The Ultimate Guide to Consumer Proposals in Canada

Every year, more and more Canadians are choosing to file consumer proposals as a way to get relief from soul-crushing debt. If you are considering restructuring your debt without having to declare bankruptcy, you should consider filing a consumer proposal. 

It is often a painful and humbling decision, but it can be the best thing for you, your mental health, and your financial future. A consumer proposal is not meant to punish or humiliate you. It is meant to be a lifeline for honest, well-intentioned people struggling through unfortunate circumstances. 

In this guide, we will discuss everything you need to know before filing a consumer proposal. We will cover topics such as who is eligible to file a consumer proposal, how to go about filing one, and what happens once the process is complete.

What is a consumer proposal?

A consumer proposal is a legally binding agreement that allows you to pay back only a portion of your debt. If you feel like you are drowning in debt and have lost hope for the future, a consumer proposal could relieve your stress and give you a fresh start. 

To file a consumer proposal, you will need to work with a Licensed Insolvency Trustee (LIT). This professional will negotiate with creditors on your behalf to come up with a repayment plan that is acceptable to both parties. Once the consumer proposal is approved by your creditors, you will make payments to the trustee, who will then distribute the funds to your creditors.

Unlike a bankruptcy, which requires the debtor to surrender their assets – like a car or house – a consumer proposal allows you to keep your assets. It divides all or a portion of your debt into multiple payments over a period of time. 

How will a consumer proposal impact my credit score?

A consumer proposal will remain on your credit file and affect your credit for three years after completion, while a bankruptcy will stay on your credit file for up to 6 or 7 years after completion. If the consumer proposal arrangement lasts for three years, for example, its effect on your credit score will last for a total of six years:

3 years during the proposal + 3 years after its completion = 6 years total

The impact on your credit score will also be lower with a consumer proposal. Your credit score is an overall grade based on the status of each individual credit account, called tradelines, in your credit file. Each tradeline is given a credit rating that ranges from R1 to R9 that indicating how well you are managing or did manage, the account.

For example, a perfect credit rating is coded as R1 while a bankruptcy is coded as an R9, which is the worst rating. A consumer proposal is coded as an R7, meaning it has a slightly less severe impact on your credit score compared to bankruptcy.

With a consumer proposal, your credit score will most often have an R7 rating for 6 years from the moment the proposal was filed or for three years from the day the proposal is complete, whichever comes first.

It’s important to remember that a credit score gives lenders key information on your financial situation, including your capacity to repay your debt. If you are planning to take a loan in the future, you will want to raise your credit score above 660 if you want to work with traditional lenders, like your own bank. You can increase your score by ensuring all your payments are made on time, or by getting a secured credit card and using it wisely. 

During the term of the proposal, you, as the debtor, will be protected from interest charges, late fees, and collection activity. That means if creditors are currently garnishing your wages, pursuing you in court, or calling you every day, all of that has to stop as soon as your consumer proposal is filed. 

Who qualifies for a consumer proposal?

In order to be eligible for a consumer proposal, you need to have unsecured debts of more than $1,000 and less than $250,000, which doesn’t include your mortgage. Unsecured debt refers to things like credit cards, lines of credit, and other loans not secured with collateral. Also, you must be able to prove that you have enough income to make the regular payments outlined in the proposed agreement. 

Other eligibility criteria include: 

• Be a person and not a business
• Have a stable source of income
• Have no other active consumer proposal fillings
• Have no annulled consumer proposal, unless all of the claims filled in the previous one have been either removed by a bankruptcy or fully paid 

The minimum amount of debt to be eligible for a consumer proposal depends on your province. If you’re considering a consumer proposal, consult with a Licensed Insolvency Trustee to determine the eligibility requirements in your province. 

A consumer proposal does not erase your debt and let you off the hook. It only restructures unsecured debts, including credit card debt, lines of credit, and personal loans. It is not available for business debts, secured debts like a mortgage or car loan, or government-backed student loans. 

What are the benefits of using a consumer proposal?

If you are experiencing hardship or crisis, a consumer proposal can help you reduce your overall debt load and get out of debt in a shorter period of time. It can also help relieve your financial anxiety and give you hope for a brighter financial future. 

When you are unable to make regular or on-time payments to your creditors, interest accumulates and makes it harder to get out from under your debt. Some may even increase your interest rate for failing to pay as agreed, like credit cards. A consumer proposal will stop interest from continuing to accrue on your unsecured debts.

Finally, another important advantage of a consumer proposal is that, unlike bankruptcy, it allows you to pay down your debt without having your house or car seized by creditors.

What are the disadvantages?

