Can You Pay Off a Consumer Proposal Early & Options How
October 3rd, 2022 by A Licensed Insolvency Trustee
If you are facing insolvency issues, you may be considering the best way to fix your debts or get a new financial start. Many people find that better budgeting or debt consolidation can help, but if this is not the case in your situation, you’ll be researching consumer proposals and bankruptcy. Of the two, the consumer proposal is the more flexible option.
Considering a Consumer Proposal?
A consumer proposal is an insolvency solution that is an alternative to bankruptcy. It carries the same benefits of clearing your unsecured debts (e.g., credit cards, payday loans, personal loans, store credit cards), and has some advantages over bankruptcy, chief among them that you retain control of your assets and that your payments into your debt solution do not increase if your income does. However, a consumer proposal usually lasts longer than a bankruptcy. If you are insolvent, you may consider entering into a consumer proposal.
The term of a consumer proposal is longer than a bankruptcy
Most first-time bankruptcies last either 9 or 21 months. That may sound like a long time, but it goes by quickly. Your reward is that you emerge free of your debt and ready to start a new financial life. Credit rebuilding is possible with a few easy steps. Within two to three years, you may qualify once again for good rates on credit products such as mortgages.
Can a Consumer Proposal Be Paid Off Early?
Yes! This is one of the advantages that set a consumer proposal apart from a bankruptcy.
Most consumer proposals are carefully set up to comprise five years of manageable monthly payments. This allows the debtor to pay the maximum amount possible to their creditors, while still maintaining their financial stability and following a reasonable budget. But does the process have to take the full five years?
Legislation around consumer proposals in Canada’s Bankruptcy and Insolvency Act dictates that a consumer proposal must be fully paid within a maximum of five years, but gives no minimum term for a proposal. Thus, if your circumstances change, you may either accelerate your payments to achieve an earlier pay-off date, or pay off the proposal in full at any time with a lump sum.
Reasons to Pay Off Your Consumer Proposal Early
Just as with any payment that must be made monthly, everyone who is currently paying a consumer proposal would prefer if they did not have to make these payments. Paying a consumer proposal beats having uncontrolled debt, but it’s natural to wish the process were over sooner.
Here are the most common reasons you might have the urge to pay off early:
Repairing your credit faster
Credit repair is the most common and practical reason for wishing to pay off early.
When you file a consumer proposal, Canada’s credit bureaus immediately add a notation to your credit report indicating you have filed – and the ratings on your individual credit accounts will fall to an R7 or an R9. This may not make much difference if your credit has already been damaged by your debt situation, but it is something you will want to improve as soon as you are able.
Usually, the notation on your credit report will last for three years after you complete your consumer proposal, and then it is automatically removed by the credit bureau. So, the sooner you pay off your proposal, the sooner your credit report will carry no evidence it ever happened.
Wishing to purchase a home
Paying off a consumer proposal early is of particular interest to anyone contemplating a home purchase. This is not only because you’d like to repair your credit sooner so that you can get a preferred mortgage rate, but also because of the need for mortgage insurance from the Canadian Housing and Mortgage Corporation (CMHC).
Most banks and financial institutions require mortgage insurance (usually from CMHC) for home purchases on which less than a 20% down payment is made. However, CMHC typically will not insure the mortgage of a buyer who is less than two years clear of a consumer proposal or a bankruptcy.
Avoiding the risk of annulling the proposal
Many people who are paying out a consumer proposal are nervous about fouling it up somehow. This is natural – none of us means to get into financial trouble, and often it comes as a shock. This can leave us feeling “shaky” about unexpected trouble cropping up again.
No one wants their consumer proposal to be annulled because of missed payments. If a proposal is annulled, it means you will return to where you started, with all the same debts back again.
However, keep in mind that you must be three payments in arrears in order to cause your consumer proposal to be annulled. A late payment is one thing – you can make it up. A late payment and then you miss the next one? Quite unlikely if you are paying attention. It is very rare for anyone paying a consumer proposal to miss three payments by accident.
