Call Us!

(844) 845-4219

Consumer Proposal vs Debt Consolidation – Which is Better?

Written by
Written by
Staff Writer

Miral is a personal finance writer and content marketing expert based in the Greater Toronto Area. She has previously worked in the financial services sector, where she was a private wealth advisor, before transitioning to the world of content strategy, SEO, and inbound marketing. She has a keen interest in budgeting and investing, and hopes to help others get on track to building financial independence.

Miral Naik
Consumer proposal vs debt consolidation

Being in debt makes it a daily struggle, even for groceries or rent. The added stress also takes a toll on the mental health of many Canadians. If you’re in a position where you’re attempting to pay everything back but still have a tough time budgeting, it might be time to look at financial solutions that may help, like debt consolidation or a consumer proposal. Read on to understand more about the distinctions between a consumer proposal vs debt consolidation and what would work well for your personal financial situation. 

What is a consumer proposal?

A consumer proposal is a debt settlement arrangement. It is a legally binding agreement filed through a Licensed Insolvency Trustee (LIT) in Canada. A consumer proposal is often considered a preferable alternative to bankruptcy if you qualify.

With a consumer proposal, applicants often pay less than what they initially owed. A consumer proposal can reduce your debt by up to 70% or 80%. You will likely be able to keep most of your assets as well. You still need to attend two mandatory credit counselling sessions and keep up regular monthly payments towards your consumer proposal.

What is debt consolidation?

If you’re currently handling a lot of different bills, due dates, and amounts, it might be hard to keep track of them all. This could be more stressful if you’re struggling to manage the payments or time them to paychecks. 

Debt consolidation allows you to combine these bills into a singular monthly payment, reducing your time and energy spent on keeping up with bills. It also provides a lower interest rate than the usual credit card and consumer debt APR percentages. This means you not only reduce the number of bills you pay but also how much interest you end up paying. This, in turn, will also reduce the time it will take for you to pay off your debts. 

What is a debt consolidation loan?

While there are a number of ways to consolidate your debt, the most common method is taking out a debt consolidation loan. The process involves taking out a relatively lower-interest loan to pay off your high-interest debts. In most cases, you can qualify based on your credit score. It is a fairly straightforward process and you will be able to check the interest rates upfront. It should ideally be lower than your existing APR percentage, otherwise, there’s no real financial benefit. Do the calculations to make sure it works for your personal financial situation. 

There are other avenues for exploring debt consolidation, like credit card balance transfers, lines of credit (LOCs), HELOCs, or debt management plans. They all work in different ways and can have varying effects on your overall finances or credit, so you need to do some research before you can pick what works best for you. 

Key differences: Consumer proposal vs debt consolidation

Learning more about the key differences between a consumer proposal vs debt consolidation will help you make an informed decision on which one may be better suited to your situation.

Eligibility differences

To be eligible for debt consolidation, you need to be able to show a source of regular income and have a good credit score. If you meet these qualifying criteria, you may be offered a loan at an affordable interest rate. 

You may be eligible to file a consumer proposal if you owe between $1,000 and $250,000 of unsecured debt and cannot keep up with your debt payments. You also need to show proof of regular income, as confirmation that you can afford the monthly payments. 

Process differences

A consumer proposal is a legally binding document filed by a Licensed Insolvency Trustee (LIT) on your behalf. They will organize and structure your financial details, as well as negotiate with creditors for you.

Debt consolidation is most commonly done by taking out a debt consolidation loan yourself. You can use a regular personal loan for the purpose of debt consolidation as well. For this, you can apply to your bank or local credit union. If you have a good to excellent credit score, the APR (interest rate percentage) will likely be relatively lower compared to consumer debt and credit card APRs. 

Repayment comparison

When you file a consumer proposal, you may be able to reduce your total debt by up to 70 or 80 percent. Meaning, in the end, you only pay back between 20 to 30 percent of your original debt load.

With debt consolidation, you still repay the full amount of your original debt. You may be able to get a lower interest rate, so you will be able to save on interest payments overall. It also has a negligible effect on your credit score.

Effects on credit score

A consumer proposal has a harsh effect on your credit score by way of an R7 rating on your credit report. This will stay on for 3 years after you have paid off the consumer proposal in full. For example, if you pay it off in 3 years, it will stay on your report for a total of 6 years.

Debt consolidation, on the other hand, does not affect your credit score much. Since it doesn’t have much of an effect, you will still be able to take on new debt before you fully pay off the old consolidation loan. Though it’s not recommended to do so. You need to be mindful of budgeting with this route, and make sure you’re tracking your expenses. 

Rebuilding credit

Debt consolidation has a negligible effect on your credit score. You may see it drop temporarily (by around 5 points) when you apply for a debt consolidation loan. This is because whenever you apply for credit, the lender does a hard inquiry. Each time a hard inquiry is done, your credit drops by a few points and will rebound in a few months. Overall, if you make payments on time, it reflects positively on your credit report.

A consumer proposal has a relatively harsher effect on your credit score. It can affect your score for a few years and could take time to rebuild. You can create a budget and stick to it, pay all your bills on time, and get a secured credit card. Over time, you will have a history of creditworthiness.

