A consumer proposal is an agreement worked out with your creditors through or in the presence of a licensed bankruptcy trustee. Consumer proposals serve as an alternative to bankruptcy and are becoming the preferred solution for many debtors. To most creditors, a consumer proposal is better than bankruptcy because of the potential returns it offers. In Canada, the number of proposals went up by 5.4 percent from 2012 to 2013, a clear indication that this type of agreement is on the rise. Here’s what you should know:

1. Consumer proposals will affect your credit rating, but less than bankruptcies

Credit bureaus receive a report whenever someone files for a consumer proposal. The R7 note attached means you have negotiated an agreement to pay your debts. Although the R7 isn’t desirable, it’s still better than the R9 note given for bankruptcy. The poor credit score is because debtors have a history of missing payments. But thanks to consumer proposals, borrowers can now make a fresh start and rebuild their credit score.

2. Consumer proposals settle unsecured debts

Consumer proposals only take care of unsecured debts such as credit cards, lending margins, and unpaid bills, which is why you will be able to keep your vehicle and house. Since your secured debts remain, you have to maintain regular payments if you want to keep the assets involved.

3. You will be making just one monthly payment to your bankruptcy trustee

If you file for this type of agreement, you will have to make monthly payments directly to your trustee. Administrators are then responsible for distributing the money based on each creditor’s percentage of the total amount owed. Remember, missing payments might void your proposal.

4. The law protects whoever files for a consumer proposal

Since this type of agreement exists under the Bankruptcy and Insolvency Act, consumer proposals benefit from the same legal protections as a bankruptcy. As such, you will be protected against related lawsuits or garnishments. It’s worth noting that you will not find this in debt consolidation or any debt settlement program.

5. Consumer proposals can be completed within a much shorter time

Even if you filed a proposal with a payment period of 60 months, you could still make your payments at a faster rate. Nothing prevents you from paying back in less time than what you agreed to with your creditors. This aspect might come in handy if your economic status happens to change. If you were to get a salary bump, win the lottery, or inherit some money, nothing would keep you from paying back as quickly as possible. In such circumstances, everyone wins. You will be done with your proposal a lot sooner, which might suit your credit rating, and your creditors will get their money back faster.

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