Consumer Proposal vs Debt Consolidation

Debt consolidation and consumer proposals are two legal solutions for dealing with debt without resorting to bankruptcy.

Although they both aim to structure the repayment of debts, their operation, impact and eligibility conditions differ greatly.

Here's a comparative overview to help you distinguish between the two options and better understand which one might be right for you.

What is Debt Consolidation?

Debt consolidation involves taking out a new loan with a financial institution in order to combine several debts into a single financing package. The amount obtained is used to repay in full the balances you choose to include.

This solution simplifies your financial management by replacing several payments with a single monthly instalment, generally spread over a period of up to five years. What's more, when properly managed, debt consolidation generally has little impact on your credit rating, since it is a new loan and not an insolvency measure.

To be eligible, however, you must meet the criteria set by the financial institutions:

• Maintain a good credit rating;

• Have stable employment;

• Have a reasonable debt-to-income ratio, usually under 40%.

If you do not meet the criteria required by your bank or if the proposed payment exceeds your financial capacity, another solution may then be considered: the consumer proposal.

What is a Consumer Proposal?

The consumer proposal is a process governed by law and administered by a licensed insolvency trustee. It allows you to negotiate a partial repayment of your debts with your creditors, based on your income and actual financial situation.

Interest on included debts stops immediately. The monthly payment is based on your ability to pay, which often makes it more affordable than a consolidation loan. The aim is to offer you a realistic and sustainable deal.

As with consolidation, the maximum term is five years, and you keep your assets as long as you meet the payment conditions. However, a notation will be made on your credit file for the duration of the agreement and for up to three years after it ends or six years after it is filed, whichever comes first.

Comparison table: Debt consolidation vs. Consumer proposal

Example: What solution for $40,000 in debt?

To understand the difference between a debt consolidation and a consumer proposal, let's take a concrete example: someone who has accumulated $40,000 in unsecured debt (credit cards, lines of credit, personal loans).

Case 1: Solvent person

Profile:

• Stable income;

• Good credit rating (680+);

• No significant arrears;

• Rasonable debt-to-income ratio.

In this scenario, the person could be eligible for debt consolidation.

She would obtain a new loan of $40,000 at a reduced rate (e.g. 12%), pay off all her current debts and make a single monthly payment for a period of up to 5 years.

Interest estimate (indicative)

• Loan of $40,000 over 5 years at 12%

• Estimated monthly payment: ≈ $890/month

• Total repaid over 60 months: ≈ $53,300

  Interest paid: ≈ $13,300

Benefits:

• No direct negative impact on credit score.

• Simplification of payments.

• Lower rates than credit cards (often 19-24%).

To consider:

• Repayment is always 100%.

• Interest always applies (even if reduced).

• Refusal possible if the bank deems the risk too high.

In this case, consolidation can be an effective solution if the budget can absorb the monthly payment.

Case 2: Person in major difficulty

Profile:

• Frequent late payments;

• Hard to meet minimum payments;

• Collection calls;

• Weakened credit rating;

• Debt ratio too high.

In this situation, consolidation is often refused by financial institutions.

The consumer proposal then becomes more advantageous.

With the help of a licensed insolvency trustee, it is possible to negotiate a partial repayment of the $40,000. For example, creditors could accept a lump sum of $12,000 to $18,000, payable over 5 years.

Why it changes everything:

• The interest on included debts falls to 0% from the time of official deposit

• You repay only the negotiated amount, with no additional interest charges

Example of monthly payments:

• $12,000 over 5 years → ≈ $200/month

• $18,000 over 5 years → ≈ $300/month

Benefits:

• Interest stops immediately;

• Monthly payment adapted to real capacity;

• Protection against creditors;

• Significant reduction in the total amount to be repaid.

• .

To consider:

• Inclusion on credit file (R7 rating);

• Temporary impact on rating.

How do I know which option is best for me?

If your credit record is solid and your income allows you to take out a new loan, consolidation may be an appropriate option for regrouping your debts and simplifying their repayment.

On the other hand, if your financial obligations have become too onerous and a bank loan is no longer an option, the consumer proposal may offer a more realistic solution that is tailored to your ability to pay. Positive point: the trustee's fees are included in the payments provided for in the proposal! So you don't have to bear any additional costs apart from the agreed payments.

Above all, don't let the situation get any worse. The earlier you intervene, the more solutions there are. A quick, confidential and non-judgmental approach with an insolvency practitioner can make all the difference in restoring your financial stability.