Credit Counselling vs Consumer Proposal: Which Is Best?

Managing debt can be overwhelming, but there are ways you can regain control of your finances. Two common debt relief options in Canada are credit counselling and consumer proposals. 

Both options aim to provide debt relief, but they work in different ways and are suited for unique financial situations. Understanding the differences between these two approaches can help you make an informed decision about which path to take to become debt-free.

What is Credit Counselling?

Credit counselling is a great first step for anyone looking to address their debt. A credit counselling agency can provide a range of services, such as one-on-one counselling, educational resources, and debt consolidation programs.

The process typically includes:

• A Credit Counsellor will assess your finances, reviewing income, expenses, debts, and assets. They’ll answer your questions and ensure a full understanding of your situation.

• The credit counsellor will then provide a recommendation which could include improved budget management, financial coaching, a debt consolidation program or a referral to a Licenced Insolvency Trustee (LIT) for a Consumer Proposal or Bankruptcy. If a DCP is the best option, they will enroll you and…

• Negotiate with creditors to reduce interest rates and consolidate payments, as associated with your DCP.

When is Credit Counselling a Good Option?

Credit counselling is a good first step for anyone looking to address their debt and is especially ideal for individuals who:

• Have manageable debt but struggle with high interest rates. If high-interest credit cards or loans make it difficult to make progress on debt repayment, credit counselling can provide you with options, including helping you negotiate lower interest rates to make payments more manageable as part of your DCP.

• Want to exhaust other options before handling the legal implications of a consumer proposal. A consumer proposal is only one potential result of a credit counselling session. 

• Prefer educational support and budgeting advice to improve financial habits. Credit counselling services can provide financial education, budgeting tools, and more to help individuals avoid future debt problems.

"A carefully prepared budget, properly executed, is the blueprint for financial success."

Randolph Taylor, Credit Counsellor at Credit Canada

How Credit Counselling Works

• Initial Assessment: The process begins with a free, no-obligation meeting with a credit counsellor who assesses the individual’s financial situation, debt levels, income, and expenses.

• Counsellor Recommendations: If appropriate, the counsellor may recommend a Debt Consolidation Program, consolidating payments into one affordable monthly amount with reduced interest rates. They could also recommend a consumer proposal or bankruptcy.

• Creditor Negotiations: As part of the DCP, the counselling agency negotiates with creditors to lower interest rates and eliminate some fees, making repayment easier.

• Repayment & Financial Education: The individual makes regular payments to the counselling agency, which distributes them to creditors while helping clients develop better financial habits.

What is a Consumer Proposal?

A consumer proposal is a legally binding agreement between you and your creditors, facilitated by a Licensed Insolvency Trustee (LIT). An LIT is a federally regulated professional in Canada who is authorized to administer insolvency proceedings, including bankruptcies and consumer proposals. They are licensed by the Office of the Superintendent of Bankruptcy (OSB) and are the only professionals legally permitted to file and manage insolvency proceedings under the Bankruptcy and Insolvency Act (BIA).

A consumer proposal allows you to negotiate a reduced repayment amount while protecting your assets and stopping wage garnishments.

When Should You Consider a Consumer Proposal?

Wondering if you should file a consumer proposal? Consumer proposals are suitable for Canadians who:

• Have significant unsecured debt but cannot afford to repay it in full.

• Are at risk of wage garnishment, lawsuits, or creditor harassment and need legal protection.

• Want to reduce their overall debt balance rather than just lowering interest rates.

Working with a credit counsellor can provide you with expert guidance, a personalized plan to manage your debt, and the financial education you need to stay on track. Book a free credit counselling session with our team to explore your options. 

"People are often able to overcome their financial difficulties on their own.  However, it's important to recognize the times when outside assistance is required.  Credit counsellors exist for this purpose, and are there for you when you need us."

Richard Haggins, Senior Education Facilitator at Credit Canada

How a Consumer Proposal Works

1. Chat with a Credit Counsellor: If you’re unsure of your options, we recommend speaking to a certified  Credit Counsellor. They can outline your options and help you determine if you need help from an LIT. If appropriate, they will provide a referral to a trusted LIT.

2. Consultation with LIT: The LIT will review the individual’s financial situation and determine if a consumer proposal is a viable option.

3. Proposal to Creditors: The trustee submits a formal offer to creditors, outlining a reduced payment plan that allows the debtor to pay a portion of their total debt over a fixed period (up to 5 years).

4. Creditor Approval: Creditors vote on whether to accept the proposal. If the majority approve, all creditors are legally bound to its terms.

5. Debt Repayment & Completion: The debtor makes fixed monthly payments without interest, and upon completion, the remaining debt is legally forgiven.

Credit Counselling vs. Consumer Proposal: Key Differences

Below is a comparison table outlining the main differences between credit counselling and consumer proposals:

Pros and Cons

Pros of Credit Counselling

• Lower interest rates if a DCP is selected. Credit counsellors negotiate with creditors to reduce interest rates on outstanding debts, making it easier to pay down balances.

• A credit counsellor is the best first call. A non-profit credit counsellor can offer expert advice, recommendations, and referrals to set you up for success. 

• Provides financial education and resources. Credit counselling services offer resources and guidance on money management, credit use, and long-term financial planning.

• Helps improve budgeting skills. Counsellors assist in creating a structured budget that prioritizes essential expenses and debt repayment.

Cons of Credit Counselling

• Does not reduce the amount of debt owed. Unlike a consumer proposal or bankruptcy, credit counselling does not eliminate or reduce the principal amount of debt. Instead, it helps structure repayment.

• No legal protection from creditors. Credit counselling does not stop collection calls, wage garnishments, or legal action from creditors, as it is not a legally binding process.

Pros of Consumer Proposal

• Reduces the total amount of debt owed. Unlike credit counselling, a consumer proposal legally reduces the overall debt balance, often allowing debtors to pay only a fraction of what they owe.

• Protects from wage garnishment and legal action. Once a consumer proposal is filed, creditors can no longer take legal action, freeze bank accounts, or garnish wages.

• Fixed monthly payments with no interest. The repayment amount is negotiated with creditors and remains fixed, without accumulating interest, making it easier to budget.

Cons of Consumer Proposal

• Will negatively impact your credit score. A consumer proposal is reported to credit bureaus and will typically remain on your credit report for up to six years from the filing date, affecting creditworthiness.

• Requires the approval of a Licensed Insolvency Trustee. Only an LIT can file a consumer proposal, and they must assess your financial situation to determine if it is a suitable option.

Which Option Is Right for You?

Regardless of your situation, a non-profit credit counselling agency like Credit Canada will be the best first call. Credit counsellors can evaluate your situation and detail all your options.

• If you need guidance and budgeting help and can afford to repay your debt in full (but struggle with high interest), credit counselling may be a good option.

• A consumer proposal is a stronger solution if you need to reduce your total debt amount and require legal protection from creditors.

Let Credit Canada Help You Choose

Navigating debt relief options can be challenging, but you don’t have to do it alone. Credit Canada’s team of experts can guide you toward the best solution for your unique situation. As soon as you speak to a credit counsellor, you're engaging in credit counselling, and we’re happy to help guide you to the right option for your needs.

Choosing the right debt relief solution is crucial for your financial well-being. Reach out to Credit Canada today and take the first step toward a debt-free future with the help of our credit counsellors.