Consumer Proposal or Debt Settlement: What’s The Difference?


Category: Avoid Bankruptcy (2) comments

You’re looking for ways to reduce your debt but don’t understand the difference between a consumer proposal and a debt settlement. Are they different? Both offer to settle your debts for less than you owe so which is better? How can you tell what is the right choice? To best answer that question, let’s look at an example of a person with debts and what a Debt Settlement Company might offer and what a Consumer Proposal might offer.

Debt Settlement Company Solution

Joe Smith owes $30,000 on five different credit cards.  A debt settlement company tells him they can settle his debts for $10,000.  Joe doesn’t have $10,000, so they put him on a payment plan where he sets aside $500 per month for the next 20 months in a “set aside” fund.  Because he is setting aside money, he is no longer paying his creditors directly. Once he has the $10,000 saved up, the debt settlement company will approach the five credit card companies and attempt to settle the debt, obviously for less than the full amount owing.

Will this work?  Maybe, but a debt settlement can be risky.

By the time the debt settlement company approaches the credit card companies, 20 months have elapsed since Joe last made a payment to them.  They may be willing to accept a deal after waiting so long for payment.

It is unlikely, however, that the credit card companies will wait for 20 months.  Instead, they will be calling Joe, sending him collection letters, and perhaps even taking him to court and garnisheeing his wages.  That’s not a great outcome for Joe.

If the debts were already 20 months old, and if Joe had $10,000 cash today, a debt settlement might be a good option, assuming that ALL the credit card companies agree to a deal.  If only three or four of his creditors agree, Joe still has a problem: The remaining credit card company he owes money to could still  take legal action against him.

A Consumer Proposal – The Better Solution

A better option to consider would be a consumer proposal. If Joe’s creditors are willing to accept $10,000 in settlement of his debts he could offer a consumer proposal where he pays $200 per month over 50 months (or a little more than 4 years). The creditors vote on the proposal, and if more than half of the dollar value of the creditors agree, ALL creditors must accept the proposal.

In this case the advantage of a consumer proposal over a debt settlement are:

  • the consumer proposal is legally binding on ALL creditors once accepted
  • the creditors have 45 days to vote, so in a month and a half Joe will know if the creditors will accept his deal. In a debt settlement plan it may be a year or two or more before he knows if the creditors will accept the deal.
  • all legal action stops as soon as the proposal is filed. Joe no longer has to worry about having his wages garnisheed by the credit card companies.
  • the payment is affordable. Since a proposal could be spread out over a longer period of time, Joe’s payment of $200 per month was much more affordable than $500 per month.
  • Joe can pay off the proposal at any time. If he works overtime or gets a tax refund, he can apply those funds to the proposal and pay it off faster.

If you require legal protection, don’t have cash in the bank and you want a reasonable monthly payment, a consumer proposal is a better debt settlement option.

A licensed consumer proposal administrator, who is also a trustee in bankruptcy licensed by the federal government, can help you decide if a consumer proposal or debt settlement option will work in your situation. Contact a trustee in bankruptcy today to find out if a consumer proposal will work for you.

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    1. J. Douglas Hoyes

      Hi Roger. The short answer is that if the consumer proposal is not approved by the creditors, the Trustee (the Consumer Proposal Administrator) doesn’t get paid. A Consumer Proposal Administrator is paid out of the proceeds distributed to the creditors, so if there are no funds distributed, the Trustee doesn’t get paid. That’s why it is in everyone’s best interests to attempt to make a reasonable proposal that will work for you, but will also be acceptable to the creditors.

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