Most Canadians would be shocked to learn that it is three times more expensive to eliminate one dollar of their debt using credit counselling compared with a consumer proposal! Eliminating one dollar of your debt by making a consumer proposal is a terrific bargain at approximately 35 cents on the dollar. Credit counselling, on the other hand, which requires between 100 cents and 130 cents worth of payments to eliminate one dollar of debt costs a king’s ransom in comparison!
Mark Silverthorn, author, former collection lawyer and collection industry insider
Over the past six years I have provided advice to hundreds of Canadians experiencing debt problems. Ever since I wrote my book titled The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010), published by McClelland & Stewart, consumers—as well as the media—have routinely contacted me for information and advice on consumer debt issues. I have spoken to so many Canadians on debt-related issues that several acquaintances refer to me as “the debt doctor”.
Debtors’ preferred choice: the debt consolidation loan
Every day hundreds of thousands of Canadians deal with debt problems. People who are late making a credit card payment do not pick up the phone to schedule an appointment with a bankruptcy trustee to discuss a consumer proposal. Nor do they call a credit counselling agency. The initial response of most consumers facing mounting debt problems is to try and borrow their way out of their current debt predicament.
In some instances where a debtor can borrow money at a low interest rate, it might make sense to obtain a loan, pay off existing debts, and then pay off his loan over an extended period of time, ideally, with lower monthly payments. Some Canadians, for example, will obtain a low-cost debt consolidation loan by taking out a second mortgage, and then pay off their high interest rate department store credit card debt.
In contrast, what rarely makes sense is for a consumer to borrow money at high interest rates to eliminate his existing debt. This happens when individuals pay off their debts by taking cash advances on their credit card to pay a debt or to pay the debt using a high-interest rate credit card. You would also be eliminating your debt by borrowing money at high interest rates if you were to obtain a debt consolidation loan from a finance company.
How much will it cost me to eliminate one dollar of my debt?
When it comes to eliminating your debt there is one key question that you need to ask yourself. How much will it cost me to eliminate one dollar of my current debt using this particular debt relief option?
If you were able to obtain a debt consolidation loan at five percent interest, then you are eliminating your debt at 105 cents on the dollar. Similarly, if you were to obtain a debt consolidation loan at 20 percent interest, then you are eliminating your debt at 120 cents on the dollar.
Strategies for improving your short-term debt situation
Many Canadians, however, cannot obtain a low-interest debt consolidation loan to address their current debt woes. If you are unable to solve your current debt problems by obtaining an inexpensive debt consolidation loan then you might have some success trying one or more of the following:
Raising some cash by selling some of your assets
Increasing your monthly income by getting a roommate or a lodger
Increasing your monthly income by getting a higher paying job
Reducing your monthly living expenses
Reducing discretionary spending
Borrowing money from family or friends
More aggressive debt relief options
If you cannot obtain a low-interest debt consolidation loan, and despite your best efforts you cannot adequately deal with your debt situation, then you will likely need to use a more aggressive debt relief option. These will have a negative impact on your ability to access credit over the next few years.
The most aggressive debt relief option is filing for personal bankruptcy. Most Canadians would consider bankruptcy a debt relief option of last resort. It is typically not attractive for high net worth individuals nor those earning more than $40,000 or $50,000 a year. Furthermore, bankruptcy is not desirable for people who own shares in corporations, and it is a bar to working in a significant number of job categories and professions.
If you cannot obtain a debt consolidation loan and filing for personal bankruptcy is not appealing then the number of potential debt relief options available to you becomes smaller. Depending upon your particular circumstances, at the present time you might choose to deal with your debts using one of the following:
A Debt Management Plan arranged through a credit counselling agency
a consolidation order under an Orderly Payment of Debts (OPD) program –only available to residents of Alberta, Saskatchewan and Nova Scotia)
A consumer proposal
Settle your debts on your own
Do absolutely nothing
Adopt a wait-and-see approach
If you do not live in Alberta, Saskatchewan, or Nova Scotia then you might want to ignore any references in this blog to a consolidation order or the Orderly Payment of Debts program since the information will not apply to you.
You can read my comparison of a consumer proposal with settling debts on your own here. And here you can learn more about all of the debt relief options available to consumers .
Debt relief options affording lower monthly payments and protection from creditors
A significant percentage of those experiencing debt problems want to obtain (1) some protection from their creditors, and (2) a reduction in their monthly payments to selected creditors—particularly any high-interest credit cards or personal loans. Three debt relief options fit this bill, making a consumer proposal, a Debt Management Plan arranged through a credit counselling agency, and a consolidation order—the latter only available to the residents of Alberta, Saskatchewan, and Nova Scotia.
The skinny on credit counselling and consumer proposals
The purpose of this blog is to compare the relative merits of eliminating your debt through credit counselling and making a consumer proposal. To facilitate a head-to-head comparison between these two debt relief options I am going to include a consolidation order under the umbrella of credit counselling.
