Debt Settlement vs. Consumer Proposal

In the debate against consumer proposal vs debt settlement, Canadians in debt must know arguments for both sides. Having a certain amount of debt is common. In fact, most Canadian adults have some form of debt.

Canadians carry an average debt load of $22,800 (excluding mortgages). This is somewhat of a hefty amount. But while some consumers may be able to manage their debt payments, others find it difficult.

Certain events can occur that can put consumers in severe debt. Further, irresponsible spending habits can bury consumers under mountains of debt. In these cases, it can be difficult to climb out of debt without some outside intervention.

Consumers can take steps on their own to ease their debt loads. Making more than minimum payments, paying down high-interest debt first, and limiting spending are some way to reduce debt.

But in many other cases, it may be impossible to pay down debt alone.

Luckily, certain programs are available for consumers who need help with their debt. Consumers who are suffering from debt issues might find debt settlement or consumer proposals useful.

But what are these programs? What’s the difference between debt settlement and consumer proposal? How are they similar? And most importantly, which one is best for you?

Let’s go into detail about these programs to help you decide if any one of them is right for you.

What is Debt Settlement?

If your debt is getting out of hand, a debt settlement program might be an option for you. It’s a service offered by debt settlement companies. They do so by negotiating with your creditors and debt collectors.

Representatives from the settlement companies will try to convince your creditors to settle your debt at less than what you owe. For example, if you owe $20,000, it’s possible to settle at a more manageable amount of $10,000.

The creditors involved will have to agree to this arrangement. If not, debt settlement might not be an option.

How does debt settlement work?

Debt settlement companies will try to negotiate a better payment plan with your creditors. They may also try to settle or reduce your debt on your behalf. These services come with a fee, which is usually a percentage of the amount you would save on the settled debt.

The company could try to negotiate for a lump-sum payment that’s less than the amount you owe. If the creditors agree, you must make at least one payment to your creditors for the settled amount. The company will then charge you for the services provided.

During the negotiation process, some settlement companies may tell you to stop paying your creditors until you reach an agreement.

Consumer Proposal vs Debt Settlement – What kind of debt can you settle?

You can’t settle all debts with this type of program, including secured debt. This includes debts such as mortgages, car loan, and title loans. A secured debt is a loan backed by collateral.

You can settle most unsecured debts. These include:

  • Credit cards
  • Unsecured personal loans
  • Student loans
  • Payday loans
  • Medical bills

What are the risks of debt settlement?

When it comes to consumer proposal vs debt settlement, settlement can be a helpful solution. But there are certain risks that consumers should understand before choosing this route.

Some debt settlement companies might not have your best interests in mind. There are scams out there that consumers should be watchful of. Luckily, consumers may get protection under the Collection and Debt Settlement Services Act.

You could end up with late fees and interest payments if you fail to pay your debt. The part of the settlement that was forgiven may also be subject to taxes, as well. It’s important to keep these risks in mind before going forward with a settlement program.

Pros and Cons of Debt Settlement

There are obvious perks to going with a debt settlement program. These programs help consumers reduce their debt. They also help consumers better manage the debt after settlement.

Reducing debt can help consumers stick to their budgets and make timely payments in full every month. Rather than making minimum payments on all their bills, they can dedicate more of their money to making full payments. This can help them pay down their debts faster.

But in addition to the advantages, there are also some drawbacks to be aware of. Consumers should weigh the pros and cons before choosing this avenue. There may be other programs available that might be more suitable.

Pros of Debt Settlement

  • Could lower your debt load
  • Save money every month
  • Pay only an amount you can afford
  • Provides flexible payment schedules
  • Better alternative to bankruptcy

Cons of Debt Settlement

  • High upfront fees as a con on debt settlement
  • Credit score may be negatively affected
  • Full debt amount is not fully repaid
  • Creditors do not have to accept settlement offers
  • Debt balances may increase because of late fees or interest while negotiating settlements
  • Collection actions could continue
  • First settlement can take as long as 6 months
  • May have taxes to pay on the portion of the debt that’s not repaid

Again, it’s important for consumers to be diligent about choosing a debt settlement program. They should also be vigilant about the company they choose to work with. This will help ensure that their best interests are kept in mind.

What is Consumer Proposal?

A consumer proposal is an arrangement that’s negotiated between a Licensed Insolvency Trustee and your creditors. It is governed by the Bankruptcy and Insolvency Act (BIA).

It’s usually a last resort before filing for bankruptcy. If other debt management programs haven’t worked, a consumer proposal might be an option.

A Licensed Insolvency Trustee will negotiate with your creditors to arrange for a partial repayment of the debt you owe. The proposal will request that your debts be alleviated to a certain extent. It could also request that your interest rate be lowered on whatever debt amount you still owe.

The amount that the Licensed Insolvency Trustee will propose to your creditors will depend on your income and what you own. Consumer proposals are attractive options for consumers because they can reduce the amount of debt owed.

Consumer proposals are legally binding. That means both you and your creditors are entering a contract. This agreement will immediately protect you from debt collectors and collections calls.

With a debt consumer proposal, you agree to pay a part of what you owe. In turn, your creditors will agree to forgive the balance.

Consumer Proposal Vs Bankruptcy

Bankruptcy and consumer proposals are popular insolvency options for consumers. Both will ease your debts and protect you from creditors, but there are some differences between the two.


