Every year, millions of people find themselves facing insurmountable financial troubles. For many, financial hardships aren’t a result of wrongdoings or poorly planned actions. In many cases, families aren’t prepared to face the sort of financial pressure that can arise seemingly out of nowhere. When debt becomes overwhelming, wiping the slate clean with a consumer proposal can be a good solution.
Key Points
Key Points
1. A consumer proposal in Canada is a legally binding debt relief option, administered by a Licensed Insolvency Trustee, that lets you repay only a portion of your unsecured debt over up to 5 years.
2. You keep your assets, your payments never change, and you avoid the surplus income rules that come with bankruptcy.
3. To qualify, you must owe between $1,000 and $250,000 in unsecured debt (not counting your mortgage) and have a steady income.
4. A consumer proposal leads to an R7 credit rating, which is less severe than the R9 that comes with bankruptcy.
What Is A Consumer Proposal?
A consumer proposal is a legally binding debt relief solution that is administered by a Licensed Insolvency Trustee (LIT). It involves working with the LIT to develop a proposal for your creditors. The proposal is meant to offer a fair debt repayment deal for you and your creditors. Typically, the amount you owe will be reduced to an amount that is affordable for you while still being fair to the creditors.
What Happens When You File For A Consumer Proposal?
When you file a consumer proposal you’ll work closely with a LIT who will deal with your creditors, file your paperwork, and help you every step of the way. Entering a legal proceeding without any idea of what might happen is a scary thing, especially when your money is involved. Here are a few things you can expect when you file for a consumer proposal in Canada.
Before you file, your LIT will usually walk you through the consumer proposal initial assessment to review your income, debts, and assets and confirm that a proposal is your best option.
What Happens If The Creditors Reject Your Proposal?
If your creditors reject your proposal, you’ll be able to review it and resubmit with new changes that will hopefully lead to an acceptance. In many cases you can amend your consumer proposal to reach an agreement. If you’re unable to come to an agreement with your creditors, you’ll have to consider other options for debt relief, such as declaring bankruptcy.
What Happens If The Creditors Accept Your Proposal?
If your creditors accept your proposal, you’ll officially begin fulfilling the agreement you made with them. Depending on the offer made, you’ll be responsible for paying a lump sum amount of cash or periodic payments to your LIT, who will then distribute the payments to your creditors.
As mentioned, in general, you’ll have a maximum of five years to repay the agreed-upon portion of your debt. Once the payments are made and you’ve reached the end of your proposal, you’ll be released from your debts. You’ll also receive a “certificate of full performance” to prove your fulfillment of the program.
How Does The Creditor Consumer Proposal Voting Work?
The acceptance or rejection of your consumer proposal depends on the amount of debt owed to the creditors and not the number of creditors who voted. Your creditors have 45 days to review the proposal. If creditors who hold at least 25% of your total debt request a meeting, a vote is held. If no meeting is requested within that time, your proposal is automatically accepted, which is what happens with most proposals.
When a vote does take place, the proposal passes if the dollar value of the creditors who vote in favour equals 50% plus 1. For example, if you owe $100,000, and the dollar value of the creditors voting in favour equals $50,001, then the proposal will be accepted. However, if the dollar value is below that, then it will be rejected. Whether your creditors will accept your consumer proposal often comes down to how fair your offer is compared with what they would receive in a bankruptcy.
Are There Any Qualifications?
Unfortunately, consumer proposals aren’t for everyone. Everyone’s financial situation is different and therefore not everyone can benefit from the same help. For you to be deemed eligible to file a consumer proposal there are several conditions, besides being insolvent, which you must fulfill:
- Be an individual; businesses are not allowed to file consumer proposals
- You have at least $1,000 of unsecured debt but no more than $250,000 (this does not include your mortgage). A joint proposal can go up to $500,000
- Have a stable income to ensure that you’ll be able to make monthly payments
- Be unable to pay off your debts in full with interest
- No prior consumer proceeding is still open. The debt specialist handling the previous filing must have a discharged status
- If you have a pending consumer proposal, you may not file another until all claims in your previous proposal have been fully serviced or you’ve filed for bankruptcy
The right amount varies from person to person, since how much debt you should have before filing a consumer proposal depends on your income, your other options, and how much you would actually save.
How Much Does A Consumer Proposal Cost?
One of the most reassuring things about a consumer proposal is that it has no upfront fees. Your Licensed Insolvency Trustee is paid through a government-regulated tariff that comes out of the monthly payments you already agreed to. In other words, the trustee’s fee is not an extra charge on top of your proposal. The amount you agree to pay is the amount you pay, nothing more.
Consumer Proposal vs Bankruptcy
A consumer proposal and bankruptcy are the two legally binding debt relief options under the Bankruptcy and Insolvency Act, but they work very differently. A consumer proposal lets you keep your assets and pay a set amount over time, while bankruptcy clears debt faster but can cost you some assets.
| Feature | Consumer Proposal | Bankruptcy |
|---|---|---|
| How it works | Repay part of your unsecured debt; you keep your assets | Surrender non-exempt assets; most unsecured debt is eliminated |
| Length | Up to 5 years | 9 to 21 months (first bankruptcy) |
| Payments | Fixed, and never change even if your income rises | Can change with your income (surplus income) |
| Your assets | You keep them | Some non-exempt assets may be sold |
| Credit rating | R7 | R9 |
| Best if | You have assets to protect and a steady income | You have little income or few assets and need the fastest relief |
The right choice between a consumer proposal vs bankruptcy depends on your assets, your income, and how quickly you need to be debt-free.