I am going to do so for two reasons. Firstly, in some circumstances, a consolidation order, sometimes known as the Orderly Payment of Debts (OPD) program, and a Debt Management Plan arranged through a credit counselling agency are very similar. Secondly, in some provinces a credit counselling agency will administrator of the provincial government’s Orderly Payment of Debts program. In Alberta, for example, Money Mentors, a not-for profit credit counselling agency, is the Alberta Government’s exclusive administrator of the province’s Orderly Payment of Debts program.
This blog will set out what happens if you were to do one of the following:
Make a consumer proposal
Enrol in a Debt Management Plan with a credit counselling agency
Obtain a consolidation order (for residents of Alberta, Saskatchewan, and Nova Scotia only)
I will highlight the advantages and disadvantages of each debt relief option. At the end of this blog I will describe the two limited circumstances in which credit counselling might be more attractive than making a consumer proposal.
When choosing between credit counselling and making a consumer proposal you should consider the following ten questions:
1. What happens if you were to do credit counselling?
2. What happens if you were to make a consumer proposal?
3. When are these debt elimination options available?
4. When is a fair apples to apples comparison of these debt relief options possible?
5. What are the advantages of doing credit counselling?
6. What are the disadvantages of doing credit counselling?
7. What are the pros of doing a consumer proposal?
8. What are the cons of doing a consumer proposal?
9. Why is a consumer proposal almost always more attractive than credit counselling?
10. In what two scenarios might credit counselling be more attractive than a consumer proposal?
What happens if you were to do credit counselling?
When people refer to credit counselling they are, in fact, speaking about eliminating unsecured consumer debt by enrolling in a Debt Management Plan with a credit counselling agency. There is, however, another debt relief option, a consolidation order, which is not credit counselling, but, in many circumstances resembles a Debt Management Plan. Debt Management Plans are available as a debt relief option to Canadians across the country whereas a consolidation order is only available to the residents of Alberta, Saskatchewan, and Nova Scotia. Consolidation orders are a debt relief option in these three provinces under the Orderly Payment of Debts Regulations enacted under the federal Bankruptcy and Insolvency Act. For Quebec residents, there is a Voluntary Deposit program which is very similar to a consolidation order, available through a consumer’s local courthouse.
Comparison Between Debt Management Plan and Consolidation Order
Factor
Debt Management Plan
Consolidation Order
Where available
Anywhere in Canada
Limited to residents of Alberta, Saskatchewan, and Nova Scotia
Procedure for setting up this debt relief option
Enrollment with a credit counselling services provider
Must be approved in accordance with federal law
Debts to be included
Each and every unsecured consumer debt
Each and every unsecured consumer debt
Student loans
Monies owing to the government
Suspend or stay current court proceedings against debtor
No
Yes
Terminate existing wage garnishments
No
Yes
Debtor must make monthly payments
Yes
Yes
Percentage of outstanding debt to be repaid
100 %
100 %
Interest to be paid on outstanding balance
To be negotiated
Fixed rate of five percent
Total cost to consumer to eliminate one dollar of indebtedness
Between 100 and
130 cents
A minimum of 105 cents
Maximum length
No maximum duration
Three year maximum duration unless all creditors agree to longer duration
In many respects a consolidation order is a hybrid between a consumer proposal and a Debt Management Plan. It is similar to a consumer proposal as it relates to the following:
Type of debts to be eliminated
The amount of protection from creditors
The requirement that a specific percentage of the original indebtedness must be paid to creditors within a fixed time period
(3-year maximum for consolidation orders and five-year maximum for consumer proposals)
A consolidation order resembles a Debt Management Plan in that both require that a consumer pay a minimum of one hundred percent of their original indebtedness in order to eliminate their debt.
In order to have a basic understanding of credit counselling it is helpful to know something about the following five issues:
Credit counselling is a very expensive debt relief option
Different types of credit counselling service providers
The need for due diligence selecting a credit counselling service provider
How a Debt Management Plan actually works
How a consolidation order works (Alberta, Saskatchewan, Nova Scotia residents only)
1. Credit counselling is an incredibly expensive method for eliminating debt
If you decide to eliminate your debt by enrolling in a Debt Management Plan (or using a consolidation order) then you are choosing a debt relief option which is three times more expensive than a consumer proposal! Under a Debt Management Plan you will pay between 100 cents and 130 cents to eliminate one dollar of your debt. Under a consolidation order you will be paying a minimum of 105 cents on the dollar to eliminate one dollar of your debt. These two debt relief options do not look very attractive compared to a consumer proposal under which it costs a consumer approximately 35 cents to eliminate a dollar of debt!
a. Cost of eliminating debt using a Debt Management Plan
There are three distinct types of costs associated with a Debt Management Plan arranged through a credit counselling agency:
Your original indebtedness: You will repay one hundred percent of the monies owing to your unsecured consumer creditors whose debts are included in your Debt Management Plan—and you are required to include all of your unsecured consumer debts in your plan.
