What is a consumer proposal?
A consumer proposal is a legal agreement under the Bankruptcy and Insolvency Act where you repay a portion of your unsecured debt over up to five years. Your creditors forgive the rest. Only a Licensed Insolvency Trustee can file one on your behalf.
Your monthly payment is based on what you can afford after housing, bills and other essentials. The trustee reviews your income and expenses to work out a realistic figure. Your creditors then vote on whether to accept it.
Types of debt a consumer proposal covers
Consumer proposals deal with unsecured debts. These include credit cards, lines of credit, personal loans, payday loans, tax debt, and outstanding utility bills.
Secured debts, like mortgages and car loans, are excluded. Student loans less than seven years old, child support, and court fines cannot be included either. You need to keep paying those separately.
If most of your debt is in the form of mortgages and car loans, a consumer proposal probably won’t help you.
How to apply for a consumer proposal
Meet with a Licensed Insolvency Trustee
The process starts with a free consultation. The trustee reviews your financial situation to see if a consumer proposal makes sense. If another option is better, they’ll tell you.
All Licensed Insolvency Trustees in Canada are federally regulated. They’re not working for your creditors. Their job is to find the right solution for you.
Complete the documents
If you decide to proceed, the trustee prepares the consumer proposal paperwork. This includes your current income, expenses, total debt, and the repayment amount you’re offering. The proposal also states how long it will last and what your monthly payment will be.
Your trustee files the documents electronically with the federal government. Once filed, you receive a stay of proceedings, which means your creditors must stop contacting you. You also stop making payments on the debts included in the proposal.
Creditors vote
Your creditors have 45 days to accept the consumer proposal or request a meeting to discuss it. If creditors representing 25% or more of your debt request a meeting, it must be held within 21 days. At the meeting, your creditors vote on whether to accept, reject or modify the proposal.
If more than 50% of your creditors by dollar value accept, the proposal is approved. If they reject it, you’ll need to consider other options, such as bankruptcy.
Start making payments
Once approved, you start making your monthly payments. You’ll also attend two mandatory credit counselling sessions covering budgeting and managing money to help you avoid future debt problems.
You must make all your payments on time and attend both counselling sessions to complete the consumer proposal successfully.
Pros of a consumer proposal
Lower monthly payments
Consumer proposal payments are based on what you can afford, not what your creditors demand. The trustee calculates this using your income and essential expenses. Your creditors can negotiate, but you’re never forced to pay more than your budget allows.
You’re repaying only part of the total debt, which is why monthly costs drop compared to what you were paying before.
Asset protection
A consumer proposal lets you keep your home, car, pension, investments, tax refunds, and other assets. Your creditors cannot seize them, garnish your wages, or shut off your utilities once the proposal is approved.
This is different from bankruptcy, where surplus income rules can extend the process, and certain assets may be surrendered depending on provincial exemptions.
Fixed payments
Consumer proposal payments stay the same from start to finish. If your income increases, you don’t owe more. If your income drops, you still owe the same amount, so plan carefully.
Creditor protection
Once the consumer proposal is approved, your creditors cannot contact you, take legal action against you, or garnish your wages. Collection calls and enforcement action stop.
This protection lasts as long as you’re making your payments on time.
Fresh start
When you make your final payment, you receive a certificate of full performance. This confirms that all debts included in the consumer proposal are settled, and you’re no longer legally responsible for them.
Cons of a consumer proposal
Lengthy process
Consumer proposals can take up to five years to complete. The average is three to five years. That’s longer than a first-time bankruptcy, which typically lasts nine months if you have no surplus income.
The length depends on how much you owe, how much you can afford to pay each month, and whether your creditors will accept a shorter arrangement.
Credit impact
A consumer proposal appears on your credit report for three years after you complete it or six years after you file, whichever comes first. This damages your credit rating and makes it harder to get loans, credit cards, or a mortgage.
Lenders who do approve you will charge higher interest rates because they see you as a higher risk. Rebuilding credit takes time.
Excluded debts
Consumer proposals only cover unsecured debts. Mortgages, car loans, student loans under seven years old, child support, and court fines are excluded. You must continue paying those separately.
If most of your debt falls into the excluded category, a consumer proposal won’t solve your problem.
Potential rejection
Your creditors can reject your consumer proposal. If they do, you’ll need to consider other options like bankruptcy. There’s no guarantee they’ll accept your offer even if your trustee thinks it’s reasonable.