Benefits And Disadvantages Of Filing A Consumer Proposal
While it’s understandable that seeking any type of debt relief is a hard choice, it helps to weigh the benefits against the disadvantages before you file.
Benefits
- Surplus income is not something you need to worry about, as it is with a bankruptcy.
- Your assets will not be seized.
- Your payments will never change or increase, even if your income goes up.
- The impact on your credit is less severe than bankruptcy. A consumer proposal usually leads to an R7 credit rating, whereas a bankruptcy leads to an R9.
- You only need to pay back a portion of your debts.
Disadvantages
- You cannot pick which debts will be included in the process.
- It will not remove any alimony or child support payments or obligations you currently have.
- It will not remove your current student debt responsibilities.
- It does not include your secured debts (mortgage, car loan, etc.).
- Some creditors may not accept your proposal, regardless of your situation.
- If you default on a proposal, you will not be eligible for a second one, so do not file unless you are sure you can see it through.
- Your proposal will stay on your credit report for up to 6 years, which can affect future eligibility.
Whether a consumer proposal is worth it comes down to how much you would save versus the temporary hit to your credit.
How Does A Consumer Proposal Affect Credit?
When you file a consumer proposal, you’re asking your creditors to accept repayment of a certain percentage of the total amount you actually owe them, over an agreed amount of time. Throughout the proposal period, your debts still exist in the eyes of the credit reporting bureaus (Equifax and TransUnion) and with the creditor to whom you were indebted.
When you file for a consumer proposal you’ll be given one of the lowest possible credit ratings: R7. This will remain on your credit report for 3 years after you complete your proposal, or 6 years from the date you filed, whichever comes first.
This credit rating will affect your ability to obtain credit in the future. However, with time and effort, you can rebuild your credit and regain control of your finances. Just be sure that your credit bureaus are properly updating your credit report. You can send a copy of the “certificate of full performance” to your credit bureaus to ensure they update your credit report.
Can You Pay Off A Consumer Proposal Early?
Yes. A consumer proposal sets a maximum of five years, but there is no penalty for finishing sooner. If you come into extra money, you can pay off your consumer proposal early and close it out. Some people even use their home equity to pay off a consumer proposal in a single lump sum. Finishing early means your R7 rating starts clearing from your credit report sooner.
Filing A Joint Consumer Proposal
Most types of debt can be shared with another person. For example, when you co-sign a loan, both individuals are equally responsible. Shared debt is most common among married couples or couples who live together, although this is not always the case. A joint filing is also possible, where more than one person co-operates in filing a consumer proposal. The individuals who are filing the consumer proposal must have “all or substantially all” similar debts. There is no actual definition for what “substantially all” means, so be prepared for your consumer proposal proceedings to be unique to your current debt situation.
Remember that while you might be permitted to file a joint consumer proposal, each individual is responsible for all of the payments. What this means is that if one of the people who agreed to split the payments can’t afford to pay them, the other person will be solely responsible for the payments. It is also possible for your proposal to be annulled should one or both of you be unable to make the payments.
Speak With An Expert
Consumer proposals offer a viable alternative to bankruptcy for people in financial difficulties. To gather more detailed information concerning consumer proposals and determine if you qualify, we can’t recommend enough that you speak with a debt specialist. A debt specialist will be able to provide you with information pertinent to your situation and guide you through whichever option you choose.
The sooner you get in contact with a debt specialist, the sooner you’ll be able to start your journey toward a better financial future for yourself and your family. If you’re interested in being matched with a debt specialist in your area, Loans Canada can help.
Consumer Proposal FAQs
If you miss 3 or more of your monthly payments, your consumer proposal will be annulled. This means your creditors will be free to pursue you and request payment however they wish.
Yes, there are multiple reasons why you may be rejected for a consumer proposal. You may not meet the eligibility criteria, such as having between $1,000 and $250,000 in unsecured debt. Similarly, if all of your debt is secured, you won’t qualify for a consumer proposal. Lastly, if your proposal is not deemed fair, your creditors may reject it as well.
To put it simply, yes, you can. After a declaration of bankruptcy, you might consider re-evaluating your situation. For instance, you may find a new job after filing for bankruptcy, earn more income, and become liable for greater payments. Switching to a consumer proposal could reduce your monthly payments by extending the repayment term and make payments more manageable. It is convenient for your creditors as well, since you end up repaying a greater portion of your debt.
If your debt exceeds $250,000, we wouldn’t suggest that you try to file a consumer proposal. You could consider filing a Division 1 proposal, as there are no limits on the amount of debt you can have under this type of debt relief. Do be aware, though, that if your Division 1 proposal is rejected by your creditors, you will automatically be bankrupt. A debt specialist can assist you in determining whether to file a Division 1 or a consumer proposal.
References
- Office of the Superintendent of Bankruptcy Canada. (2026). Insolvency statistics in Canada. https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research