Fees paid to your credit counselling service provider: Unless you are fortunate enough to find a credit counselling service provider that does not charge for its services, then you are going to pay fees for its services. These fees can add an additional 10 to 15 percent to the total cost of your Debt Management Plan.
Interest charges: In some instances, a consumer will not pay any interest under a Debt Management Plan. In other cases, however, a consumer might pay a substantial amount of interest on one or more debts included in a Debt Management Plan.
b. Cost of eliminating debt using a consolidation order
If you are a resident of Alberta, Saskatchewan, or Nova Scotia, and you obtain a consolidation order to eliminate your debt—excluding secured debt and non-dischargeable debt–then it will cost you a minimum of 105 cents to eliminate one dollar of your debt. These costs can be broken down as follows:
100 percent Repayment of original indebtedness
5 percent Fixed interest rate on outstanding balance
2. Different types of credit counselling service providers
Credit counselling agencies are regulated by provincial and territorial governments. There are three different categories of credit counselling service providers:
Credit counselling services provided by government agencies
Non-profit credit counselling agencies
For-profit credit counselling agencies
The most common type of credit counselling service provider in Canada is the not-for profit credit counselling agency. There are, however, some credit counselling agencies which do not have non-profit status.
3. When choosing a credit counselling agency a consumer should do their homework
Typically, if you enrol in a Debt Management Plan with a credit counselling agency then you will sign an agreement with it setting out your respective rights and obligations. This document will contain details with respect to any and all fees that you are to pay to the credit counselling agency for its services associated with your Debt Management Plan. Anyone contemplating credit counselling should do some research including the following:
The reputation of the credit counselling agency
The complaints history of the credit counselling agency
Details with respect to fees charged by the credit counselling agency
To what extent, if any, it will be able to obtain interest relief for you on your outstanding balance during the life of your Debt Management Plan
No one should sign an agreement with a credit counselling agency where its fees are front-end loaded. If you are going to enroll in a Debt Management Plan with a credit counselling then it is reasonable for the agency to receive a fee equal to a small percentage of your total monthly or bi-weekly payment. It is totally unreasonable, however, for a credit counselling agency to expect a consumer to pay one hundred percent of the credit counselling agency’s fees before any monies are paid to a consumer’s creditors.
You should determine whether or not a credit counselling service provider is a for-profit credit counselling agency. Creditors prefer to work with a government-sponsored credit counselling agency or a non-profit credit counselling agency. You should not be surprised if some creditors decline to offer any interest relief whatsoever to consumers who obtain a Debt Management Plan through a for-profit credit counselling agency.
4. How does a Debt Management Plan at a credit counselling agency work?
A representative from your credit counselling agency—often referred to as a “counsellor” will contact all of your unsecured consumer creditors on your behalf. The purpose of this communication is three-fold. Firstly, the counsellor wants to secure your creditor’s agreement to participating in your Debt Management Plan as it relates to its debt. Secondly, your counsellor will want to negotiate the number of months during which you will repay a particular outstanding debt. Finally, your counsellor will attempt to negotiate some kind of relief with each creditor regarding the amount of interest you will pay on a specific debt.
Once you enroll in a Debt Management Plan you will make regular payments to your credit counselling agency. Your credit counselling agency will then distribute these monies, less any fees paid to it, to your creditors under your Debt Management Plan. Within a few days of enrollment in a Debt Management Plan collection calls, from creditors whose debts are included in your plan, should stop. The fact that you have enrolled in a Debt Management Plan will not stop existing wage garnishments nor will it stop lawsuits which have already been commenced against you. Furthermore, your enrollment in a Debt Management Plan will not prevent your secured creditors from attempting to recover monies from you!
5. How does a consolidation order work?
If you are a resident of Alberta, Saskatchewan, or Nova Scotia then you have the option of obtaining a consolidation order. Consolidation orders are available under the Orderly Payment of Debts Regulations enacted under the federal Bankruptcy and Insolvency Act. In these three provinces there is an Orderly Payment of Debts administrator.
A debtor must include all of debts—excluding secured debt and non-dischargeable debt–in his consolidation order. Where a consumer obtains a consolidation order he must repay one hundred percent of his indebtedness to his listed creditors. Furthermore, under a consolidation order, a debtor must pay a fixed rate of five percent interest on his outstanding balance. Under a consolidation order a debtor makes payments to the plan administrator and the administrator then distributes monies to the debtor’s creditors.
Under a consolidation order, a consumer must repay his indebtedness within a three-year period unless all of his creditors agree to a longer repayment period. A consumer who obtains a consolidation order is entitled to greater protection from creditors than a consumer enrolled in a Debt Management Plan. When a consumer obtains a consolidation order then it stays, or suspends, any lawsuits against the consumer, and terminates any wage garnishments—except those involving secured creditors and those involving child support and spousal support.
What happens if you were to make a consumer proposal?
