Cautions of a Consumer Proposal Vs Debt Consolidaton

The options available to Canadians in financial trouble today are to approach a Debt Settlement company who will negotiate your amounts owing lower. Or you could approach a bankruptcy trustee who will prepare a consumer proposal to make structured payment to those you owe over time. Finally, there is a simple debt consolidation in which a mortgage broker arranges a new loan secured against your home to pay out your debts owing.

Let’s look in more detail at the solution a consumer proposal provides and the potential consequences of this choice.

Barrie Consumer Proposal

Jas was at the end of her financial rope. She had lived a jet set lifestyle for years only to have her debts catch up with her at last. At the advice of her family, she sought out a bankruptcy trustee in Barrie for guidance as to how to get her debt in order. The shame of bankruptcy was difficult for Jas to deal with, so the trustee explained that Jas had another option. She could arrange a consumer proposal where the trustee makes a formal plan over a period of 3-5 years to pay back her creditors. At the time the proposal is filed her creditors would cease charging interest and would not have legal right to take action against Jas like garnishing her wages. Her Barrie consumer proposal would cost a legal fee that would be added to the payment schedule made to her creditors.

What was made less clear to Jas was what would happen on the road to financial recovery. Immediately on filing her consumer proposal in Barrie, the credit cards involved moved to an R9 status which is the equivalent of having the debt written off to a collector by the credit provider. This had a major negative effect on her credit rating and will stay with her report for the next 7-10 years affecting the interest rates she will be offered on everything from mortgages to car loans to future credit card interest rates. The effect of a consumer proposal is binding in that until you have paid back in full what the agreement states, you will not be released to rebuild your credit. In Jas’ case, not until 5 years from filing the proposal would she be able to begin the rehabilitation process and then usually another 2 years to have her credit back in a position to be considered an excellent credit rating.

Debt Consolidation in Barrie

As Jas pondered the information provided, she remembered her friend, a Barrie mortgage broker who had always offered free credit advice as part of his service. In the course of a quick phone conversation, she was explained the consequences of choosing a consumer proposal as laid out above. With a full overview of her debts in hand, he offered her a solution. Jas’ total debts equaled the equivalent of 98% of the value of her home including her mortgage and credit cards. This meant that there were no banks that would lend money to her. The answer her Barrie mortgage broker provided was called a Self Directed RSP Mortgage where a family friend was able to lend her RSPs to Jas up to 100% of the market value of her home today in the form of a mortgage. This saved Jas over $1,150 per month in cashflow and kept her from having to file a consumer proposal and any cost in arranging the mortgage was added to the new loan. Now Jas would be able to begin rehabilitating her credit immediately with a short term timeline of 12-24 months to refinance her debt into a better loan situation with improved credit.

Outside of having Jas’ eternal gratitude, her friend also earned a market interest on the money loaned which was much better than she had experienced in her money market fund over the last 10 years.

Here is another case of The Bad versus The Good where the bad being a consumer proposal where your financial future gets put on hold while your credit rating gets trashed for longer than the average life of a household pet. To the good where a mortgage broker provides a creative solution to a difficult problem and a short timeline to turn the credit rating and the situation around in a positive direction.