With so many people struggling financially in Toronto, it’s no surprise there are people looking for debt relief options and we know it’s easy to get lost and confused. You want to know who to talk to about your debts and what your options might be. Today we are going to discuss in detail two very popular options that allow you to consolidate your debt into one lower monthly payment and avoid bankruptcy.
For people living in Ontario, there are two primary ways to negotiate a repayment plan:
- Debt Management Plan through an accredited credit counselling agency; and
- Consumer Proposal which can only be administered by a Bankruptcy Trustee.
When A Debt Management Plan (Credit Counselling) Works
If your debts are manageable and you want to pay off the entire amount (in other words re-pay 100% of what you owe but just need to stop interest), then a Debt Management Plan may be the right solution for you.
In a Debt Management Plan (DMP) you can pick and choose which debts you want to include. Your credit counsellor will approach your creditors and request they stop interest and penalties. They will negotiate a payment plan that will allow you to pay off the principle balance, in full, in 4 to 5 years’ time. So if you owe $24, 000 you would have to pay back approximately $400 per month for 5 years (plus a small fee for the credit counsellor).
For the debts that form part of your Debt Management Plan, a note will appear on your credit report that you filed a Debt Management Plan and this will remain for 2 years after you have completed your payments.
The drawback with a Debt Management Plan is that it doesn’t provide any legal protection. Your creditors could technically take legal action against you (even after originally agreeing to the plan, or could start charging interest again).
Make sure you approach a legitimate Not-For-Profit Credit Counselling Agency as there are many “businesses” that call themselves debt settlement agencies that won’t provide you with the help you need. Make sure you’re not speaking to someone that is charging large fees upfront and that they are properly qualified and accredited.
When To Choose A Consumer Proposal
A consumer proposal is a solution that many people in Toronto and the GTA have used to avoid bankruptcy, stop legal actions and pay off their debts. It is a form of debt settlement offered through the Bankruptcy & Insolvency Act.
It is important to note that a consumer proposal can only be administered by a Bankruptcy Trustee. No other agency or type of business can offer to file a proposal. If a business claims they can file a consumer proposal (but only after large upfront fees), then be very cautious. They are most likely charging you a fee to help you with the paperwork and they will end up connecting you to a Trustee in Bankruptcy anyways (something you can avoid and do for free by calling us). Many companies (that are not trustee firms) advertise consumer proposals and bankruptcies because they know these are important options people need, but they take advantage of individuals who don’t know any better. By talking directly to a trustee you will not be charged unnecessary extras for a consultation or paperwork.
A consumer proposal helps you eliminate your debt faster because you offer to pay only a portion of the principle. You have up to 5 years to pay it off which makes your monthly payments affordable and you can always pay it off sooner.
All your unsecured debts have to be included in a consumer proposal (you can’t pick and choose) but that means all your unsecured debts (i.e. credit cards, bank loans, overdrafts etc) will be eliminated. Typically creditors are satisfied when you offer 25-33% of what you owe. So if you have $60, 000 of debts you could offer $15, 000 over 5 years which works out to about $250 per month.
There is no additional fee for filing the proposal. You pay only what you offer your creditors. Your trustee is paid from this amount for their services so effectively your creditors are paying the cost of the administration.
Keep in mind a proposal has to be better for your creditors than a bankruptcy, so the amount that you offer will be different depending on your situation. In a proposal you retain control of your assets and the Trustee does not take possession of anything you own. After you file a consumer proposal your creditors have 45 days to vote on the proposal and could potentially ask for more money. Your trustee will help you negotiate a payment you can afford that also satisfies your creditors.
Once the proposal paperwork is signed, the legal protection starts and your creditors cannot pursue any legal actions against you and any wage garnishments would stop right away.
In a consumer proposal, a note will appear on your credit report for 3 years after the proposal is completed in full. The sooner you pay it off, the sooner you can start rebuilding your credit. The advantage of a consumer proposal is that your payments will be lower so you will likely be able to complete your debt repayment sooner than in a DMP.
To Summarize – Consumer Proposal vs. Debt Management Plan
|Consumer Proposal||Debt Management Plan|
|Repayment Amount||-pay a portion of principle (typically 25-33%) and no more interest accrues||-pay 100% of principle and interest is either stopped or reduced to 1 or 2%|
|Timeline||-maximum is 5 years, but can always be paid off sooner||-usually 4 years to pay off plan, but can sometimes be extended to 5 years|
|Credit Rating||-remains on your credit report for 3 years after completed||-remains on your credit report for 2 years after completed|
|Legal Protection||-wages are protected and any legal actions are stopped as a result of the Consumer Proposal||-wage garnishments or other legal actions may still begin and can continue|
|Assets||-you retain control of your assets and nothing is lost to the trustee||-same as the proposal|
|Debts Included?||-all your debts have to be included (except for mortgages and car loans and other secured debts)||-you can pick and choose which debts you want to form part of the proposal|
|Who Administers?||-only a Trustee in Bankruptcy can administer a consumer proposal (and all trustees are federally regulated and play by the same rules)||-only a not-for-profit legitimate credit counselling agency can administer a debt management plan-not all agencies are accredited or offer the same services|
|Cost for Filing||-no filing fee-the remuneration of the trustee is built into the payment plan, so you don’t pay us anything extra (all trustee’s get paid the same amount)||-usually a small fee for the credit counselor on top of the plan that agreed upon by the creditors-varies depending upon the agency you choose|
If you feel overwhelmed and need free, professional advice, then call us toll free at 310-PLAN or 866-747-0660 and speak to one of our experts who will explain all of your financial options in greater detail. We can help you choose the best solution and get you started living debt free.