Tuesday, May 21, 2024

How to Consolidate a Debt with Consumer Proposal?

A bad debt reflects badly on the credit score, impacting numerous financial decisions in the future. It dwarfs the possibility of taking loans or making any solid financial investments in the future. However, there is a way to take care of the debt without filing for bankruptcy through a consumer proposal.

So, what is a consumer proposaland how does it help consolidate debts? Here is everything you need to know about how bad debt can be taken care of with the help of a consumer proposal.

Need for a consumer proposal

It is a legal but negotiated agreement between you and your creditors to repay the debt. However, in this case, the total amount to be paid to the debtor is reduced based on your income. This is a great alternative to avoid filing for bankruptcy. As the payment amount is lowered, it gives more time for the payment. You can opt to pay the unsecured debt in one single monthly payment as the total amount is lowered.

On filing the consumer proposal, the monthly payments are lower than bankruptcy. Also, it does not require you to surrender assets like real estate, vehicles, investments etc. It allows you to pay off the debt faster than the set period.

What kind of debts can be paid off through consumer proposals?

Although the consumer proposal is a better alternative to the bankruptcy filing, not all debts can be paid through a consumer proposal. It is used for consolidating the unsecured debt without taking into possession like house, car etc. Here are some things to keep in mind before filing a consumer proposal:

  • One can file for a consumer proposal to pay off debt only when the total debt is less than $250,000. Anything above this amount would likely require one to file for bankruptcy. 
  • It can be filed to pay off credit card debt, lines of credit, payday loans, student loans, income tax debts, and personal loans. 
  • People can only file a consumer proposal with a stable income source. The aim is to make the overall payment easy and affordable for the individual. 

Improve credit score through a consumer proposal

A good credit score helps take loans, open bank accounts, and make smooth financial transactions. A bad loan or debt hurts the credit score significantly and impacts financial aspects like loans, mortgages etc. As a debt relief program, consumer proposal helps improve credit scores and clear off debt. As the agreement helps ease the loan’s repayment process by reducing the amount, it plays a pivotal role in enhancing the credit ratings. As you become more and more debt free, it subsequently improves your credit score.

Secured loans cannot be paid off through consumer proposals.

The legal agreement of the consumer proposal is only for payment of unsecured debt. If you are lagging on secured loans like a house or car, it cannot be reduced through a consumer proposal. Some debts that cannot be paid off include alimony obligations or maintenance payments, mortgage loan, court fines, fraud debt, student loans for students who have been a student for over seven years etc. In such cases, you must either file for bankruptcy or connect with the concerned department for the right advice.

Summing up

Bad loans and unsecured debts are quite the stress that impacts the credit report. However, the consumer proposal agreement effectively pays off the debt by reducing the total amount that needs to be paid off. It makes it easy for the person in debt to consolidate the debt with a one-time payment or in instalments without having to file for bankruptcy.

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