While a consumer proposal is a viable option for many people in debt, there are also several disadvantages. For example, the process can be relatively lengthy and more expensive compared to other debt relief methods.

While you will invest time and money in filling a consumer proposal, there is no guarantee that creditors will agree to the terms.

Another thing to consider is that your credit rating will still be negatively impacted, making it more difficult to access new credit in the future. A consumer proposal will usually stay on your credit report for three years after its completion.

Finally, consumer proposals are legally binding, meaning that you have a legal obligation to fullfill the terms of the agreement. If you fail to meet the obligations of the proposal, your creditors can resume collection activity for the money you owe them. 

Where to file a consumer proposal

Every single consumer proposal in Canada must be filed through a Licensed Insolvency Trustee (LIT). This person is an accredited trained professional recognized by the Canadian government. It also means that you cannot file a consumer proposal by yourself. 

Even if you could, the complexity of the process will most likely require you to seek the guidance of an expert. An LIT is your advocate who is highly skilled at negotiating on your behalf for a fair agreement between you and your creditors.  

How to file for a consumer proposal

To file for a consumer proposal in Canada, there’s some documentation you’ll need to gather. First, you’ll need a Statement of Affairs, which details your assets, liabilities, and income.

Next, you’ll need a Statement of Income and Expenses, which provides a breakdown of your monthly financial situation.

Of course, you will also have to prepare the Consumer Proposal, which outlines your offer to creditors. 

Finally, you’ll need an Assessment Certificate and a Creditor Report. These documents will help assess your financial situation and determine whether a consumer proposal is the best option given your financial circumstances. 

Filling a consumer proposal with another person

You can file a consumer proposal jointly with another person, like a spouse, known as a joint filing. When you file a consumer proposal jointly, both of your names will appear on the proposal and both of you will be legally bound by its terms. 

In other words, you and the other person are co-signing or guaranteeing to pay the debt together as per the agreement, regardless of who is responsible for accumulating the debt. 

If you want to fill a joint proposal to your creditors, there are certain eligibility requirements that must be met. First, all or most of the debts must be similar in nature. Second, you must both be individuals; sole proprietorships, partnerships, and corporations are not eligible to file a joint proposal. 

When you fill a joint consumer proposal, the total debt must be less than $500,000 as opposed to the $250,000 limit that applies to a single person. This debt limit does not include a mortgage on your principal residence.

How much does a consumer proposal cost? 

When you file a consumer proposal, there are some upfront costs to prepare for that are the same across Canada. First, prepare to cough up about $1,770 at the time you file. You must pay a filing fee ($100), counselling session fees (2 sessions at $85 a pop),  and an initial trustee fee ($1500), trustees will collect additional fees later.  

Then, you have to pay a certain amount depending on how much debt you are proposing to restructure. You need to pay 20% of the amount available for distribution to the creditors, which is the total amount of unsecured debt outlined in the proposal. 

The fees alone total $1,770, excluding the 20% trustee fees and the 5% federal tax on the amounts distributed to creditors. 

For example, let’s say Diane has a debt of $50,000. She meets with a trustee and they recommend settling $10,000 of her debt. The following table illustrates what will happen with the proposed funds.

Fees paid by Diane directly to the trustee based on the proposed debt of:	$10,000
Filing fee	– $100.00
Counselling fees (2 * $85)	– $170.00
GST on counselling fees (5%)	– $8.50
Initial Trustee fees	– $1,500.00
GST on Trustee fees (5%)	– $75.00
Total fees before distribution	– $1,853.50
Amount available for distribution ($10,000 – $1,853.50)	$8,146.50
Trustee fees on distributions (20%)	– $1,629.30
GST on Trustee fees (5%)	– $81.40
Levy on creditor distributions (5%)	– $407.30
Net amount payable to creditors ($8,146.50 – $1,629.30 – $81.40 – $407.30)	$6,028.50

Explanation of fees

In the table above we see that Diane pays $100 for the filing fee, $170 for two counselling session fees  + $8.50 GST on counselling fees, and $1500 for the trustee fee + $75 in GST.

The Initial Trustee fee is not paid in full from the start; $750 is paid upon filling the proposal and  $750 is paid only upon the approval of the consumer proposal by the court.

Note that while Diane has offered $10,000 to settle her debts, only $8,146.5 is available for distribution to her creditors. This is because the amount available for distribution to creditors is calculated by subtracting all the fees paid when filing for the consumer proposal from the total amount of money proposed to settle the debts. 

The creditors will usually start receiving distribution after the payment of the filing fee, initial trustee fee, and counselling fee. Each time creditors receive a distribution, the trustee receives 20% of the distribution plus taxes and 5% is deducted from the creditor’s distribution for the levy that needs to be paid out to the Superintendent of Bankruptcy. 

