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Consumer proposals are Canada’s number one alternative to bankruptcy. They help those who are experiencing serious debt problems repay a portion of the money they owe and become debt free. But, while a consumer proposal can help you with debt, it can also have a negative impact on your credit.  So if you’re struggling with debt, you may be wondering “Is a consumer proposal worth it”? 

Is A Consumer Proposal Worth It?

Under the right circumstances, a consumer proposal can help reduce your unsecured debts by up to 80%. It’s a legally binding process that’s regulated under the Bankruptcy and Insolvency Act and can only be initiated by a Licensed Insolvency Trustee (LIT). You and your LIT will work together to figure out how much debt you’re able to repay.

Here are some of the main reasons why a consumer proposal might be worth it for you:

You Get To Keep Your Assets

Even if you have to pay back a portion of your debts, one major benefit of a consumer proposal is that you get to keep your assets during the process. That means you won’t lose important assets such as your vehicle, house, tax refunds and investments. 

On the other hand, if you owe enough in bankruptcy, the court may order you to surrender all non-exempt assets to repay it. 

Creditor Protection Is Activated

Since consumer proposals are regulated under the Bankruptcy and Insolvency Act, a legal stay of proceedings will be put into effect as soon as you file. This will immediately stop any collection penalties or wage garnishments your debts have caused. Once the majority of your creditors vote in favour of the proposal, it becomes binding to all of them. 

Your Monthly Payments May Be Lower

A consumer proposal gives you up to 5 years to repay your unsecured debts such as personal loans and payday loans. Not only can your debts be reduced by as much as 70% or 80%, but you may also get lower payments than with other debt relief solutions. For instance, credit cards and debt consolidation loans have interest and fees, which can make them more costly overall.

With a consumer proposal, you’re also allowed to make larger payments or pay in full, at any time during your term, without penalty. That means you could become debt-free faster than with other debt solutions too. Some creditors will be more inclined to accept a consumer proposal if it means they’ll get more out of the deal than during bankruptcy.          

There Are No Surplus Income Payments 

Another major advantage of a consumer proposal is that your monthly payments won’t change unless you want to pay extra. However, if your gross income is over a specific threshold when you file for bankruptcy, the court may decide to subtract a regular percentage of your earnings (surplus payments) as part of your duties toward them and your creditors.

Depending on how much you owe and what your finances look like, you might need to make surplus income payments in addition to surrendering your assets in bankruptcy.   

Is A Consumer Proposal Worth It If It Affects Your Credit

Filing, a consumer proposal will likely cause your credit score to dip. When you file for a consumer proposal, it will be noted on your credit report. For consumer proposals, credit ratings of R7 or R9 are usually noted, which will stay on your credit report for 3 years following the completion of the consumer proposal, or 6 years following the date of filing, whichever comes first.

While a consumer proposal stays on your credit report for a long time, it’s not as bad as bankruptcy. Moreover, there are ways of completing a consumer proposal early and working on your credit score.

How To Build Credit After A Consumer Proposal

Once you’ve completed your consumer proposal, you can start working on building your credit score immediately. While you’re unlikely to qualify for regular credit products, you can use secured credit cards and credit builder loans to help you build your credit. One of the best things you can do when building credit is to keep track of it. Checking your credit regularly can help you track your progress and ensure there aren’t any errors in your credit report. 

When Is A Consumer Proposal Considered Accepted?

Your trustee will submit your consumer proposal to your creditor, which will include information about your situation and the reasons for your financial troubles. Then, your creditors will have 45 days to either accept or reject your proposal.

Your consumer proposal can be accepted in the following circumstances:

  • If the majority accept it. Your consumer proposal is considered accepted if the majority of your creditors agree to your offer. 
  • Upon expiry of the 45 days. As mentioned, your creditors have 45 days to respond to your proposal. If they do nothing and the 45-day time limit elapses, your proposal is considered accepted. 
  • If there is a creditors meeting. If at least 25% of the creditors request a meeting, your trustee must hold a meeting of creditors to vote on your proposal. The consumer proposal will be accepted if the majority of creditors vote in favour of it.

What Happens If The Majority Of Creditors Vote No? 

If a vote is held and the consensus of the vote is “no”, the process doesn’t end yet. In the majority of cases, creditors will request an adjustment to the original terms you offered. They do this because they know that if you declare bankruptcy instead, they will likely get less than what you offered in the proposal. The adjustments creditors requests could be more money per month or a change in the length of the payment plan. If you agree to the new terms, the consumer proposal will be accepted as revised. 

If the new terms are not acceptable to you, you can make a counteroffer. However, if the counteroffer you make is rejected, you have the following options:

  • Renegotiate the terms of your proposal with creditors
  • Withdraw your proposal and pursue another debt relief option
  • Withdraw your proposal and file for bankruptcy
  • Withdraw your proposal and file again in the future. It’s best to wait a minimum of six months before preparing another proposal because if you file before the six-month mark the automatic stay of proceedings does not apply.

Final Thoughts: Is A Consumer Proposal Worth It?

Being in the position to file a consumer proposal is tough enough. Worrying about whether or not it is worth it will only add more stress. This is why it’s so important to speak with a trustworthy Licensed Insolvency Trustee. These professionals are trained to help you choose the best debt relief service for your needs. And if that ends up being a consumer proposal. They will help you through the whole process. 

Is A Consumer Proposal Worth It FAQs

How am I protected with a consumer proposal?

Once your consumer proposal has been filed by your Licensed Insolvency Trustee it is registered with the government. After which a stay of proceedings comes into place. This means that creditors must halt further legal action, phone calls, payment demands, and collection letters. You may also stop making payments to your creditors at this point.

Can I complete my consumer proposal early?

Yes, you can pay your consumer proposal off earlier if you have the financial ability to do so. There is no early prepayment penalty fee for paying down your proposal before the deadline. Completing your consumer proposal early means you’ll be able to start rebuilding your credit sooner.

How long does a consumer proposal remain on your credit report?

The amount of time that a consumer proposal remains on your credit report depends on the credit bureau. For example, Equifax will remove a consumer proposal from your credit report three years after you’ve repaid the debts included in the proposal. TransUnion will remove a consumer proposal from your credit report either 3 years after you’ve repaid the debts included in the proposal, or 6 years after you sign the proposal. Whichever of the two happens first.

Can you amend an active consumer proposal?

You are unable to have multiple consumer proposals active simultaneously. However, you are able to amend your current consumer proposal. This is an option if you are no longer able to fulfill your payment plan due to changes in your financial circumstances. You can amend the terms of your active consumer proposal to reflect those changes and adjust the repayment plan as needed.
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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