Consumer Proposal

Debt consolidation vs. Consumer Proposal

When comparing debt consolidation vs. consumer proposal, the right choice depends on your unique financial situation.
Bruce Hodges
November 8, 2023
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Table of Contents

Debt consolidation vs. Consumer Proposal

Debt consolidation and consumer proposals are two debt relief options that many Canadians consider when they find themselves in a challenging financial situation. While both strategies aim to make debt more manageable, they take very different approaches, with implications for one's credit, financial future, and current holdings. Here's a breakdown of the two options:

Key Takeaways:

  • Debt consolidation involves combining multiple debts into a single, more manageable loan or credit arrangement and will not negatively affect your future financial options
  • A consumer proposal is a formal legal process in which a Licensed Insolvency Trustee helps negotiate a reduced repayment plan with creditors and can significantly strain your future financial options.
  • We always recommend that you pursue options like debt consolidation before considering a consumer proposal. Consumer proposals can have severe consequences and make it difficult to acquire credit again in the future.
  • Debt consolidation may be right for you if you have multiple high-interest debts, are seeking a streamlined repayment plan with the potential for lower overall interest rates, and don’t want to negatively impact your future financial activity
  • A consumer proposal may be right for you if you are facing significant financial challenges, have unsecured debts that are difficult to manage, and need a formalized agreement to negotiate reduced payments and avoid bankruptcy.

Debt Consolidation

Debt consolidation is the process of combining multiple debts into a single loan with a lower interest rate. This can simplify debt repayment by replacing multiple payments with one monthly payment, potentially reducing the interest rate, and offering the opportunity to pay off debt faster. 

Here are some of the key features of Parachute debt consolidation approach:

  • Cashback Incentives: Unlike traditional debt consolidation loans, Parachute offers up to 10% cashback on your loan when you complete actions that contribute to your financial wellness.
  • Consolidation Without Additional Credit: Parachute focuses purely on consolidating your existing debt into one manageable payment without opening new lines of credit that could further complicate your financial situation.
  • Improved Financial Health: The end goal of consolidation with Parachute is to leave you in a better position by improving cash flow, helping you qualify for better interest rates in the future, and boosting your credit score.
  • Substantial Monthly Savings: Customers typically save an average of $300 per month by taking advantage of our lower interest rates.
  • Straightforward Terms: Parachute offers loans ranging from $5,000 to $25,000 with interest rates from 24.99% to 29.99%. These rates are particularly advantageous when consolidating high-interest predatory debt, which can have rates upwards of 46%.

Consumer Proposal

A consumer proposal, on the other hand, is a legally binding process administered by a Licensed Insolvency Trustee (LIT). The trustee works with you to develop a proposal—an offer to pay creditors a percentage of what you owe them over a specific period, or to extend the time you have to pay off the debts, or both. Here’s what you should know about consumer proposals:

  • Legal Protection: Once filed, a consumer proposal provides immediate protection from debt collectors. Creditors cannot take legal action or continue to contact you for payment.
  • Debt Reduction: It often allows you to repay only a portion of your debt based on your ability to pay, not what creditors are demanding.
  • Fixed Payments: Your payments are fixed and interest-free over the term of the proposal, which can be up to five years.
  • Impact on Credit: A consumer proposal can negatively affect your credit rating for the duration of the proposal plus an additional three years after you have completed all the payments.
  • Asset Consideration: Unlike bankruptcy, a consumer proposal allows you to keep your assets, which can be important if you have equity in a home or other valuable holdings.

Comparing Debt Consolidation vs Consumer Proposal

You can’t really compare debt consolidation with consumer proposals as they are very different financial tools. However, the right choice depends on your unique financial situation. Debt consolidation is often the first step for those with sufficient income to handle their existing debt  at a lower interest rate, especially if preserving a good credit score is a priority. 

On the other hand, a consumer proposal may be more suitable if you are no longer able to handle the existing debt you already have and require a reduction in the debt you owe, are seeking legal protection from creditors, and possibly if keeping your assets is a factor, despite the more considerable impact on your credit rating.