Time taken to complete the process

A consumer proposal agreement is different for each applicant, so the duration varies. It depends on your proposal, and what you are able to pay every month. There is a 5-year limit on a consumer proposal’s duration.

Most debt consolidation options range from three to seven years, depending on the amount you borrow. Some lenders in Canada offer flexible repayment options, sometimes as little as a year. If your debt is a relatively small amount, you could be debt-free in around a year!

Cost differences

Since each consumer proposal is personalized, the costs vary as well. Your proposal would include an offer to pay a portion of the debt, request an extension, or both. Whether your consumer proposal is accepted depends on your existing debt, financial situation, current expense commitments and ability to make payments, amongst many other factors.

For debt consolidation, you would be saving money due to the lower interest rates. You would be paying the full principal amount, and saving on interest payments.

Debts that can be included

With a consumer proposal, you can include any unsecured debt between $1,000 and $250,000. If you’re planning to file jointly with your spouse, the limit increases to a combined $500,000. 

Debt consolidation covers many different types of unsecured debt, like credit cards, store cards, gas cards, other personal loans, existing consolidation loans, and more

Debts that cannot be included

A consumer proposal does not cover secured loans like mortgages or auto loans. If you’re facing debt issues due to a secured loan, a consumer proposal may not be the best fit for you. However, if your existing secured loan is no longer viable, you have the option to stop making payments. If you do so, the creditor is likely to take possession of the collateral you put up. If you allow them to take possession before the consumer proposal starts, you may be able to add any shortfall you still owe to the proposal. The good news is that any existing assets you already own also remain untouched. 

Similarly, debt consolidation does not cover secured loans either. Mortgages and auto loans cannot usually qualify for debt consolidation.

When is debt consolidation a better option?

Debt consolidation may be a good fit for you if:

  • You can show proof of regular income and the ability to make the new payments on time.
  • You have good credit and are able to qualify for a consolidation loan at a lower interest rate.

If these two factors seem doable, debt consolidation may be a better option for you. It gives you the ability to get out of debt sooner than if you would have continued paying higher rates of interest. It’s important to note that you should combine this with a budget – and stick to it. Do not take on more debt while consolidation is in progress; focus on becoming debt-free.

When is a consumer proposal a better option?

If you’re in a large amount of debt and unable to keep up with payments, consider a consumer proposal. It is a preferable option to bankruptcy in various ways. You get to keep most of your assets, and your income is not garnished.

As soon as you file for a consumer proposal, a “stay of proceedings” is applied, so you will not be charged interest from that point on, nor can collections keep hounding you to pay. While a consumer proposal may involve a more intensive process, it is viable for many who were otherwise considering bankruptcy.

Consumer proposal vs debt consolidation- How to decide?

If the monthly payments seem to be manageable, and you have a good to excellent credit score, debt consolidation may be the better option. With this, you still need to pay the full amount you owe. If you qualify, you are likely to get a lower interest rate and pay off your debts sooner. Debt consolidation also tends to have a negligible effect on your credit score, compared to a consumer proposal. 

If you are not able to keep up with payments, or have a relatively higher amount of unsecured debt, consider learning more about a consumer proposal. You may be able to reduce your total debt by around 70 or 80 percent. You need to file a proposal with your creditors, and show proof of your financial situation and inability to repay in full. It also has a stronger negative effect on your credit score, adding an R7 rating. Another benefit of a consumer proposal is the “stay of proceedings” granted when you file. 

Key Takeaways

Both debt consolidation and consumer proposals are solutions for becoming debt-free. Each has its own place, and what works best for you will depend on your personal financial situation. If you have the income and credit score for debt consolidation, it is preferable to explore that option, compared to a consumer proposal. A consumer proposal can be viable if you are really unable to pay your debt, or if your assets and/or home are at risk of being seized by creditors. 

If you’re ready to take steps towards getting out of debt, contact us today. Our experts will be able to discuss your situation and options with you, so you can make an informed decision on whether debt consolidation would suffice, or if you really do need to go for a consumer proposal. We are here to help – you can ask for advice or recommendations for other viable debt relief options you may not have considered. The key is to find a solution that is the right fit for you. 

Frequently asked questions

Consumer proposal vs debt consolidation: What’s worse for my credit score?

A consumer proposal would be worse for your credit score, compared to debt consolidation.

Debt consolidation has a negligible effect on your credit score – only a temporary drop when a hard credit inquiry is done during the application process.

A consumer proposal, on the other hand, adds an R7 rating to your credit report, and you may find it difficult to get approved for new credit in the meantime. If you do, you may end up qualifying for relatively higher interest rates.

Would an increase in my income affect a consumer proposal?

No, an increase in your income does not affect a consumer proposal. This is one of the benefits of a consumer proposal, as compared to filing for bankruptcy. The terms of the consumer proposal are legally binding and will not change if your income increases. You will still be able to stick to your agreed-upon payments. If you filed for bankruptcy, a re-negotiation would likely happen based on your financial changes. 

Can I include a student loan in my consumer proposal?

To be included in a consumer proposal, seven years should have passed before the date you file your consumer proposal. If your student loan is less than 7 years old, it cannot be included in a consumer proposal.

Share this page



Consolidated Credit Canada