Owing any debt can put a financial strain on day-to-day life, so if you are struggling, a consumer proposal could be just what you need. Filing a consumer proposal will help you navigate loan repayments and make the process less financially strenuous.
What is a Consumer Proposal?
A consumer proposal is submitted by a Licensed Insolvency Trustee (LIT) on behalf of an individual who owes money to creditors. The proposal is a negotiation between the person in debt and the creditor. It’s meant as an attempt for the former to set a new arrangement with the latter. This arrangement may be for lower monthly repayments or a longer period that requires the debt to be repaid.
A consumer proposal functions similarly to debt consolidation, allowing you to pay less monthly towards your loan repayment. However, debt consolidation is different because it also allows you to accumulate more debt before you’ve finished paying off the initial loan. A consumer proposal does not allow the individual in debt to take out more loans until they have paid back what they already owe.
How Does Home Equity Work?
Home equity is the current market value of an individual’s home minus the amount of money they owe to pay off its mortgage. You’ll be able to calculate your home’s equity based on how much debt you have remaining on your mortgage. This equity will steadily rise as you pay the loan back to the lenders.
Secured Credit vs Unsecured Credit
There are two lines of credit that an individual can accumulate: secured credit and unsecured credit. Secured credit includes ‘collateral’ that the creditors can take possession of if you do not repay the loan. For example, if you do not or cannot repay your mortgage, lenders may repossess your home to settle the debt. When collateral is involved, your material assets are at risk if you do not repay the money you owe.
Unsecured credit, on the other hand, excludes collateral, so no single asset is on the line if you struggle to pay the money back. An example of this is a credit card. If you do not meet the monthly payments, your account will go into debt and may eventually be closed. If the account is closed, your credit history will be negatively affected, impacting your chances of borrowing more money in the future.
What Does a Consumer Proposal Mean for Home Equity?
Equity is incredibly important because it determines the value of your home, and the more valuable your home, the more money it will be worth. However, a consumer proposal does not involve your home’s equity because it refers to unsecured credit, not secured credit. You can only submit a consumer proposal to your unsecured creditors, such as your credit card company, landlord, or doctor’s office.
Secured credit is a fixed amount of money you owe, so you cannot attempt a consumer proposal to lower these monthly repayments. Your home’s equity will rise as you pay off your mortgage, and you cannot propose to reduce what you pay back to the lenders each month. As such, your home’s equity will not be affected because you will not be paying back less money, which would slow down the increase of equity.
A consumer proposal could positively impact your home equity because of how it eases your unsecured credit. If you can lower the monthly repayments that you owe on your credit card, for instance, you will then be able to set aside more money to put towards your mortgage. The more manageable your mortgage repayments, the faster your home equity will increase.
Consumer proposals will not be for everyone, but they are a great way to make the debt more manageable. Though you’ll still owe the full amount, you’ll have longer to pay back the money and more money left in your account for your other expenses. Even better, a consumer proposal will not impact your home equity and may end up helping you to pay off your mortgage faster by prolonging the time you have to settle debts with unsecured creditors.
Understanding home equity alongside what a consumer proposal entails can seem initially difficult. However, hopefully, this has shed much-needed insight on the matter.