For example, let’s say Diane has agreed to make monthly payments, and each month she sends $1,000 to her creditors. When the creditors receive $1000 from Diane, they will have to distribute 20% of the payment they received (20% of $1000 is $200) plus taxes (5% of $200 is $10) to Diane’s trustee and 5% of the same payment (5% of 1,000 is $50) to the Superintendent of Bankruptcy.

After Diane makes all the payments and completes the consumer proposal, creditors will keep a total of $6,028.5 from Diane from the total of  $8,146.5 available for distribution.

What to expect when filing for a consumer proposal

The process to file a consumer proposal generally involves three steps: 

The first step is to meet with a Licensed Insolvency Trustee and discuss your financial situation. If the trustee determines that a consumer proposal is the right option for you, they will help you gather the necessary paperwork.

The second step is to file the consumer proposal with the Office of the Superintendent of Bankruptcy. Once it has been filled, you can expect to receive a notice from the office in question informing you about your proposal and what will happen next.

The final step is to attend a meeting of creditors if there is one, where your proposal will be voted on by your creditors. There isn’t always a meeting, so don’t be alarmed if this doesn’t happen. 

If your consumer proposal is approved, then you will make payments to the trustee who will then distribute the funds to your creditors – minus the fees, taxes, and levies described above. It will be mandatory to attend two financial counselling sessions.

Once all the required payments have been made, your consumer proposal will be complete and you will be free of the debt covered under the proposal. 

What happens when a proposal is approved?

One of the most important advantages of a consumer proposal is that it becomes binding on all your creditors too, not just you. Plus, not every single creditor needs to accept your proposal either. As long as the majority of them do, the rest have to comply even if they voted against it.

If you make the payments according to the agreement, the unsecured debts that are included in your proposal are wiped out at the end of the payment period. Payments will be made either periodically or in a lump sum, depending on the agreement. There will be a public record on your credit report for three years indicating that you completed a consumer proposal. 

Also, as long as you continue to make payments according to the agreement, there’s no risk of losing your assets, like your house or car, which is not the case with bankruptcy. 

What happens if the proposal is rejected?

If your consumer proposal is rejected, you have a few options available. You can negotiate with your creditors to see if they will agree to different terms, such as a longer repayment period or a different monthly payment. 

If you cannot reach an agreement, you can explore other options or file for bankruptcy. A bankruptcy will allow you to discharge your debts and start fresh. However, for most people, bankruptcy should be considered a last resort option, as it can have longer-lasting effects on your credit rating, limiting your ability to qualify for lending for a longer period of time. It could also affect assets like your home or car. 

How much debt can you reduce with a consumer proposal?

The answer to that is unique to each person and their individual circumstances. On average, people filling a consumer proposal see a debt reduction of around 50%. In other words, you do not necessarily have to pay the entire debt in order to file for a consumer proposal.

Several variables will influence how much debt you can restructure with a proposal, including income, total debt, and the comparison to a bankruptcy.

In general, the higher your income and the less debt you have, the more likely you are to be successful in reducing your debt with a consumer proposal. For this reason, your Licensed Insolvency Trustee will assess your capacity to pay down your debt by taking into your current income and expenses.

Another thing to consider is time. The duration of the consumer proposal means a lower monthly payment. A consumer proposal cannot go for more than five years, meaning that the monthly payment or the lump sum you will agree on will be influenced by your capacity to pay a certain sum of money within a specific time period. 

By taking into account all of these variables, the Insolvency Trustee can determine whether a consumer proposal is right for you compared to other debt relief methods. During consultations, your Trustee will explain to you all of the advantages and disadvantages of a consumer proposal and other debt-relief methods such as bankruptcy or debt consolidation.

Consumer proposal vs bankruptcy

In simple terms, with a consumer proposal, you will be able to reduce at least some of your debt without impacting assets like your house or car. With bankruptcy, you will get rid of all debt but you have to submit control of your assets to the Trustee. 

With a consumer proposal, you negotiate with your creditors to pay back a portion of your debt. This is an option to consider when you are unable to make your minimum payments, but you still have an income that will allow you to make regular payments. Once the proposal is accepted by your creditors, you will make monthly payments for a specific period of time. At the end of the agreement, if you have satisfied all your payments and other obligations, the remaining debt will be forgiven. 

Bankruptcy, on the other hand, is a more drastic measure. It involves surrendering control of your assets to the Trustee, but there are some exceptions. This option is typically only used as a last resort when all other options have been exhausted. When you file for bankruptcy, you enter into an agreement with your creditors to repay a portion of your debt. In exchange, you get relief from the debt that is left. 