Consumer proposals are regulated by the federal government’s Office of the Superintendent of Bankruptcy. In Canada both consumer proposals and personal bankruptcies are administered by federally licensed bankruptcy trustees.
There are five things that you should know about the process of making a consumer proposal:
Requirement that you meet in person with a bankruptcy trustee
You must provide a detailed list of all your debts
Your consumer proposal will be filed with the Office of Superintendent of Bankruptcy
A consumer proposal requires creditor approval
You must make all the required payments under your consumer proposal
1. You must meet with a bankruptcy trustee
If you want to make a consumer proposal then it will be necessary for you to meet with a bankruptcy trustee.
2. You must provide detailed information with respect to all your debts
If you are going to make a consumer proposal at some point the bankruptcy trustee will instruct you to complete a document called a Statement of Affairs. This document is a detailed list of your creditors including the amount of monies owing to them. It is important for you to list all of your relevant creditors in your Statement of Affairs because listed creditors will be sent a copy of this document and they are to suspend collection activity against you upon receipt of this document. Furthermore, only those creditors listed in your Statement of Affairs are required to take a haircut if your consumer proposal is approved.
3. Your consumer proposal will be filed with the Office of the Superintendent of Bankruptcy
A bankruptcy trustee will prepare your consumer proposal after reviewing your Statement of Affairs and your current financial situation including your monthly income and living expenses. This document will set out the percentage of your debt that you propose to repay, the number of months that you propose to make monthly payments, as well as the dollar amount of your monthly payment. Your consumer proposal will be filed with the Office of the Superintendent of Bankruptcy (OSB). On the day that your consumer proposal is filed with the OSB then all lawsuits against you will be stayed, or suspended, except for those involving child support and spousal support.
4. Your creditors must approve your consumer proposal
At the same time that the bankruptcy trustee files your consumer proposal with the Office of the Superintendent of Bankruptcy it will also provide a copy of your consumer proposal to your creditors. Your creditors must accept or reject your consumer proposal within 45 days. Your creditors listed in your Statement of Affairs have the right to vote on whether or not to accept your consumer proposal. Each listed creditor is entitled to one vote for each dollar of debt owed to that creditor. A consumer proposal is approved if fifty percent, plus one, of the votes are in favour of acceptance of the proposal. All creditors are bound by the result of a vote. If your consumer proposal is rejected by your creditors then the bankruptcy trustee can submit a second consumer proposal your creditors.
5. You must make all the required payments under your consumer proposal
The fact that your creditors approve your consumer proposal is no guarantee that you will successfully eliminate your indebtedness to your creditors—excluding secured debt and non-dischargeable debt. With a few exceptions, under a consumer proposal an individual must make monthly payments to the bankruptcy trustee over a period of three to five years. In the event that you were to do a consumer proposal and you were to become more than 90 days in arrears making your payments then your consumer proposal would be automatically annulled. In that scenario, you would get credit for any payments made to date but you would lose any and all of the benefits afforded under your consumer proposal.
When are these debt elimination options available?
Before we can make a fair comparison between these debt relief options it is helpful to know when each of these are available to a consumer. The following factors come into play:
The province in which you live
The types of debts which can be eliminated
Limitations regarding the dollar amount that can be eliminated
Whether or not you can cherry pick the debts you want to eliminate
Whether having equity in your home will prevent you from using these options
1. The province in which you live
There are no residency requirements if you wanted to do a consumer proposal or a Debt Management Plan through a credit counselling agency. A consolidation order, however, is only available to the residents of Alberta, Saskatchewan, and Nova Scotia. Quebec residents are able to obtain debt relief comparable to a consolidation order, something called a Voluntary Deposit program.
2. Credit counselling vs Consumer Proposal: Types of debts which can be eliminated
The chart below lists five different debt categories and identifies those debt types which can be eliminated using a Debt Management Plan, a consumer proposal, or a consolidation order.
In some instances your creditor, known as a secured creditor, has collateral it can look to if you fail to repay monies owing to it. The two most common examples of a secured debt is a mortgage on a home and a lien placed on a car that has been purchased or leased. Any debt that is not secured debt can be described as unsecured debt. There are different categories of unsecured debt. The most common type of unsecured debt is unsecured consumer debt. Unsecured debt which is not consumer debt includes the following:
Student loans
Monies owing to the government
Non-dischargeable debt
Non-dischargeable debt is a category of unsecured debt which cannot be forgiven or discharged under a consumer proposal, personal bankruptcy, or a consolidation order. This includes the following:
Child support and spousal support obligations
Civil judgments involving fraud
Court fines
Award of damages by a court for sexual assault or the intentional infliction of bodily harm
The type of debt to be included in a consumer proposal is the same as that for a consolidation order.
3. Limitations regarding the dollar amount of debt that can be eliminated
If you are interested in doing a Debt Management Plan through a credit counselling agency (or obtaining a consolidation order) there are no restrictions, based on the dollar amount of your debt, as to the availability of this option. In contrast, a consumer proposal is not available if your relevant debt is (1) less than $10,000, or (2) more than $250,000, excluding mortgage debt. This information is summarized in the following chart.
