103 – Is There an Advantage to Paying Off My Consumer Proposal Early

Wayne Kay 00:04
Should you pay off your loan to your Consumer Proposal early? Well, that’s our topic today with the Debt Matters Podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay and we’re going to talk about that.

Should you pay off your Consumer Proposal early? What is the danger of getting a loan to do so now? When should you start to pay down that loan a little more aggressively? And who should you talk to when it comes to making the decision? And how do you go about paying it early if you want to pay off your Consumer Proposal?

To help us out with this topic, my guest today, Derek Chase from Chase & Associates Licensed Insolvency Trustee serving Vancouver Island, Sunshine Coast and the North Coast of BC. 

Hi there, Derek.

Derek L. Chase 00:53
Hi, Wayne. How are you doing today?

Wayne Kay 00:55
I am doing great. How are you doing?

Derek L. Chase 00:57
I’m fantastic. Can’t wait to talk about today’s topic.

Wayne Kay 01:00
Well, this is very interesting. We’re going to talk about the Consumer Proposal. Before we get into whether or not you should pay it off, let’s talk about what it is for somebody who’s hearing about it for the very first time.

Derek L. Chase 01:12
Yes, good point. A Consumer Proposal is a federal government of Canada option to help people reorganize their finances, specifically to make a proposal to their unsecured creditors, typically to pay back a portion of that debt over time with 0% interest. 

So it’s a great way to consolidate unsecured debt, and in fact, it’s the most popular way to consolidate unsecured debt in Canada. I was just looking at some statistics the other day, and for insolvency filings across Canada, over 75% are Consumer Proposals and Bankruptcies are in the minority. So it’s become a very popular way for people to reorganize their finances.

Wayne Kay 02:05
Right. And does it work out better for the creditors that are looking for this repayment? Do they get more than they would in a Bankruptcy?

Derek L. Chase 02:15
They do. That’s why they agree to it. The Consumer Proposal offers the creditor just a little bit better recovery than what they might otherwise get in a Bankruptcy, and that’s why they agree to it. 

So it’s a win-win, and it ends up being quite a smooth painless process because all the individual has to do, or the couple has to do. Make a monthly payment, much like a regular bank loan. But the payment is designed to fit their budget so that there’s room in the monthly budget. There’s room in the month to live life and not be pushed up against the edge of your finances every month.

Wayne Kay 02:57
Okay. So that’s good to know, because a lot of people, they get into this financial situation, so they have major debt. All of a sudden they come to you. You figure out the best way to move forward is with that Consumer Proposal. But they don’t have to pay the entire amount of the debt back.

They come up with a certain number that works for everybody, and then they pay that back. And you said that’s interest free.

Derek L. Chase 03:21
That’s correct. And it’s over quite a long time, too. The longest that a person can take to finish a Consumer Proposal is 60 months, which is five years. And that’s a fair long time. 

And most Consumer Proposals that we see do call for payments over that 60 month period. That’s simply to drive the monthly payment to be as low as possible. 

Ultimately, you want to have that flexibility within your budget. So if you make the proposal over 60 months, then the simple math behind that creates a lower monthly payment than if you were going to offer the same amount over 36 months or 24 months.

Wayne Kay 04:04
So what happens to your credit rating during this time?

Derek L. Chase 04:10
Your credit rating is touched by a Consumer Proposal. There’s no doubt about it. It’s not hit as harshly as a Bankruptcy filing, which I suppose that’s another reason that Consumer Proposals have become popular.

It does touch your credit rating. But future credit is ultimately going to be a function of what your future cash flow is. So tackling one problem at a time. You’re getting control of your finances. Now you’re stopping the momentum that comes with a big debt load and you’re getting reorganized.

So hopefully in the future, when you’ve saved up a little bit of money and you can show a future lender that you’ve got the cash flow to support a loan, you’re going to qualify for that. And we see people getting loans in the future. So life goes on for sure.

Wayne Kay 05:02
Now why would somebody pay off this Consumer Proposal early?

Derek L. Chase 05:10
Well, we do see it happen from time to time where Consumer Proposals are scheduled to run for 60 months or 48 months, and people end up paying it off sooner than that, which is fantastic. 

I guess there could be a couple of different reasons why you would want to pay it off early. If you are concerned about your overall credit history and credit score, the sooner that you finish a Consumer Proposal, the sooner that it’s going to automatically purge off of your credit history and it’s set to purge three years after it’s completed. So in theory, the sooner you finish it off, the better. 

Another reason why you might want to do that is if you’re going to, let’s say you’re going to go into a real estate transaction, well, that whole situation would be easier when your Consumer Proposal is successfully completed.

And so that’s another reason why you might want to pay it off early and just to get the darn thing out of the way. If circumstances change and you’re able to do so, why not just get it done right?

Wayne Kay 06:27
I actually knew somebody who did a Consumer Proposal and they actually got a windfall of some cash and they were wondering whether or not just to pay it all off right there and then or whether it was better to spread it out over the year or not. I guess that does happen.

Derek L. Chase 06:46
It does. I mean, everyone’s situation is a little bit different and maybe that person wants to put part of the windfall against the Consumer Proposal and just keep some of it in the bank to have money in the bank. 

So it depends on your situation, what sort of dollar amount you’re talking about, how close you are to the finish. There’s all sorts of factors that go into deciding that, but it’s definitely available to be paid off in full at any time.

