Consumer Proposal Facts & Myths
Myth: A consumer proposal can’t help with government debts.
Fact: A consumer proposal is actually the only available option (aside from bankruptcy) to reduce or settle government debts. Income tax debt, HST debt, and CRA debt can be reduced and eliminated with a consumer proposal. Further, student loan debt can be reduced or eliminated after 5 or 7 years after finishing studies, depending on your financial circumstances.
Myth: A consumer proposal is the same as debt consolidation or a debt settlement program.
Fact: A consumer proposal offers a number of benefits not available through a debt consolidation or debt settlement program:
- Legal protection is not offered by debt consolidation or a debt settlement program. A consumer proposal will stop garnishments and seizures; other options could leave you at risk for a lawsuit, garnishment or seizure of property.
- Reduces the total amount of debt to be repaid. Debt consolidation programs require additional credit, and both options are subject to additional fees.
Myth: A consumer proposal will ruin your credit.
Fact: Any accounts that are associated with debt consolidation, a debt management program, or a consumer proposal are listed as an R7, and accounts that are associated with repossession or seizure are actually rated worse than a consumer proposal at an R8.
The truth is that for most people a consumer proposal allows them to reset their finances, and their credit rating.
Often, by the time people have come to consult with Doyle Salewski, they are often have experienced some damage to their credit rating due to an inability to pay their bills, and have been rated between R2 (Late payment by 31-59 days) all the way to R5 (Late by more than 120 days). These late payments as well as collections activity stay on the credit report for 6 years from the last activity date. In addition, credit bureaus have proprietary calculations, and even if you can make payments, your credit score suffers if you are maximizing your credit on your accounts. If you have high balances that are moving between accounts, this can also be considered to be a credit risk, resulting in a poor score. A consumer proposal stays on your record for 3 years after you finish making proposal payments and then disappears completely – many people are shocked to learn their credit rating improves drastically in such a short amount of time! For example, one of our clients who declared bankruptcy was able to achieve a credit score of 650 in less than a year after her discharge.
Myth: I won’t be able to renew my mortgage
Fact: While one of the major benefits of a consumer proposal is that you get to keep your house, many people wonder if things will change when your mortgage comes up for renewal. If your mortgage payments are current and on time, your current lender should allow you to renew as you will not need to file a new credit application. It is rare that a consumer proposal affects an existing mortgage agreement.
If you decide to switch lenders or refinance, you will be required to submit a new credit application which will include your current credit rating; set at R7 for 3 years after the proposal is finished. This could prove to be challenging; creditors will see you as a greater risk and therefore the lending rate will typically be higher, which is why most people stay with their current lender.
Myth: I won’t be able to get a mortgage
For most people, this is not a concern. Firstly, because a mortgage requires a down payment and most home buyers will want an emergency fund to cover unexpected costs, a consumer proposal actually allows them to begin saving instead of paying down debt for many years. For those that have RRSP savings that are protected by a consumer proposal, they can take advantage of lending rules that allow them to borrow from the RRSP when buying their first home.
In addition, rebuilding credit after a consumer proposal can begin immediately; lenders require borrowers to demonstrate a history of paying bills on time – this includes consumer proposal payments, utilities, rent, and cell phone bills. A secured credit card (not prepaid) of $600 – $2000 can be obtained with a security deposit, allowing you to actively re-establish credit during the proposal by demonstrating the budgeting skills you’ve learned from the credit counselling sessions during your consumer proposal.
There are a lot of factors that mortgage brokers look at, as well as ways you can improve your situation such as saving a larger down payment, which is possible when you’ve eliminated overwhelming debt. If you’re interested in saving for a home after your consumer proposal, your Doyle Salewski Counsellor can help you create a plan to meet your goal and introduce you to a mortgage broker, if required.
Myth: I won’t be able to finance a vehicle
Fact: If you have failed to make loan payments or had your vehicle repossessed in the past, you’ll receive an R8 rating which will stay on your credit report for 7 years and have more of a negative impact than a consumer proposal! Lenders will work with borrowers after their consumer proposal, and some may even work with you during the proposal. Approval typically requires confirmation of reliable employment and a steady income, as well as a down payment – the bigger, the better. In addition, a consumer proposal allows you to work on your budget and build up savings to use towards a vehicle as a down payment or ideally, a cash purchase. Often the lenders will charge a higher interest rate, so it’s important to have a plan which could include refinancing at a future time when your credit rating has improved.
Myth: Only poor people can file a consumer proposal; my income is too high.
Fact: Financial hardship affects people from all walks of life, including those that earn a high income. In fact, we often see high income earners that have run into family law conflicts, cashflow issues, emergencies, health problems, or have mismanaged their tax debt making it impossible for them to meet their financial obligations. Many times, those with high incomes also carry a high amount of debt and once cashflow becomes challenging, their financial situation can deteriorate quickly. To qualify for a consumer proposal the debtor must owe between $1000 – $250,000 (Or $500,000 for a couple, not including the residential mortgage). If the debts exceed these limits, a legally binding proposal may still be filed, but not according to the Consumer Proposal standards.
Myth: My partner will be affected by my consumer proposal.
Fact: A consumer proposal only affects your financial obligations and credit report and will not affect your spouse’s financial records. If you have joint credit cards, lines of credit, bank overdrafts, or co-signed loans the debt must be included in the consumer proposal and your partner will become responsible for paying back the portion the debt not paid for in the proposal.
Myth: People will know I’ve filed a Consumer Proposal and/or it will affect my employment
Fact: Although your consumer proposal is filed with the government as public record, typically no one will know about your consumer proposal aside from your creditors, people you choose to tell, and applications that request this information (such as credit applications).Not just anyone can access this information; they are required to register and pay the $8 fee to search the Bankruptcy and Insolvency records, but the chances of this happening are rare.For many people the biggest embarrassment is beginning to live within their means without access to credit on a set budget – which means saying “no” to certain luxuries. For those concerned about not being able to purchase things online in the case where they give up their credit cards, many banks offer a secured credit card that will allow you to make online purchases. In a proposal where you have a nil balance on a credit card at the time of filing, you may keep this credit card and continue to use it going forward.
In the case of employment, your employability is protected by Section 66.36 of the Bankruptcy and Insolvency Act: “No employer shall dismiss, suspend, lay off, or otherwise discipline a consumer debtor on the sole ground that a consumer proposal has been filed in respect of a consumer debtor”
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