Availability of Debt Management Plan, Consolidation Order, and a Consumer Proposal
By Dollar Amount of Debt
4. Whether or not you can cherry pick the debts you want to eliminate
Regardless of whether you eliminate your unsecured consumer debt by way of a Debt Management Plan, consolidation order, or a consumer proposal, you cannot pick and choose which debts are to be eliminated! Furthermore, if you make a consumer proposal or obtain a consolidation order then you must include all of your student loans and monies owing to the government. None of these options permit you to cherry pick debt and exclude specific accounts from your chosen debt relief option!
5. Whether having equity in your home will prevent you from using these options
If you own real property in your own name then it is possible that you might own sufficient equity to effectively disqualify you from a Debt Management Plan, a consumer proposal, (or where applicable, a consolidation order) or possibly all of them. If you own real property it is possible that one or more of your unsecured consumer creditors might refuse to include its debt in your Debt Management Plan because their position is you could sell your home or refinance it in order to pay your creditor. Similarly, the fact that you have substantial equity in your home might mean that you do not satisfy the insolvency requirement under federal law, and, therefore, are not entitled to make a consumer proposal.
When is a fair apples to apples comparison of these debt relief options possible?
When you are comparing debt relief options it is helpful to know whether or not you are comparing apples to apples. For example, a Debt Management Plan with a credit counselling agency can only be used to eliminate unsecured consumer debt—and it cannot be used to eliminate outstanding student loans or monies owing to the government.
If one hundred percent of your indebtedness is unsecured consumer debt then you are comparing apples to apples if you were to consider resolving your debts by way of the following:
Debt Management Plan with a credit counselling agency
consumer proposal
consolidation order (for residents of Alberta, Saskatchewan, and Nova Scotia only)
If your debts include student loans or monies owing to the government then you are making an apples to apples comparison in terms of eliminating your debt if you had a choice between the following two options:
Consumer Proposal
Consolidation order (for residents of Alberta, Saskatchewan, and Nova Scotia only)
It would not be fair to say that making a consumer proposal is a superior debt relief option than credit counselling. The following statement, however, would be an accurate comparison of the relative merits of credit counselling and a consumer proposal.
“Except for two limited circumstances, making a consumer proposal is virtually always going to be more attractive than credit counselling. Not only is eliminating debt at 35 cents on the dollar more attractive than eliminating debt at 100 cents on the dollar, but a consumer proposal provides a debtor with much more robust protection from creditors than credit counselling.”
What are the advantages of doing credit counselling?
1. Some collection activity will cease
One of the advantages of credit counselling is that collection activity will stop in connection with any and all debts included in your Debt Management Plan. You can only include unsecured consumer debt in a Debt Management Plan. Consequently, enrollment in a Debt Management Plan will not stop collection activities against you in connection with secured debt, non-dischargeable debt, as well as monies owing to the government, or outstanding student loans.
If you live in Alberta, Saskatchewan, or Nova Scotia, and you were to obtain a consolidation order then you would be entitled to more robust protection from creditors than you would if you were to enrol in a Debt Management Plan. A person who obtains a consolidation order is entitled to the same level of protection from creditors as a person making a consumer proposal!
2. Reduce your monthly payments to creditors on your unsecured consumer debt
Another advantage of credit counselling is that a consumer will be able to reduce the size of his monthly payments arising from his indebtedness to his unsecured consumer creditors.
Enrolling in a Debt Management Plan offers greater opportunities to lower a consumer’s monthly payments compared with a consolidation order. One of the disadvantages of a consolidation order is that a consumer must pay a minimum of 105 cents on the dollar on his original indebtedness over a period not to exceed three years—except where all the consumer’s creditors agree to a longer repayment period.
3. A Debt Management Plan is not automatically terminated if debtor is 90 days in arrears making payments
If you were to make a consumer proposal and you were to become 90 days in arrears making your payments then your consumer proposal would be automatically annulled. In contrast, Debt Management Plans are more forgiving to those in arrears making their payments. There is no requirement that a Debt Management Plan be automatically annulled if a consumer were to become more than 90 days in arrears
What are the disadvantages of credit counselling?
1. You repay creditors a minimum of 100 cents on the dollar—and typically much more
The single most important disadvantage of credit counselling is that it is an incredibly expensive debt relief option! If you successfully complete a Debt Management Plan (or a consolidation order) then you will have paid a minimum of 100 cents on the dollar to eliminate a dollar of your debt—about three times the cost of what you would have paid had you done a consumer proposal!
2. If your total debt is more than $10,000 then credit counselling is rarely more attractive than a consumer proposal
If your total unsecured consumer debt—or if your combined indebtedness for unsecured consumer debt, government debt and outstanding student loans—is more than $10,000 then rarely will credit counselling be a more attractive option than a consumer proposal. If you eliminate your debt using credit counselling it will cost you somewhere between 100 cents and 130 cents to eliminate a dollar of your debt. In contrast, if you were to make a consumer proposal then it would cost you approximately 35 cents to eliminate a dollar of your debt.
