Debt Settlement Vs. Consumer Proposal: 3 Main Differences

When your debts are overwhelming and you cannot make your monthly payments for them, it might be time to start looking for a way out. While bankruptcy is one option, there are two others that might be better for you. Debt settlements and consumer proposals are both good alternatives to bankruptcy and both achieve similar results. There are some differences though, and here are three of the main differences you should be aware of before selecting one of these options.

How The Plan Is Accepted

One of the key differences between a consumer proposal and debt settlement is the way the plan is accepted by creditors. When you file a consumer proposal, an offer is made to the creditors. The creditors will all receive the letter that explains the offer and they must vote on it. If at least 50% of the creditors (in terms of dollars owed) accept the plan, all other creditors must also accept it.

A debt settlement is different from this. After a plan is created, the creditors are notified of the offer. They will each get to choose whether to accept it or not. Some may end up agreeing to it, while others may not. If creditors do not agree to it, they do not have to accept it. There is no voting with a debt settlement offer.

The Protection Offered

Another big difference between these plans is the protection it offers. A consumer proposal is something you will file with a bankruptcy trustee. As soon as the proposal is sent to the creditors, you will instantly have protection from them even while they are deciding whether or not to accept it. During this time:

  • Your creditors will not be allowed to call you to collect money from you
  • Interest and late fees on the accounts will freeze
  • Your creditors will not be able to send the accounts to collections or try to garnish your wages

Debt settlement plans do not offer this protection. If you can get the creditors to agree to the plans, you must get the agreements in writing. With written agreements, you may have some protection, but this protection is not equal to the type you would receive through a consumer proposal.

Effects On Credit

Finally, it's important to understand the effects each option will have on your credit. While filing for bankruptcy results in an R-9 rating on your credit report, a consumer proposal offers a slightly better effect. Because consumer proposals are legal tools, you will automatically get an R-7 rating on your credit report after you file. Fortunately though, this rating will usually drop off after approximately three years.

One advantage of using a debt settlement plan is that there may be more flexibility with the way you repay your debt; however, debt settlement plans can have negative effects on your credit. If you work out a debt settlement plan that involves repaying portions of your debts over the next two years, your credit will suffer during these two years.

This occurs because there is no legal plan in place. Your creditors can mark your payments as late even if you are making the payments you agreed to make. It could take several years after you repay the debts to begin seeing an increase in your credit score.

Both of these options allow you to get out of debt without paying off every penny you owe, but there are differences. Before you choose one option or another, you might want to talk to a bankruptcy trustee and a debt settlement agency. By doing this, you can find out the answers to all your questions, and you can learn more about the effects of both.


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