What Happens When You Can’t Afford Your Consumer Proposal?

What Happens When You Can’t Afford Your Consumer Proposal?

Written by Mustafa Khan
Fact-checked by Caitlin Wood
Last Updated August 31, 2022

If you’ve been having a tough time handling all of your debt payments, one popular program Canadians can opt for is a consumer proposal. While bankruptcy is always an option, consumer proposals tend to be popular because they allow Canadians to keep the assets that may have been lost in bankruptcy. In addition, the monthly payments are often lower compared to those paid in a bankruptcy, especially when high surplus income is involved. However, as beneficial as consumer proposals may be, they’re not free. You are still obligated to make payments as part of the deal to satisfy your debts. The payments required are negotiated with your creditor(s).

 For the most part, these payments are based on the amount you are able to afford every month. But what if you can’t afford your consumer proposal payments? What if things have changed for you over the course of your consumer proposal and you are now in a financial predicament that has made you unable to afford your consumer proposal payments?

What To Do If I Can’t Afford My Consumer Proposal Payments At All?

Once your consumer proposal is finalized with creditors, you must start to comply by making the required payments. But what if after making a few installments, you are unable to make any further payments? See below for some possible options:

Renegotiate Your Consumer Proposal

If you are unable to make payments under your consumer proposal, contact your Licensed Insolvency Trustee (LIT) immediately. Explain to your trustee that your financial situation has changed due to decrease or loss of income. Your trustee will contact the creditors on your behalf to inform that a revision is required to the payment terms agreed under the previous consumer proposal.

This revision is called an amendment of the consumer proposal and typically does not attract any additional fees. Creditors will generally accept your amended consumer proposal for lower payments if your excuse is reasonable.  Loss of job due to pandemic, shut down of business, severe long-term illness, accident or injury are some of the excuses that might be considered as acceptable. If creditors approve the revision, your payments will be amended to a lower payment amount and extended over a longer period of time.

Risks Of Amending Your Consumer Proposal

At the time of presenting the amended consumer proposal, there is a risk that the creditors may reject it. In that case, the amended proposal is canceled and any ‘due’ payments under the previous proposal will be reinstated automatically. So you either stick to making all due payments under the previous proposal or file for bankruptcy. 

File For Bankruptcy

Your trustee can assist you after listening to your reasons for non-payment under the consumer proposal. The sooner you inform your trustee the more time they will have to find a better solution so acting quickly is key.

Your trustee will evaluate your reasons for non-payment to determine if they are because of income loss or over-expenditure. If you are spending too much, your trustee will encourage you to attend financial and credit counseling sessions. If you still cannot comply with the original consumer proposal or if your revised consumer proposal is rejected by the creditors, you can now file for bankruptcy. This can be either done immediately or after the expiry of three months without making any payment at all under the original consumer proposal. Keep in mind that the money you have paid so far (if any) will not be returned or refunded. Once three months are passed without a single payment, the consumer proposal is automatically canceled. 

Can I Use A Debt Consolidation Loan To Pay Off A Consumer Proposal, If You Can’t Afford It? 

It is typically difficult to obtain a new loan while you are bound by a consumer proposal. Banks and other lenders often require a credit check before issuing a new loan. As your credit check will reveal your consumer proposal status the loan application is likely rejected. However, some alternative lenders may accept your application based on other requirements. If you manage to get a new loan to pay off the debt under the consumer proposal, you will be making an interest payment to the lender of the new loan. Since payments under the consumer proposal are interest-free, this may put you under further financial strain and debt.

What Happens If I Default On Your Consumer Proposal Payments?

You made a firm commitment to yourself that you will make all payments under the consumer proposal on time. But new circumstances have emerged out of nowhere and now you are unable to make any payment. Here are some outcomes you might face if you end up defaulting on payments.

Defaulting On One Or Two Payments 

Under a consumer proposal, you submit the payments to your trustee. These payments should follow the installment schedule under the consumer proposal. If you miss a payment or two, you are still pretty much within the proposal. 

If you miss all payments in a three-month time without filing a revised or amended consumer proposal, then your existing proposal will automatically end. This process of automatic cancellation is called annulment.

Annulment of Consumer Proposal

There will be several consequences when a consumer proposal is automatically annulled, including:

The money that you have paid so far to the creditors is lost and will not be returned to you.

Consumer proposal payments are principal payments only and are free of any interest, penalty, or fee. After the annullment, the interest, penalty, or fee is reinstated for the whole debt covered under the proposal. For example, you paid 50% of the proposal payments before it is annulled. Now you will have to pay interest, penalty, or fee applicable to the 100% of the debt covered under the proposal from its inception regardless of the payments made.

Getting a new consumer proposal after an annullment is a difficult and time-consuming procedure. This time the court will be involved to issue you permission to get a new proposal.

How To Calculate Your Consumer Proposal Payments

Calculating your consumer proposal payments requires determining two figures. First, the total amount of debt outstanding to all the creditors. Secondly, the total number of months for which a consumer proposal is allowed for. The total debt amount is based on what you owed to your creditors. The number of months can be agreed upon with creditors but it cannot exceed 60 months or five years. If you can pay larger payments, a shorter duration may be agreed upon as well.  

Refinancing Other Forms Of Debt To Pay Off A Consumer Proposal

If you have a mortgage due for renewal, you may add the debt balance under the consumer proposal to the remortgaged amount. If this is the case, you will no longer be liable to make monthly proposal payments, as you will have paid off your proposal. Your debt payments would now spread over to the remaining years of your mortgage. Keep in mind that while this is a viable option, it means you will now be paying interest on the debt which was originally part of your consumer proposal. Consumer proposal payments are interest free.

Frequently Asked Questions About Consumer Proposals

Can defaulted payments on consumer proposals result in wage garnishment in Canada?

No. However, an annulled consumer proposal due to several missed payments will no longer protect you from debt collectors and wage garnishment

How long does a consumer proposal stay on my credit report?

The length of which a consumer proposal stays on your credit report depends on the credit bureau. In Canada, there are two main credit bureaus – Equifax and TransUnion. Both credit bureaus, removes consumer proposal three years following the date you pay off all of your unsecured debts included in the proposal, or six years following the date which you’ve signed the proposal; whichever is sooner. In some instances, different provinces will have varied legislation on the duration of which a consumer proposal may be permitted to stay on credit reports.

Will I lose my house if I default on my consumer proposal payments?

Mortgages and Auto loans are both considered as secured loans, where the underlying asset is the house or vehicle itself. Secured loans do not qualify for consumer proposals, as a consumer proposal can only be used to settle unsecured debts. So, you will not lose your home if you defaulted on a consumer loan payment, as your mortgage debt is unrelated to your consumer proposal. However, defaulting on your mortgage payments may eventually lead to a foreclosure on your home. 

Looking for Help With Your Consumer Proposal?

If you’re currently thinking about filing a consumer proposal it’s best to discuss all details of your proposal with your licensed insolvency trustee. Make sure to consider your current and future financial situation and capability. For more information on consumer proposals, bankruptcy and debt- take a look at our blog spot. 

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