Consumer Proposal vs Debt Settlement: What is the Difference?

Let’s face it—debt can be a real burden, and figuring out how to handle it can feel overwhelming. If you are looking into a consumer proposal vs. a debt settlement, you might wonder what sets them apart and which one is right for you. Both options are here to help you tackle your debt, but they do it in different ways. When it comes to tackling debt, it is important to know your options. Let’s break down the differences between consumer proposals vs. debt settlements.

What Is a Consumer Proposal?

Consumer proposals are federally regulated, which means they give you legal protection from your creditors. A Licensed Insolvency Trustee (LIT) is there to help you every step of the way. They will handle everything from drafting the proposal to negotiating with your creditors. Although your credit score will take a hit (it will show up on your credit report for up to three years after you are done), consumer proposals offer fixed, affordable monthly payments over a set period. This can be up to five years. Below are the pros and cons of consumer proposals.

Pros:

• Legal Protection: Once your proposal is approved, creditors must stop collection actions, including collection calls, lawsuits, and wage garnishments.
• Reduced Debt Amount: You will only need to repay a portion of your debt—often much less than the full amount you originally owed.
• Fixed Monthly Payments: Your payments are structured into a manageable monthly amount, giving you predictability and control over your finances for a set period.
• Avoid Bankruptcy: Consumer proposals are an alternative to bankruptcy.
• You Keep Your Assets: You can keep most of your valuable assets, like your home and vehicle, even while you re repaying your debt.

Cons:

• Negative Credit Impact: Your credit score will take a significant hit, and the proposal will remain on your credit report for up to three years after you have completed the payments.
• The Duration: The repayment plan can last up to five years, which might feel like a long time to be under a payment plan.

What Is a Debt Settlement?

On the other hand, debt settlements involve negotiating with your creditors to pay a lump sum or follow a short-term plan to settle your debt. Debt settlement companies, as capable as they may be, are not licensed by the Federal Government to file proposals and bankruptcies like your Trustee can; therefore, they are powerless to help you rid yourself of your debt problems. Your Trustee will ensure you understand all of the options available to you, and in fact, Trustees are required by law to do so. A debt settlement firm may be limited to one approach – and they will likely not have the educational or professional background to advise you of all the options available. Below are the pros and cons of debt settlements.

Pros:

• Potential for Significant Debt Reduction: You may significantly reduce the total debt owed.
• Flexible Payment Options: You can often settle with a lump sum or short-term payment plan.
• Avoid Bankruptcy: Provides an alternative to declaring bankruptcy.

Cons:

• Credit Impact: Settlements negatively affect your credit and remain on your credit report for up to six years.
• Risk of Creditor Lawsuits: Creditors may pursue legal action if negotiations fail.
• Fees and Potential Scams: Debt settlement companies may charge substantial fees, and some may be fraudulent.
• No Legal Protection: Unlike consumer proposals, debt settlements offer no legal protection from creditors.

The Key Differences Between a Consumer Proposal vs. a Debt Settlement

A consumer proposal offers legal protection, is more structured, and involves fixed monthly payments managed by a Licensed Insolvency Trustee. It impacts your credit but allows you to keep your assets. On the other hand, there are risks and the lack of legal protection that comes with debt settlement. The choices these days are seemingly endless but the best way to deal with your runaway debt load is to speak with a Licensed Insolvency Trustee to understand your options and get you the protection you deserve. In addition to advising you and educating you as to your options, a Trustee can immediately stop your creditors from harassing you by using the full power of Federal law to protect you. They can demand that your creditors cease all collection actions, garnishments, and harassment. That debt settlement firm? They can make a few telephone calls but that is about it. They have no power over your creditors. That is because debt settlement firms are not federally licensed and have no legislative power over your creditors. We know how important it is to find the right path for your financial health. Our team is here to help you understand your options and figure out the best choice for your situation. Book a free consultation today and we will guide you through the process, helping you make a decision that feels right for you!