When to Consider Debt Consolidation

If you meet the following criteria, consolidating your debt with Parachute may be the right choice for you:

  • You wish to simplify multiple debts into one.
  • You seek a reduction in interest rates but can still afford to pay back the majority of your debt.
  • Maintaining a healthier credit score is vital for you.
  • You want incentives to improve your financial behaviour through cashback rewards with Parachute.

Advantages of Debt Consolidation:

  • Combining multiple debts into one makes it easier to manage and track payments.
  • Consolidating debts may lead to a lower overall interest rate, reducing the total cost of repayment.
  • Debt consolidation often comes with a structured repayment plan, providing clarity and a set timeline for becoming debt-free.
  • In some cases, consolidating debts can result in lower monthly payments, making it more manageable for the debtor.
  • Responsible debt consolidation and consistent payments may positively impact your credit score over time.
  • Dealing with a single creditor simplifies communication and reduces the number of creditors you need to manage.
  • Debt consolidation can help individuals avoid defaulting on payments and the more severe consequences of bankruptcy.

Disadvantages of Debt Consolidation

  • Debt consolidation does not eliminate debt; it reorganizes it. Individuals may still need discipline to avoid accumulating new debts.
  • While the interest rate may be lower, extending the repayment period could result in a higher overall cost.
  • Securing a favourable consolidation loan may be challenging for individuals with poor credit.
  • Debt consolidation may involve fees, such as loan origination fees or balance transfer fees, impacting potential savings. At Parachute, we do not charge these fees.

At Parachute, your financial wellness is our top priority. Our debt consolidation loans are structured to help you achieve financial freedom. Learn more and see if you’re a good fit today.

When to Consider a Consumer Proposal

Alternatively, if your situation aligns more closely with the following criteria, working with a Licensed Insolvency Trustee on a consumer proposal may be the more suitable option:

  • You need legal protection from creditors, and are struggling with wage garnishments and/or collection calls.
  • You cannot pay back the full amount of your debt and need to settle for less.
  • You are willing to accept a negative hit on your credit score for a fixed period.
  • Preserving your assets without liquidation is essential to you.

We always recommend that you pursue options like debt consolidation before considering a consumer proposal. Consumer proposals can have severe consequences, and make it difficult to acquire credit again in the future.

Disadvantages of a Consumer Proposal:

  • A consumer proposal is noted on the credit report, negatively affecting the individual's credit score for several years.
  • Creditors can reject a consumer proposal if they disagree with the terms proposed by the debtor.
  • Certain debts, such as secured debts (e.g., mortgages or car loans), are not covered by a consumer proposal.
  • Consumer proposals are a matter of public record, which can impact personal privacy.

Advantages of a Consumer Proposal:

  • A consumer proposal provides legal protection against creditors' collection actions, including wage garnishments and legal proceedings.
  • Through negotiation with creditors, a consumer proposal aims to reduce the total amount of debt owed, making it more manageable for the debtor.
  • Similar to debt consolidation, a consumer proposal involves a single monthly payment to a Licensed Insolvency Trustee, simplifying the repayment process.
  • A consumer proposal offers an alternative to bankruptcy, allowing individuals to settle debts without the severe and long-term impact of bankruptcy on credit.

Do Creditors Usually Accept Consumer Proposals?

The acceptance of a consumer proposal by creditors depends on several factors, including the specific terms proposed, the financial circumstances of the debtor, and the creditors' individual policies. In many cases, creditors may be willing to accept a consumer proposal because it allows them to recover a portion of the debt without resorting to more aggressive collection methods or facing potential losses in the event of bankruptcy.

For the proposal to be accepted, a majority of the creditors, representing at least two-thirds of the total dollar value of the claims, must vote in favour. Working with a Licensed Insolvency Trustee who can negotiate on behalf of the debtor and present a well-structured proposal increases the likelihood of acceptance by creditors.

Before making a decision, it’s critical to assess your financial situation carefully and consider seeking advice from a financial expert. With Parachute, you could find a debt consolidation approach tailored to encouraging your financial wellness and long-term prosperity. 

Remember, an informed decision is your parachute to financial stability.

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
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