If you owe more than $250,000, excluding mortgage debt, then a consumer proposal is not available to you! If you do owe more than $250,000 to your creditors, excluding monies owing on your mortgage, then you should consider speaking to a bankruptcy trustee about a Division 1 Proposal, which is similar to a consumer proposal, and a much less expensive debt relief option than credit counselling.
3. If your total debt is less than $10,000 then credit counselling will rarely be the optimal debt relief strategy
If your total debt is less than $10,000 then making a consumer proposal is not available to you! Credit counselling, however, is rarely the optimal debt relief option for those owing less than $10,000 to their creditors. The odds are good that you can obtain better results by doing one of the following:
Simply waiting until your indebtedness exceeds $10,000 and then doing a consumer proposal
Not making any payments on selected unsecured consumer debt and relying upon the expiry of your province’s limitation period to avoid paying your debt altogether
Not making any payments to selected unsecured consumer creditors until such time that you can set aside some monies and negotiate a one-time lump sum payment for less than one hundred percent of the outstanding balance as settlement in full—often at a substantial discount
Let’s assume that today you owe $9,000 on two high interest credit cards. If you were to do credit counselling today then you would likely repay somewhere between $9,000 and $11,700, by making monthly payments. If, however, you were to wait 12 to 24 months until such time that your total outstanding balance reached $10,000 then you could make a consumer proposal in which case you would pay approximately $3,500, by making monthly payments over a period not to exceed five years.
Based upon my 12 years of experience as a collection lawyer and collection industry insider I know that creditors rarely sue individuals who owe less than $4,000 to a single creditor. Therefore, if you owe $10,000 and this indebtedness is split amongst two or three creditors then there is a real chance that you might never have to repay a penny of these monies. Here you can learn more about why a creditor might never sue you.
Each province in Canada has a provincial limitation period which effectively forces unsecured consumer creditors to sue debtors within a certain number of years, after which it can be very difficult for creditors to recover their monies. The relevant limitation period is two years in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, three years in Quebec, and six years in the rest of Canada.
Creditors rarely sue consumers after the relevant limitation period has expired. If you have an unsecured consumer debt and you are not sued before the expiry of the limitation period in your province then you are going to be able to avoid paying your outstanding debt altogether!
Once your unsecured consumer debt remains unpaid for six months—and for months and years thereafter–then you have the option of attempting to settle your account by negotiating a one-time lump sum payment as settlement in full. It is quite common for consumers to be able to negotiate settlements with creditors in which the consumer makes a one-time lump sum payment equal to somewhere between 25 cents and 50 cents of the current outstanding balance.
3. You might not obtain interest relief from your creditors
After you enroll in a Debt Management Plan then a counsellor from your credit counselling agency will speak to your creditors and attempt to negotiate some kind of relief regarding interest accruing on your outstanding balance during the life of your plan. There is, however, no guarantee that your creditor will agree to provide you with (1) generous interest relief, or (2) any relief whatsoever in connection with interest. It is common for creditors to refuse interest relief to those debtors enrolled in a Debt Management Plan with a for-profit credit counselling agency. Furthermore, if you fail to successfully complete your Debt Management Plan then you should not anticipate saving a penny in interest relief.
4. A Debt Management Plan will not terminate existing lawsuits brought by creditors
If you make a consumer proposal any lawsuits brought by your unsecured creditors will be suspended or stayed. In contrast, enrollment in a Debt Management Plan with a credit counselling agency will not stay any existing lawsuits against you. Any current lawsuits against you, however, will be stayed if you were to obtain a consolidation order. Your liability to your secured creditors and your liability for child support and spousal support are not affected by a Debt Management Plan or a consolidation order.
5. A Debt Management Plan will not terminate existing wage garnishments
Making a consumer proposal or obtaining a consolidation order will terminate wage garnishments except for those wage garnishments arising from liability for child support and spousal support payments. Enrolment in a Debt Management Plan with a credit counselling agency does not terminate any existing wage garnishments.
6. A Debt Management Plan is not available to eliminate student loans or monies owing to the government
Enrolling in a Debt Management Plan with a credit counselling agency will not enable a consumer to eliminate student loan debt or monies owing to the government.
In contrast, under a consolidation order a consumer can eliminate student loan debt and monies owing to the government.
7. You are not entitled to have credit while you are in credit counselling
One of the disadvantages of credit counselling is that during your Debt Management Plan (or the life of your consolidation order) an individual is not entitled to have access to credit. Neither of these debt relief options, however, should prevent a person from obtaining a pre-paid credit card.
8. It might not be suitable for those who cannot make regular monthly payments
Credit counselling might not be suitable for those consumers who cannot make regular monthly payments. This might include people who do not receive a regular paycheque, have seasonal employment, or who routinely experience periods of unemployment.