The payments are typically lower than your regular payments, but you have to give up some assets to repay the debt. The bankruptcy is automatic and does not require approval from creditors. The are only two specific repayment periods of 9 or 21 months, depending on your income. Monthly payments depend on your excess income, which means the amount you pay fluctuates month to month. You also have to submit a full account of all your income and expenses to the Trustee each month, along with supporting documentation and your payment. 

If you have a lot of unsecured debt, such as credit card debt, a consumer proposal is likely a better option than declaring bankruptcy. With a consumer proposal, you enter into an agreement with your creditors to repay a portion of your debt. The payments are fixed regardless of your income and expenses, you have more flexibility over the repayment period, and it doesn’t involve your assets. 

Consumer proposal vs debt consolidation

Most people have likely heard of debt consolidation: taking out a new loan to pay off several smaller debts. However, consolidating your debt will only work if you’re able to get a lower interest rate on the new loan. If not, you may end up paying more in interest than you would have by making separate payments on each of your debts. 

A consumer proposal is an alternative to debt consolidation that can be used if you’re unable to consolidate your debts or qualify for a lower interest rate. With a consumer proposal, you can negotiate reduced interest rates, waived fees, and extended repayment terms. 

A consumer proposal is similar to debt consolidation, but it also renegotiates the amount of debt you owe to a lower amount. Unlike a consumer proposal, debt consolidation is not damaging to your credit rating, and could even boost by paying off your credit card balances. 

Can you still file a consumer proposal if you have already declared bankruptcy? 

Yes, you can. You are eligible for a consumer proposal in any case where you are insolvent or bankrupt and where your debt, excluding debts related to your principal residence, does not exceed $250,000. 

One common scenario in which people decide to switch from bankruptcy to a consumer proposal is when their financial situation improves substantially. With a consumer proposal, one can lower their monthly payment by extending the repayment term.

Another advantage of switching is that you will be able to keep the assets you may inherit. Furthermore, control of non-exempt assets included in the bankruptcy will be given back to you, and you will also have the possibility to use the assets to fund the consumer proposal.

To switch from bankruptcy to a consumer proposal, all you need to do is to meet with your trustee and discuss the terms that you want to offer your creditors. In the consumer proposal, you will disclose your current situation so creditors understand why you are switching from a bankruptcy to a consumer proposal. For example, if your income has increased or you are expecting to receive a certain amount of money, this is something that you will mention in the proposal to your creditors. 

It is important to keep in mind that if you are going to switch from bankruptcy to a consumer proposal, you cannot switch your trustee during the process. Another important thing to consider is that your creditors will typically expect that the amount of debt repaid will be greater than what they would have received in the bankruptcy.

If creditors accept the consumer proposal, the Court will cancel the bankruptcy within 15 days from the creditors’ approval date.

What happens if you miss payments?

A consumer proposal can be an excellent way to get out of debt, but it is important to remember that there are some strict rules that must be followed. If you miss just three monthly payments, or one payment by more than three months in case you are not on a monthly payment plan, your proposal will automatically be annulled. In simple terms, not fulfilling your obligations will void the agreement.  

If your consumer proposal is cancelled, you might end up back where you started; having to deal with creditors yourself. More specifically, all of your debts will be reinstated, including any interest or penalties you would have been charged if you never filed the consumer proposal. This means that you will owe your creditors the full amount of your debt, plus any accrued interest and penalties. Your creditors will be able to resume collection practices and pursue you legally for the money you owe. 

In addition, you may not file another consumer proposal for the same debts without permission from the Court. Finally, any payments you have made under the consumer proposal will be lost. These risks highlight the importance of getting professional help from a Licensed Insolvency Trustee when considering a consumer proposal.

How do you know if a consumer proposal is right for you?

There is no one-size-fits-all answer to this question, as the right financial solution depends on each person’s circumstances. However, there are a few general points to consider that can help you decide if, in your case, a consumer proposal is most likely a better option than declaring bankruptcy or trying other debt relief methods. 

First, consider whether you are able to make your minimum monthly payments on all of your debts. If you are only able to make the minimum payments or are falling behind, then a consumer proposal may be a good option. 

Second, think about whether you would be able to repay your debts in full within a reasonable period of time. If it would take more than five years to repay your debts, then a consumer proposal may be a better solution. 

Finally, consider the impact of a consumer proposal on your credit rating. Although a consumer proposal will have a negative impact on your credit rating, it will be less severe than declaring bankruptcy.

These are just a few factors to keep in mind when deciding if a consumer proposal is right for you. Ultimately, the decision should be made in consultation with a qualified professional who can assess your unique financial situation.