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Consumer Proposal Vs. Second Mortgage – Which Makes More Sense

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Consumer Proposal Vs. Second Mortgage – Which Makes More Sense

debtcare2Clients often come to us seeking viable debt solutions, but are unsure what those debt solutions are. Most people are aware of some of the options available, but not all, and are sometimes surprised to learnthat accessing the equity in their homes through a second mortgage is a great way to get out of debt. Once they’ve learned this, their next question is which option makes the most sense – a consumer proposal or second mortgage financing?

Let’s compare the two.

Consumer proposal

  • Pros: Consolidates debt into one monthly payment
  • Sometimes reduces debt
  • Stops interest
  • Stops collection action
  • Cons: Credit is bruised for a short period

Second Mortgage

  • Pros: Consolidates debt into one monthly payment
  • Stops collection action
  • Preserves credit
  • Cons: Interest bearing, debt will not be reduced unless settlements are made

If there is significant equity in your home, an experienced financial professional will tell you that a consumer proposal is probably not the best way to go. In theory, if you have enough equity to obtain a second mortgage, that should be explored before filing a consumer proposal.

Consumer proposals are negotiated and accepted based on your income, assets and ability to pay. If you have equity in assets that will be considered in your proposal.

Wait, there is a third option which combines the two. If you have some home equity, you can leverage it to make an cash consumer proposal – this is where a proposal is negotiated for the amount to be paid in one lump sum. Here is an example: Sally owes $45,000 in debt and has the ability to get a $30,000 second mortgage. Sally could make cash proposal for $30,000 to settle the debt once and for all if all of her financial information makes sense within consumer proposal guidelines. This would clear the debt and allow her to rebuild her credit faster.

Why? A mortgage preserves credit because the creditors are paid in full, whereas a consumer proposal reports to the credit report for 3 years from the date that it is paid in full. In the case of a cash consumer proposal, it would be paid in full when filed and so the proposal would cease to exist on the credit report 3 years from when filed – whereas bad credit can linger for 7 years or longer.

If we’ve managed to make things a bit more complex than you’d originally envisioned, that is ok – it just means that you are now more aware of the options that exist and better prepared to make the best decision for your own situation.

Our only advice is this: never go directly to a trustee, whatever your end decision. A trustee represents the creditor, not you and they actually earn more when you file a larger proposal. An independent financial consultant hired by you can structure your CP, save you big and protect you from the trustee and your creditors.

DebtCare is an experienced financial consultant – one with your best interests in mind.

Call us today to learn more about your options: 1 (888) 890-0888.




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