The biggest difference between bankruptcy and consumer proposals is the monthly payment. A consumer proposal lets you spread out the cost over a longer time frame. This can reduce your monthly payments and make it more affordable compared to bankruptcy.


You can complete a first-time bankruptcy in as little as 9 months. But it can last up to 21 months if you have to make surplus income payments. Consumer proposals can take up to 5 years.


Bankruptcy involves surrendering many of your valuable assets. But consumer proposals do not.

Income Changes

If your income increases throughout your bankruptcy, your surplus income payments may increase. But with a consumer proposal, your monthly payments stay the same even if you start earning a higher income.

Credit Score

Your credit score will be negatively affected by both bankruptcy and a consumer proposal. Bankruptcy will give you an R9 credit rating, which is the worst of all ratings. This can stay on your credit report for 7 to 14 years.

A consumer proposal will give you an R7 credit rating. It will stay on your credit report until 3 years after you complete your proposal payments.

Pros and Cons of Consumer Proposal

All forms of debt management and alternatives to bankruptcy have their pros and cons. As such, they’re not suitable for all consumers. It’s important for consumers to get familiar with the perks and drawbacks of a consumer proposal before filing for one.

Pros of a Consumer Proposal

  • Wage garnishments stop immediately
  • Interest stops accumulating as of the date you file for the consumer proposal
  • Collection agencies stop harassing you with phone calls
  • Creditors cannot contact you for payment anymore according to the law
  • Your assets are safe, so there’s no risk of losing them
  • You pay back only part of what you owe
  • The maximum repayment period can’t exceed 5 years

Cons of a Consumer Proposal

  • Consumer proposals are public records, which means they are not confidential
  • There are fees associated with consumer proposals
  • They usually take longer than filing for bankruptcy
  • They can cause your credit score to drop for about the same amount of time as bankruptcy
  • The courts must approve them
  • Creditors don’t have to agree to the proposal
  • If creditors don’t agree, you might have to offer them additional money to convince them
  • You may have to sell some of your assets or include their value in your consumer proposal
  • If you miss more than two payments, you might have to file for bankruptcy
  • You can’t include secured debts
  • You can’t include student loans that are less than 7 years old

Make sure you’re aware of all the pros and cons of consumer proposals before negotiating with your creditors.

How Does Debt Settlement Impact Your Credit?

Your specific situation will determine how debt settlement affects your credit. The more that’s written off when settling your debt, the more your credit score will be affected.

That’s why it’s best to have a professional negotiate on your behalf instead of negotiating on your own. The company you choose will crunch the numbers to make sure they’re making the best offer for your credit score.

Your credit score is probably already suffering if you’re missing or late on payments. You might even be paying late fees and higher charges because of interest. A settlement arrangement could help keep you from further late payments on your overdue debt.

Although your credit score could suffer with debt settlement, it should improve shortly after your debts are settled. Your debt-to-income ratio will improve, which can have a positive effect on your credit score. A debt-to-income ratio is the amount of debt you have relative to your income.

Above all, keep in mind that whether you settle through a CP or a settlement program, both generate the R7 penalty. With a Consumer Proposal, the penalty only stays for three years from the date of discharge. With a settlement program, it’s six years from the date of discharge (which is just as bad as bankruptcy)

The faster you settle your debts, the faster your credit score can improve.

How Does a Consumer Proposal Impact Your Credit?

When you enter into a consumer proposal agreement, a note is placed on your credit report. Anyone who pulls your report will be able to see it, including future lenders. That means when you apply for new credit or loans, you will likely have less of a chance of getting approved.

The notation will indicate that you’ve filed a consumer proposal. This is almost as bad as the note made for bankruptcy. An R7 is the rating for a consumer proposal and R9 is for bankruptcy.

To most lenders, R7 and R9 are almost the same. That can make it difficult for you to take out a loan in the years this notation stays on your credit report.

It’s important that you maintain a good payment history on a secured debt while making your proposal payments. This will help you rebuild your credit.

Other Alternatives to Manage Debt

Debt settlement and consumer proposals are a couple of options for consumers who need help with their debt. But there are other options that may be available. These include the following:

Debt Consolidation

This programs involves taking out one large loan to pay off all loans and debt. Consolidating can make your debts easier to manage. It can also help consumers save money with a lower interest rate.

Credit counselling

With this arrangement, you would work with a credit counsellor. This expert will help you budget better and will educate you on managing your finances and debts. They will make suggestions about what you can do to reduce your debt load.

Debt Management

With this program, a debt repayment agreement is made with your creditors. A credit counsellor will review your ability to make payments and negotiate with your creditors to lower your interest rate and fees.

A repayment schedule will then be created based on your ability to make payments. Instead of paying your creditors, you pay the credit counselling agency. The agency will then make payments to your creditors on your behalf.

Consumer Proposal vs Debt Settlement – Which is right for you?

There are many options available to help deal with your debt, and debt settlement and consumer proposals are a couple of examples. But while these might be good options for some people, they’re not for everyone. Find out what other options are available to you by speaking with one of our coordinators today.

Since consumer proposals and debt settlement plans have such a large negative impact on your credit they can affect your life for years to come. As such it’s critical to speak with an expert like a trained credit counsellor to make sure this is the only option you have left before you make a plan to settle. Our trained credit counsellors can help weigh your options, so call (844)-402-3073 to receive the advice you need now.

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