9. You must include all of your unsecured consumer debt in your Debt Management Plan
You must include all of your unsecured consumer debts in your Debt Management Plan. In certain circumstances, this lack of flexibility might be a disadvantage. This would be the case, for example, if the relevant limitation period has expired, or will soon expire, on one or more of your unsecured consumer debts.
10. You cannot take advantage of a limitation period to avoid paying a debt
One of the disadvantages of credit counselling agency is that you will not be in a position to take advantage of the expiry of a limitation period to avoid paying one or more outstanding accounts.
What are the pros of making a consumer proposal?
1. A consumer proposal stops most wage garnishments against the consumer
Once your consumer proposal is filed with the Office of the Superintendent of Bankruptcy then any and all wage garnishments against you will end except for those for spousal support and child support.
2. A consumer proposal stops most lawsuits against a consumer
If you make a consumer proposal that is accepted by your creditors then most lawsuits against you will be stayed or suspended. Making a consumer proposal does not prevent your secured creditors from using the courts to recover monies from you!
A consumer proposal can be incredibly helpful to homeowners and those who own real property.
“Making a consumer proposal can be a very effective debt relief option if you own real property in your own name and one or more of your creditors chooses to sue you.”
If you make a consumer proposal before one of your creditors sues you, obtains a judgment against you and puts a lien on your real property then your creditor is only entitled to approximately 35 cents on the dollar. If, on the other hand, you were to make a consumer proposal after your creditor sued you, obtained a judgment, and placed a lien on your property, then your creditor might receive an amount equal to more than 100 cents on the dollar because of court costs and post-judgment interest—the latter which can often be a significant amount of money!
3. A consumer proposal stops collection activity against a consumer
Once your consumer proposal is approved then all collection activity with respect to unsecured consumer debt, monies owing to the government, and student loan debt will stop. The fact that you have made a consumer proposal does not prevent your secured creditors from attempting to recover monies from you!
4. A consumer proposal offers the opportunity to eliminate most types of debt at 35 cents on the dollar
The single most important advantage of a consumer proposal is that affords the consumer an opportunity to eliminate unsecured consumer debt, monies owing to the government, and outstanding student loans at approximately 35 cents on the dollar by making monthly installments over a period not to exceed five years. By making a consumer proposal an individual can eliminate their debt for a third of the cost of either a Debt Management Plan or a consolidation order!
In order to take advantage of this opportunity a consumer must make his monthly payments during the life of the consumer proposal. A consumer proposal is automatically annulled in the event that a consumer is more than 90 days in arrears making his payments under a consumer proposal.
The fact that a consumer makes a consumer proposal will have no impact on his secured debt nor on his non-dischargeable debt.
5. You have the option of eliminating your debt by making a one-time payment of approximately 35 cents on the dollar
When a consumer’s creditors approve a consumer proposal a creditor will typically make monthly payments to the bankruptcy trustee over a period of between three and five years. A consumer, however, does have the option of “paying out” his consumer proposal liability much more quickly if the necessary funds become available. This might come about because of funds made available from a friend or family member. It might also occur because the consumer experiences a windfall such as an inheritance or receipt of a large settlement cheque arising from a lawsuit. A consumer who can “pay out” his indebtedness arising from a consumer proposal will be able to repair his credit rating and obtain credit more quickly.
What are the cons of making a consumer proposal?
1. A very inflexible, structured debt relief option
Making a consumer proposal is a formal, structured process, lacking in flexibility. It is necessary for the consumer to meet with the bankruptcy trustee in person. An individual must include all of his debt—excluding secured debt and non-dischargeable debt—in his consumer proposal. The consumer’s creditors have the right to vote and reject the consumer’s proposal. A consumer proposal is automatically annulled if a consumer is more than 90 days’ arrears making payments under a consumer proposal.
2. The fact your creditor’s approve your consumer proposal is no guarantee of successful completion
The fact that your creditors approve your consumer proposal is no guarantee that you will successfully complete your proposal and eliminate your debt at approximately 35 cents on the dollar. It has been estimated that about twenty-five percent of individuals whose consumer proposal are approved by their creditors do not successfully complete it!
3. A consumer proposal is automatically annulled if a consumer becomes more than 90 days in arrears making payments to the bankruptcy trustee
By law, if you are more than 90 days in arrears making your payments under your consumer proposal then your consumer proposal is automatically annulled!
4. You must be able to make monthly payments over three to five years
There is no point in making a consumer proposal if you are unable to make the necessary monthly payments over the next three to five years. The fact that a person making a consumer proposal must be able to make monthly payments over a period of three to five years means that it is not attractive for people who do not earn a regular income or those who routinely experience unemployment.
5. You are not entitled to have credit during the life of your consumer proposal
If you make a consumer proposal then you are not entitled to have access to credit during the life of your consumer proposal, typically between three and five years. It is common for some people contemplating making a consumer proposal to buy an inexpensive used car before they make a consumer proposal. The fact that you make a consumer proposal does not prevent you from having a pre-paid credit card.
