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Consumer Proposal or Debt Management Plan: What’s the Difference?

    While almost everyone has heard of bankruptcy, fewer people have a complete understanding of the various alternatives available to them. Two of these options (which are both popular and often misunderstood) include the debt management plan and the consumer proposal. Similar concepts? Perhaps, but the differences between the two are rather important! A consumer proposal is an arrangement between a borrower and their creditors.

    Consumer Proposals

    Simply put, a consumer proposal provides for partial repayment of the total debt with the creditor(s) agreeing to forgive the remainder. They are negotiated through a Licensed Insolvency Trustee resulting in a legally-binding agreement that provides immediate protection from debt collectors and wage garnishments.

    Consumer proposals typically result in a reduction of the owed amount – sometimes by up to 85% or more. Consumer proposals work on most unsecured debts, including credit cards, bank loans, payday loans, and tax debts.

    This process will impact the borrower’s credit, as it does place an R7 rating on their credit report for 3 years after completion of the agreement.

    Debt Management Plans

    Debt management plans are complete debt repayment plans that primarily offer relief from interest accruing on those debts. This option is mainly used by those who are financially able to pay off their debts, but need a period of time in which to do so. In most cases, debt management plans involve the consolidation of all debts into a single payment – as such, this option requires the intervention of a credit counsellor.

    Debt management plans offer several benefits. While a borrower will usually need to pay back the full amount of their debts (unlike when a consumer proposal is used), they still gain protection from debt collectors and accruing interest with a debt management plan.

    A debt management plan is a voluntary process rather than a legal procedure (as is the case with a consumer proposal.) This means that creditors are not legally bound to honor it, and all parties must enter into the agreement of their own volition.

    A debt management plan will also impact the borrower’s credit despite the fact that loans are being repaid in full. Much like in the case of a consumer proposal, an R7 rating will be applied to their credit report for 2-3 years.

    So, which is better?

    Naturally, you’re probably wondering which of these two solutions is the better choice. The truth is that there’s no easy answer to that question because every person’s financial situation is unique. What we can tell you is that in most cases, the payments arranged in a consumer proposal will be less than those in a debt management plan – and often significantly so. Considering that both options cause nearly the same impact to a borrower’s credit score, the consumer proposal is often the best solution of the two.

    To learn more about these and other options, and to see how they may fit into your particular situation, we recommend speaking with a debt management professional.


    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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