Consumer Proposal vs. Debt Management - What's the Difference?

Consumer Proposals are one of the leading alternatives to bankruptcy in Canada today.  To put that into a local context - in 2015, over 55% of all consumer insolvencies filed in Greater Vancouver were Consumer Proposals.  The numbers were only slightly lower on Vancouver Island at 44%.  For all of British Columbia it was 51%.

A Consumer Proposal is a formal process governed by regulations contained in the Bankruptcy & Insolvency Act, and a Consumer Proposal must be filed through a Licensed Insolvency Trustee.  A Debt Management Plan, on the other hand, is an informal arrangement with creditors on terms negotiated by a credit counsellor. 

There are some important differences between the two processes, but there are also a few similarities:

1. Both Consumer Proposals and Debt Management Plans have the express purpose of providing you with more favourable repayment terms with your creditors so you can eventually become debt free.
2. Both involve some amount of negotiation with your creditors.  This is always true in a Debt Management Plan, but only necessary in a Consumer Proposal if the creditors don't accept your initial offer.
3. Both will negatively impact your credit rating in virtually the same way.  Canada's major credit reporting agencies - Equifax and TransUnion Canada - will report details of the Consumer Proposal or Debt Management Plan.  The creditors will report your accounts as R7 or I7.  This information will be removed from your credit report three (3) years after completion of your Consumer Proposal or Debt Management Plan.

These are the differences between a Consumer Proposal and Debt Management Plan:

1.  In the vast majority of cases, a Consumer Proposal involves a reduction in the total indebtedness.  By contrast, you must pay your total debt under a Debt Management Plan.
2. Interest does not accrue in a Consumer Proposal.  Under a Debt Management Plan, interest will continue to accrue, but often at a reduced rate as negotiated by the credit counsellor.
3. You can deal with government debts such as income taxes and student loans in a Consumer Proposal.  By contrast, a credit counsellor will not be able to negotiate with the government and therefore these debts cannot be included in a Debt Management Plan.
4. There are clear and consistent rules governing the Consumer Proposal which are transparent to all stakeholders.  Under a Consumer Proposal, all creditors are dealt with at the same time and on the same terms.  Moreover, what constitutes a default under the Consumer Proposal is codified.  By contrast, Debt Management is an informal process with no rules and regulations.  Different creditors may agree to different terms, and they may leave the plan at any time if you miss even one payment.
5. A Consumer Proposal is appropriate when you can't repay your debts in full or in the ordinary course.  A Debt Management Plan is appropriate when you can pay your debts in full but need more favourable repayment terms and help repaying your debt. 

If you are having trouble repaying your debt and would like to know more about Consumer Proposals, Debt Management Plans and other options, speak with a Licensed Insolvency Trustee who will review your situation in detail and explain all of your options. 

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