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Consumer Proposals – Too Good to be True?

From the desk of Matthew Shantz:

While most of us are cooped up inside, one part of our bodies that is getting worked out more then ever are our thumbs. As we scroll through Facebook, Instagram and Twitter, mindlessly passing by ads for this and that. I have noticed a significant uptake in the number of ads on my personal accounts for “Debt Consolidation Products” and, interspaced evenly between Cooking Tutorials, DYI Face Masks, and Millionaires promising to give away their fortunes.

Typically, I would pass these ads by, ignoring them as the unwanted, unsolicited, poor and misleading advice that they are. Except for today, today I decided to engage one to see what this was all about, and the realization hit me “People really are going to fall for this crap!”

Most of them start off innocently enough “It Is Very Easy To Write Off The Complete Debt With Up To 80% Savings”. For people struggling under the crushing weight of credit/consumer debts, of course this is going to grab your attention, who wouldn’t want to be debt free and only pay 20% of what they owe? I mean, after all not only can I write off my debts – but on top of that it is also “Very Easy”, great, these are two words that I love. I don’t want it to be “Very Hard” after all.

Many of these ads may or may not actually state that what we are looking at is actually a Consumer Proposal. Advertised as a way to consolidate debts, this is true…from a certain point of view. So we need to ask ourselves – what actually is a Consumer Proposal and why should I stop myself from clicking on this ad, I mean granted, everyone looks happy and carefree and they aren’t dealing with money problems – why shouldn’t I do what they are doing?

Consumer Proposals are governed by Canada’s Bankruptcy and Insolvency Act, they are a legal agreement between yourself and your creditors to repay part of a debt in a period of up to 5 years. This agreement is arranged by a Bankruptcy Trustee and serves as an alternative to actually declaring Personal Bankruptcy. Wait. The happy people in the ads I see, definitely, do not look like they are negotiating debts with a Bankruptcy Trustee – perhaps the “Easy” part of the ad is misleading?

There are some positives to using Consumer Proposals as a way to reduce your debt obligations:
-Substantial Reduction in the amount of debt you need to pay to your creditors
-Consolidating debts if you are unable to repay all of what you owe
-Pause active collections against you
-If you don’t have Equity in a Property and cannot qualify for a consolidation loan

However, there are some major disadvantages as well:
-A Consumer Proposal is filed as a Permanent Public Record and is included in Online Searchable Databases
-There are a lot of costs associated with these: Filing Fees, Processing Fees, Legal Fees…
-They impact your credit almost as long as a Bankruptcy
-A court must approve it and creditors may choose to reject the proposal, you may be forced to liquidate some assets and secured debts & student loans (less then 7 years old) cannot be included
-If you miss payments, you may be forced into Bankruptcy and if you have Professional Licenses, these may be put at risk or future employment may be put at risk and this is counted as a Permanent Record of your Insolvency.

But it was supposed to be easy!
And Quick!
And I could Save Money!

The reality is that, if something sounds too good to be true – it is.
A Consumer Proposal will impact your ability to secure credit and financing, especially in when it comes Real Estate for up to 2 years after the Proposal has been paid in full. If it takes you the full 5 years to pay out the proposal, you will have limited borrowing capability for an additional 2 years – that would be a total of 7 years where you are going to find yourself with restricted borrowing options. The same length of time as a Bankruptcy.

I am not saying that a Consumer Proposal is not an option worth looking into, if your situation is dire and calls for it. But, under no circumstances should it be your first option. If you own a home, there are far better, less long-term damaging options available to you. Refinancing your home, Secondary Financing, Secured Loans. These options typically cost less overall then a Consumer Proposal, are actually Quick & Easy (in most cases) and won’t negatively impact your credit.

The Quick and Easy take away from all this is: Never, Ever, Under Any Circumstance – get financial advice through Social Media and if someone is offering to get you out of debt Quick & Easy: Run away. Run. Run away, and never click the link. Call a Professional for advice first.     

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