Wayne Kay 07:15
Do you ever run into people who start getting antsy about having this and decide maybe they want to get a loan to pay it off early?

Derek L. Chase 07:22
No, we don’t run across that so much. We do know that some people are offered loans to pay off their Consumer Proposal early and you have to be careful on that setting because the Consumer Proposal itself has a 0% interest. 

So I wouldn’t be rushing into getting a loan that probably has a fairly hefty interest rate to use that money to pay off your Consumer Proposal. That doesn’t make a lot of sense to me. So I think if you are going to get a loan, you really have to watch that interest rate and if it’s too high, then just don’t do it.

Wayne Kay 08:02
Yes, you can’t beat 0%.

Derek L. Chase 08:05
No, it’s a pretty sweet deal.

Wayne Kay 08:07
Yes, exactly. Is there come a point though where people should maybe start paying it down a little more aggressively?

Derek L. Chase 08:14
Yes, that comes up quite often and especially when we say, well, we’re going to run this Consumer Proposal offer out over 60 months, so your payment is only going to be $200 a month or some relatively modest amount. And people get quite excited about that because they’re used to paying much more on their monthly payments before the Consumer Proposal started.

So then they say, well, can I pay more than that? And they really want to get going on this Consumer Proposal. And our advice is typically just to let the dust settle and let’s get the proposal accepted by the creditors because there is a voting process where the creditors have a chance to vote in favor or against the Consumer Proposal. And we would also advise to just build up that contingency fund, that safety blanket of money that’s just in the bank to get there first before you start focusing on your Consumer Proposal.

That’s our advice. People can do as they wish, but I think it’s wise to let maybe 12 months 18 – 24 months go by before you really start paying down your Consumer Proposal more aggressively.

Wayne Kay 09:36
Do they keep in touch with you as the LIT who created and set up this Consumer Proposal through the entire process?

Derek L. Chase 09:47
For sure, yes. We welcome phone calls and emails anytime for the people that we’re working with.

And you might recall from some of our earlier conversations that there’s two financial counselling sessions that take place during a Consumer Proposal. So during those sessions, we go over where people are at in the program and how much is left to pay, amongst a whole bunch of other information about financial matters. 

And there’s a discussion about whether to leave the payment the same, increase the monthly payment, whether they want to make a bulk payment on the Consumer Proposal, maybe from a tax refund they’ve received, or maybe they’ve got some help from a family member. So it’s good to make that decision in consultation with the LIT and get some input there. Because it does happen.

It’s not uncommon for a Consumer Proposal to be paid off early, or there’s also nothing wrong with letting it run its full course. So it’s good to discuss the pros and cons that are specific to a person’s situation.

Wayne Kay 10:54
Right. And if they do want to pay it off early, how does that work? They just contact you?

Derek L. Chase 11:00
Yes. Sometimes people will send us e transfers. Sometimes they’ll just walk in with a cheque. Other times, if it’s more paying it off early in the sense that they’re increasing their monthly payment by a certain amount, then we adjust the pre authorized debit to take a little bit more out each month. But yes, in consultation with our office.

And either e transfer, cheque or change to the pre authorized debit amount is the most typical way. And we still take cash, Wayne, believe it or not.

Wayne Kay 11:36
Okay. I would imagine that somebody who is in this situation, when they get to that point where there’s all this debt over their shoulders, over their heads, and it’s so difficult. Then they come to you and they decide, we can actually do this Consumer Proposal, and you figure out that number and they still have money left. They’ve got to feel free. 

Because as you were talking, I would think it would be wonderful to be paying down that Consumer Proposal, but also building up that emergency fund and putting money into the bank so that when the five years comes up, they paid for that and they still have a lot of cash in the bank.

Derek L. Chase 12:17
Yes, that’s the perfect situation. And you want to have at least, I think, two months of living expenses in the bank. And so if you can both deal with your debt and work on building up that emergency fund, that’s just ten out of ten, that’s a great spot to be.

Wayne Kay 12:36
Absolutely. You’d feel better than a lot of people in the country when we’re seeing what’s happening with debt levels these days. I think that’s just so powerful for them to follow your advice and just kind of ride it out, just keep putting a couple of dollars away here and there.

Derek L. Chase 12:53
Yes. It doesn’t have to be a huge amount. I mean, once you’ve got control of your debt, then you just want that slow, steady process to build up the emergency savings and hopefully further down the line into making some long term savings as well. So it’s so much about momentum and Consumer Proposals have been excellent for breaking the negative momentum of debt.

Wayne Kay 13:16
Yes, well, I think that’s so encouraging. As you said, 75% now in the country filing a Consumer Proposals as opposed to 25% for Bankruptcy.

That’s very telling. Anything else we need to know on this whole paying off Consumer Proposals early?

Derek L. Chase 13:33
It is available. It’s a good choice for some people but not for others. So I think it’s important to have some good communication with the Licensed Insolvency Trustee involved and you’ll come to the right decision.

Wayne Kay 13:48
Terrific. Derek, thank you. It’s always a pleasure having you on the show.

Derek L. Chase 13:51
It’s been my pleasure, Wayne. Thanks very much.

Wayne Kay 13:54
My guest today, Derek Chase. Learn more and schedule that free consultation with Chase and Associates, Licensed Insolvency Trustee by going to bankruptcytrusteebc.ca. 

That’s it for today’s Debt Matters Podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.