If you are having trouble paying, make sure you contact your Trustee before you miss a second payment. You can discuss ways of getting back on track before things become worse.
That being said, if your life is very distracting and you truly fear accidentally causing your consumer proposal to be annulled, you may wish to pay it off early if possible.
The “get ‘er done” urge
Finally, you may wish to pay off your consumer proposal early for no other reason than that it will feel good to do so. This is entirely legitimate! The circumstances leading up to a consumer proposal being filed are typically very stressful, and the usual five-year payout period may seem like a long road ahead. When an opportunity to pay off early occurs, many people will go ahead simply to put the proposal into the past.
How to Pay Off Your Consumer Proposal in Under Five Years
Many individuals with consumer proposals do pay them off early – but how do they do it? What are the typical circumstances and the process? Read on to see some scenarios and options.
Make larger payments
Sometimes a person’s circumstances change during the course of their consumer proposal, and more money becomes available in their monthly budget. They have the option, then, of simply increasing their monthly payment into the proposal, which will shorten its term. The pay-off date will come sooner!
If you are currently paying a consumer proposal and feel you could handle larger payments, ask your Trustee about this.
Make more frequent payments
Similarly, a consumer proposal can be designed for (or shifted to) payments that are a bit more frequent than once-a-month. If you pay your proposal every four weeks instead of monthly, you will shave a few months off its term.
Sell something to make a lump-sum payment
At any point in your proposal, if money becomes available to you, you may use it to make a lump-sum payment to partially or fully pay off the proposal.
It is even practical in some circumstances to use the proceeds from the sale of your home. This may sound odd, since one of the features of consumer proposal is that it is easier to retain your family home – but what if you decide to sell it anyway? You may be able to pay off your proposal at the same time, from the surplus you receive after the mortgage is paid off.
Any asset may be sold and the proceeds paid towards your consumer proposal.
Use Caution with the Following Options
Although the urge to pay off a consumer proposal may be strong, caution is warranted with certain options that may be riskier or end up costing you more than sticking with your proposal payment schedule.
If you browse the web, you will find companies offering loans specifically for paying off consumer proposals. These companies know that you may feel in a rush to pay out, especially if you wish to improve your credit rating and purchase a home. But proceed with caution.
These loans are high-risk for the lender, which means interest rates for the consumer will be high. They are also high-risk for the consumer, since you are jumping right back into consumer credit again – and expensive consumer credit at that!
Any financial situation in which you are made to feel in a hurry should be examined very closely before you act.
On the other hand, if a family member offers you a loan on good terms to allow you to pay off your proposal, the risks will be less.
Borrowing from RRSPs
Although this option is possible to raise the funds to pay off your consumer proposal, Trustees do not recommend it because of the costs and complications. Tax must be paid on amounts withdrawn from an RRSP. If your employer matches your contributions, withdrawing from your RRSP may cancel that program.
Also – the intention of an RRSP is to secure your financial future after retirement. It is best left in place to do just that.
Bottom Line: Remember That Your Consumer Proposal Is Interest Free
We urge you to remember two things: your consumer proposal is interest free, and it will cost you the same in total whether you pay it off early or pay for five years.
This means that borrowing (with interest) to pay it off will necessarily cost you more.
Do not make an early pay-off the primary reason to sell assets or take on new debt. For instance, if you are downsizing your home anyway, certainly any surplus you realize after selling your home and purchasing your new one can be used to pay down your proposal or pay it off. It’s an added bonus, but not the primary purpose of the financial maneuver.
Questions? A Trustee Can Assist!
Thinking about a consumer proposal to resolve your debt issues? A Licensed Insolvency Trustee (LIT) is the professional best qualified to help you with your questions about consumer proposal. In fact, only an LIT can prepare and file your proposal with the federal government. Trustees are knowledgeable on all consumer debt solutions, and can advise you on options that will work best for you.
Find a Trustee in your area today! Your first meeting is free and confidential.
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