Debt Relief Experts
The best debt relief solution depends on your financial factors and the type of creditor protection you need. Two popular debt solutions in Canada are debt management programs (DMP) and consumer proposals.
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Debt Management Plan vs Consumer Proposal: The Basics
A debt management program, often called a DMP, is a voluntary arrangement between you and your creditors. It’s designed to help you pay off your unsecured debts over time, usually within 3 to 5 years. A credit counselling agency manages your DMP. In this program, your credit counsellor negotiates a repayment plan with your creditors to potentially lower your interest rates and waive certain fees. You then make a single monthly payment to the credit counselling agency, which distributes the funds to your creditors on your behalf.
On the other hand, a consumer proposal is a legal process governed by the Bankruptcy and Insolvency Act. It’s a formal offer to your creditors to settle your debts by paying only a portion of what you owe, without interest, over a maximum of 5 years. A Licensed Insolvency Trustee (LIT) files a consumer proposal on your behalf. Your creditors then vote to accept or reject the proposal. If accepted, you make monthly payments to your LIT, who distributes the funds to your creditors.
Key Differences Between Debt Management Programs and Consumer Proposals
Now that we understand the basics, let’s compare the key differences between these two debt relief options:
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Legal status: A debt management program (DMP) is voluntary. You can pick and choose which debts to include. Individual creditors can decide whether or not they want to participate, and they can withdraw at any time. In contrast, a consumer proposal is a legal process. It is binding on all unsecured creditors if accepted by the majority.
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Creditor protection: A consumer proposal provides a legal stay of proceedings that immediately halts collection calls, wage garnishments and legal actions, whereas a DMP offers no protection from creditor actions.
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Debt settlement potential: With a DMP, you must repay the full principal debt amount. A consumer proposal allows you to settle debts by paying only a portion of what you owe, potentially reducing principal and interest.
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Payment Plan: Both a consumer proposal and a debt management plan are a form of debt consolidation. You make one consolidated payment to your credit counsellor or Licensed Insolvency Trustee.
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Length: A DMP usually lasts 3-5 years, while a consumer proposal has a maximum duration of 5 years. Lump sum proposals are possible, and they can be paid out early.
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Effect on credit score and credit reports: Both a DMP and a consumer proposal are listed as an R7 on your credit report. Both remain for a maximum of 6 years after filing. In both cases, any negative impact on your credit rating is temporary.
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Types of debt included: Both programs deal with some unsecured debts, particularly credit card debt, bank loans, lines of credit and outstanding bill payments. Consumer proposals can deal with most unsecured debts, including tax debts and student loans. Secured debts, including your mortgage or car loan, are not covered by either option.
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Keeping credit cards: In a DMP, you can only keep credit cards that are not included in the arrangement. Since a consumer proposal deals with all unsecured debts, you must surrender all credit cards. It should be noted that most people can obtain a new credit card while in a consumer proposal. This new card can help you rebuild a better credit history.
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Fees and costs: Credit counsellors charge an additional fee of 10-15% of the total amount of debt you repay through the plan. For a consumer proposal, fees are regulated and already included in your proposal payments. Consumer proposal payments are generally significantly lower than in a DMP, with no ongoing interest charges.
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Interest charges: In a consumer proposal, interest stops accumulating from the date of filing. With a DMP, interest typically continues to accrue, although some lenders may agree to a lower interest rate or even waive it altogether.
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Court approval: A DMP does not involve the court because participation is voluntary. A consumer proposal, however, is filed with the Office of the Superintendent of Bankruptcy and approved by the court.
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Professional advisor: Non-profit credit counselling agencies offer DMPs, financial education, and budgeting help. Licensed Insolvency Trustees are federally regulated professionals and are the only professionals who can administer consumer proposals and bankruptcies. Both offer free initial consultations to assess your situation and explain your options.
When is a Consumer Proposal The Better Option?
Choosing between a DMP and a consumer proposal depends on your specific financial situation.
A debt management program might be suitable if you can afford to repay your debts but just can’t afford the interest. Typically, a DMP is more suitable for small debt balances on two or three credit cards and some overdue bill payments.
However, there are several situations where a consumer proposal might be the more advantageous debt repayment choice:
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Consumer proposals are often more suitable for higher debt loads, typically over $10,000. A consumer proposal might be more effective if your unsecured debts exceed this amount.
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If a creditor won’t participate and you need creditor protection, it is usually time to look at a consumer proposal.
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A consumer proposal is your only option, short of bankruptcy, to deal with outstanding government debts, including tax arrears and student loans (if you’ve been out of school for 7 years).
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The potential for significant debt reduction (as much as 70-80%) with a consumer proposal can result in a significantly shorter repayment period. This means a consumer proposal can be completed more quickly, potentially improving your credit recovery timeline.
Remember, everyone’s financial situation is unique. It’s crucial to seek professional advice from a credit counsellor or Licensed Insolvency Trustee to determine the best debt relief option for you.
Contact Hoyes Michalos to schedule your free consultation. Our compassionate professionals are ready to help you find the debt relief solution that best fits your needs and start your journey to a brighter financial future.
Frequently Asked Questions About DMPs and Consumer Proposals
Can I get a mortgage while on a DMP or after a consumer proposal? It’s possible, although both options might lead to less favourable terms like higher interest rates. Ideally, waiting two years after completing your debt management plan or consumer proposal before applying for a mortgage is best. During that time, you should take steps to rebuild your credit.
How do DMPs and consumer proposals affect my spouse or partner? They generally don’t affect your spouse unless you have joint debts.
Can I include tax debts in a DMP or consumer proposal? Tax debts can be included in a consumer proposal but not in a DMP. The Canada Revenue Agency will only settle tax obligations for less than the full amount through a Licensed Insolvency Trustee.
What happens if I can’t make payments in a DMP or consumer proposal? In a DMP, creditors will likely revert to the original terms. A consumer proposal is deemed annulled if you miss three payments, in which case your debts return.
Can I travel outside the country during a DMP or consumer proposal? Yes, neither restricts your ability to travel.