Creditors are more likely to reject proposals that offer very little repayment compared to what they’re owed.
Alternatives to a consumer proposal
Bankruptcy
Bankruptcy is a legal process that releases you from most unsecured debts. A first-time bankruptcy with no surplus income lasts nine months. If you have surplus income, it extends to 21 months.
Bankruptcy has a bigger impact on your credit report than a consumer proposal. It stays on your report for six or seven years, depending on the province.
Debt consolidation
Debt consolidation combines multiple debts into one payment, usually with a lower interest rate. This only works if you can qualify for a consolidation loan. If your credit is already damaged, lenders may not approve you.
You’re still repaying the full amount you owe. Nothing is forgiven.
Credit counselling
Credit counselling agencies review your finances and negotiate with creditors to reduce interest rates or set up a debt management plan. This is an informal arrangement, not a legal process.
If your creditors don’t cooperate, the plan falls apart. You’re also still repaying 100% of what you owe.
Talk to a Licensed Insolvency Trustee
A consumer proposal is worth considering if you have a steady income and can’t repay your debts in full. It’s not the only option, and it’s not always the right one.
If you’re not sure what to do about your debt, book a free consultation with a Licensed Insolvency Trustee. We’ll review your situation and explain your options with no obligation.
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Frequently asked questions
How much does a consumer proposal cost?
Your Licensed Insolvency Trustee’s fees are included in your monthly payment. You don’t pay anything upfront. The trustee’s fee is a percentage of what you repay, approved by the federal government.
The initial consultation is free. If you decide a consumer proposal isn’t right for you, there’s no charge.
Can I pay off a consumer proposal early?
Yes. You can pay off your consumer proposal early without penalty. This removes it from your credit report sooner because the three-year countdown starts when you complete the arrangement, not when you file.
What happens if I miss a payment?
If you miss three payments, your consumer proposal is annulled. That means it’s cancelled. Your creditors can resume collection efforts, and you’ll owe the original amount minus what you’ve already paid.
If you’re struggling to make a payment, contact your trustee immediately. They may be able to help.
Will a consumer proposal stop wage garnishment?
Yes. Once your consumer proposal is filed, the stay of proceedings stops all wage garnishments. Your creditors cannot restart garnishment as long as you’re making your proposal payments.
This protection applies even before your creditors vote on the proposal. The stay of proceedings takes effect the day your trustee files the paperwork.
Can I get credit during a consumer proposal?
You can apply for credit during a consumer proposal, but most lenders won’t approve you. Secured credit cards are an option for rebuilding credit. You deposit money as collateral, and the card issuer gives you a credit limit equal to your deposit.
Making on-time payments on a secured card helps rebuild your credit score.
What is the minimum debt for a consumer proposal?
There’s no minimum debt amount. However, consumer proposals usually make sense when you owe at least $10,000. Below that, other solutions, such as budgeting or credit counselling, may be more appropriate.
The maximum debt for a consumer proposal is $250,000, excluding your mortgage. If you owe more than that, you’ll need to file a Division I proposal, which is a different process.
How does a consumer proposal affect joint debts?
If you have a joint debt, your co-signer remains responsible for the full amount even if you file a consumer proposal. The proposal only protects you, not the other person on the account.
Your creditors can pursue your co-signer for payment. If you want to protect a co-signer, you’ll need to keep paying that debt separately, or they’ll need to file their own insolvency proceeding.
Can I include tax debt in a consumer proposal?
Yes. Canada Revenue Agency debt, including income tax, GST/HST, and overpayments, can be included in a consumer proposal. CRA is a creditor like any other and must vote on whether to accept your proposal.
CRA votes based on what they think they’ll recover. If they believe you’ll repay more in a bankruptcy, they may reject the proposal.
Do I need a lawyer to file a consumer proposal?
No. Only a Licensed Insolvency Trustee can file a consumer proposal. You don’t need a lawyer. The trustee handles all the legal paperwork and negotiations with your creditors.
The trustee’s fees are built into your monthly payment, so there are no extra legal costs.
What happens to my credit cards during a consumer proposal?
Your credit card accounts are closed once you file a consumer proposal. Any balances owed are included in the proposal. You cannot use those cards again.
After filing, you can apply for new credit, but most credit card issuers won’t approve you while the proposal is active. A secured credit card is usually the only option.