amount. However, your creditors aren’t legally obligated to participate with a counsellor, and you must pay any non-participating creditors separately. Remember, fees are in addition to what you owe, and the plan isn’t legally binding. If you owe more than you can repay and want a legally binding debt solution, a Consumer Proposal may be the answer. Here is a breakdown:
Differences between a Consumer Proposal vs. credit counselling
| Plan | Consumer Proposal | Credit counselling/ Debt Management Plan |
| Who puts the plan in place? | A Licensed Insolvency Trustee | A Credit Counsellor |
| What types of debt does it include? | Unsecured debt, including tax debt and in some cases, student loans (depending on end of schooling date) | Unsecured debt, not including tax debt or student loans |
| How much debt will it cover? | Up to $250,000 | Best for $20,000 or less |
| Do I have to repay all my debt? | It can reduce your debt by up to 80% | You have to repay 100% of what you borrowed |
| Do I have to pay interest? | Interest and penalties are stopped | It can reduce or eliminate your interest charges |
| Do my creditors have to accept it? | Yes, if the creditors who hold 51% or more of your debt agree to it | No, participation is voluntary and some creditors may still contact you. |
| Is it legally binding? | Yes | No |
| Do I pay fees? | Your monthly payment includes your fees | Your fees are included in your monthly payment and are typically 15% of your payment plus GST/HST |
| How long do I have to repay my debt? | Up to 60 months | Up to 60 months |
| How does it affect my credit score? | Your credit score will be a R7 for three years after your last payment or for six years from the date you filed, whichever comes first | Your credit rating will be an R7 from when the plan is put in place, and for two years after your last payment |
Where to Find Debt Help
Before you decide on a Consumer Proposal vs. credit counselling, it’s best to contact a professional. You can contact a credit counsellor, but it’s important to remember that they’re not required to be licensed and may not be able to reduce all creditor debt. If you choose to use the services of a credit counsellor, do your due diligence by researching the firm they work for and the reputation of the counsellor. If they can’t offer a solution to meet your needs, they may even refer you to a Licensed Insolvency Trustee.
Debt relief options that Licensed Insolvency Trustees offer include Consumer Proposals, and personal Bankruptcy, and will offer credit counselling as part of these programs. The first meeting with a LIT is typically free. They’ll work with you to determine the best option to help you get rid of your debt and move forward.
Our Licensed Insolvency Trustees at Allan Marshall and Associates have been helping overwhelmed borrowers take control of their debt for more than 30 years. Contact us online or call us at 1-888-371-8900 to book an appointment. We’ll work with you to quickly resolve your debt situation and help you get back on track.