6. You must include all of your debts in a consumer proposal
If you make a consumer proposal you must include all of your debts in it, except for non-dischargeable debt and secured debt. It is quite common for debtors contemplating a consumer proposal to want to be able to exclude some debts from their consumer proposal. For example, if you have a loan from your employer, you will likely want to repay this loan in full and not repay 35 percent of your indebtedness to your employer over a five-year period.
7. You can never eliminate your debt for less than 30 cents on the dollar
One of the disadvantages of making a consumer proposal is that you can never eliminate your debt for less than 30 cents on the dollar. Having said that, when you do credit counselling you can never eliminate your debt for less than 100 cents on the dollar!
If you were to stop making payments on your unsecured consumer account and your creditor were not to sue you before the expiry of the relevant limitation period in your province, then you would be in a position where you could avoid paying a penny on your unsecured consumer debt!
A consumer proposal will almost always be superior to credit counselling
Over the past six years I have provided advice to hundreds of Canadians across the country experiencing debt problems. My goal has been to assist those calling me to identify the one or two optimal debt relief options for their particular financial circumstances. In some instances I have recommended that an individual speak to a bankruptcy trustee about a consumer proposal or filing for personal bankruptcy. In other cases I have assisted them with negotiating a settlement where the consumer made a one-time lump sum settlement for less than one hundred percent of the current outstanding balance. In a significant number of scenarios I have suggested that an individual take advantage of the expiry of a limitation period to avoid paying a penny on their outstanding account.
“I am considered to be an expert on consumer debt and I am routinely consulted by the media. During the past six years I have provided advice to hundreds of Canadians experiencing debt problems and not once have I recommended that a consumer resolve their debt situation using credit counselling! Except for two very unique circumstances, credit counselling is virtually never the optimal debt relief option for a Canadian.”
In what two scenarios might credit counselling be more attractive than a consumer proposal?
There are two very limited circumstances in which credit counselling might be more attractive than making a consumer proposal. In both of these instances, credit counselling is used as a short-term fix, and not as the ultimate solution to the consumer’s debt problems. In these two scenarios, the use of credit counselling is a bridging strategy, providing immediate relief and assisting a consumer transition to a different debt relief option.
1. You anticipate your income will increase dramatically sometime in the next 12 to 36 months
Some Canadians experiencing debt problems will see their incomes or their net household income rise dramatically in the next 12 to 36 months. This situation could arise under several different scenarios:
Person anticipates obtaining a good paying job in the near future
Improving financial situation arising from impending marriage or cohabitation
Person anticipates receiving payments arising from a lawsuit
Person anticipates receiving sizable inheritance in the near future
For these consumers credit counselling might be an attractive short-term strategy. This would provide the consumer with some protection from creditors and a reduction in the consumer’s monthly payments. Once a consumer’s income undergoes a dramatic increase then the consumer could “drop out” of their Debt Management Plan (or cease making payments in accordance with a consolidation order) and have the option of paying his outstanding debt in full at his earliest opportunity.
2. You want to eliminate your student loan indebtedness by declaring bankruptcy but you ceased attending school less than seven years ago
You might have outstanding student loans in circumstances where your creditor refuses to negotiate a discounted one-time lump sum payment for less than one hundred percent of the current outstanding balance. In this scenario, you have two options for eliminating your student loan debt in which you do not pay 100 percent of your outstanding balance:
You make a consumer proposal in which case you will likely pay approximately 35 cents on the dollar with respect to your student loan indebtedness
You file for personal bankruptcy in which case your student loan indebtedness will be forgiven on the condition that at the time of your bankruptcy you have ceased attending school for seven years
Some people with outstanding student loans wanting to file for bankruptcy stopped attending school less than seven years ago—in which case their student loan debt would not be discharged, or forgiven, in a bankruptcy. Debtors in this position might find it very helpful to enrol in a Debt Management Plan with a credit counselling agency (or possibly obtain a consolidation order) solely for the purposes of (1) obtaining protection from creditors, and (2) reducing their monthly debt payments, during the period while they wait for this seven-year mark to arrive! Once a consumer has reached the point where he has ceased attending school for seven years he can then file for personal bankruptcy and discharge his student loan indebtedness!
For those consumers with outstanding student loans living in Alberta, Saskatchewan, or Nova Scotia waiting for the seven year mark to file for personal bankruptcy to discharge their student loans obtaining a consolidation order might be more attractive than enrolling in a Debt Management Plan with a credit counselling agency. Under a consolidation order you would be entitled to lower monthly payments with respect to your outstanding student loans. In contrast, under a Debt Management Plan you would not be entitled to any reduction in your monthly student loan payments because student loans cannot be included in a Debt Management Plan.
To learn more about eliminating your debt please contact a Trustee for a free confidential consultation.
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