What is a Consumer Proposal? The Little-Known Way Out of Debt

If you’re struggling to pay your bills and want to avoid declaring bankruptcy, a consumer proposal is a safe way to reduce and consolidate your debts into one simple monthly payment without interest.

In this guide to consumer proposals, we explain everything you need to know, including how it works, the pros and cons, costs and how to file.

What is a consumer proposal?

A consumer proposal is a legally binding agreement filed through a Licensed Insolvency Trustee between you and your unsecured creditors. Through this agreement, you repay your creditors a percentage of what you owe, with the remainder forgiven.

How does a consumer proposal work?

Through a consumer proposal, you can restructure your unsecured debt into one simple monthly payment that never increases.

Once a proposal is filed, you can freeze interest on your debts. You can also stop collection calls and wage garnishments thanks to legal protection called a Stay of Proceedings.

The great thing about a consumer proposal is that you won’t lose any of your assets, like your home, car, savings and tax refunds.

Upon completion, you are debt free.

How much does a consumer proposal cost?

The cost of a consumer proposal is based on how much you can afford to pay. The amount depends on what you owe, what the creditors expect to recoup, your income and whether you have any assets.

A Licensed Insolvency Trustee will review your financial situation to determine how much you need to pay. Typically, you can reduce your debt, sometimes by as much as 80%.

Your creditors accept a reduced interest-free payment for up to five years. After you make all your payments, the debts included in your proposal are forgiven.

Use our consumer proposal calculator to see how much you could save on debt repayments.

What debts are included in a consumer proposal?

You can eliminate most of your unsecured debts by filing a consumer proposal.

Unsecured debts are debts that are not secured against your assets, such as:

• Credit card debts
• Personal loans
• Payday loans
• Bank overdrafts
• Utility bills (You can’t include bills for services you are continuing to use)
• Unsecured lines of credit
• Tax debts (unless the CRA registers a lien on your property)
• Student loan debt if you haven’t been a student for seven years or more
• Unpaid rent
• Debts owed to friends and family.

You must include all your unsecured debts in a proposal.

Can I include secured debts?

A consumer proposal won’t affect secured debts, such as your mortgage or any secured car loan. You can keep your house and vehicle if you make payments on time.

You also have the option to stop paying and surrender the asset to the lender before you file your proposal. You can add any resulting shortfall to your proposal as an unsecured debt.

Resolving your unsecured debts in a consumer proposal can help free up money, making it easier to make payments to your secured creditors.

Can I include tax debts?

It is possible to eliminate tax debt in a consumer proposal if the Canada Revenue Agency (CRA) hasn’t registered a lien on your property. This includes income tax, payroll deductions and GST/HST.

If you proceed with a consumer proposal, the CRA is treated the same as other creditors. However, they can attach specific clauses, such as requiring you to complete future tax returns (and payments) on time.

You’ll also be required to file all tax returns for previous years so that your proposal includes all outstanding income tax debt.

If most of your creditors accept your consumer proposal, debt collection agents cannot take further action and interest is frozen.

Then, once you complete your proposal, any tax debts owed to the CRA are eliminated.

As it is a government debt relief program, a consumer proposal is the only debt relief program that the CRA will consider. They may attach specific conditions, such as clauses to file and pay future taxes on time.

Each creditor has one vote for each dollar they are owed, and if a majority accepts your proposal, it becomes legally binding even if the CRA disagrees.

Can I include student loans?

You can include student loans in a consumer proposal if it has been seven years or more since you attended school.

If your student loans are under seven years old, you cannot include them in a consumer proposal, but consolidating your other debts into one monthly payment could free up money to pay your student loan.

You can also take a student loan payment break while eliminating your other debts. Alternatively, you could wait for the limitation period to expire before you file your proposal.

Can I include property tax debt?

Property taxes is one of the costs of owning a home and cannot be eliminated in a consumer proposal. However, you can free up money to pay your property tax by using a proposal to consolidate unsecured debts into one monthly payment.

How long is a consumer proposal?

A consumer proposal can last for any time, up to a maximum of five years. If you can afford to pay more, you can complete the process faster by making additional payments.

The pros and cons of a consumer proposal Canada

A consumer proposal is Canada’s only debt settlement program approved by the government. It allows you to consolidate your debts without filing for bankruptcy or using an informal debt settlement company.

But, like all debt solutions, there are pros and cons to this debt solution that you must consider.

Advantages of consumer proposals

Let’s take a look at some of the advantages of a consumer proposal:

1. Reduce your debt

Many debt relief options, such as credit counselling, debt management plans, and debt consolidation, do not allow you to reduce your debt. A consumer proposal could reduce your debt by up to 80% based on affordability. Upon completion, all your debts are eliminated.

2. One fixed payment

A proposal lets you pay off your debts with one affordable monthly payment that won’t go up, even if your income does.

3. Stop collections

Give yourself breathing space with legal protection from creditors. Stop debt collection agencies and wage garnishments.

4. Keep your assets

Consumer proposals allow you to keep your assets, like your home, car and investments.

5. Freeze interest

Upon entering a proposal, interest and charges are frozen.

6. Government legislated

It is a debt settlement program governed by Canada’s Bankruptcy and Insolvency Act and carried out by professionals licensed by the Government Office of the Superintendent of Bankruptcy (OSB). This makes it one of the safest debt relief options available.

7. Avoid bankruptcy

It is the number one alternative to filing for personal bankruptcy.

Disadvantages of consumer proposals

In most cases, the advantages outweigh the disadvantages, but here are the downsides:

1. It will affect your credit score

Like most debt relief solutions, a consumer proposal will lower your credit score for a while, but it won’t make much difference if your credit rating is already low.

In return for debt forgiveness, it is recorded in your credit report for at least three years after completion.

Your credit won’t be affected forever, and you can rebuild it faster after your proposal because you have cleared your debts.

2. You need disposable income

You can file a consumer proposal if you have some income left over after essential monthly bills. If you have no assets or a low income, bankruptcy might be a better option.

3. A consumer proposal takes longer

You pay creditors a lower amount over a longer period, but you can pay more to complete your proposal early.

4. Not all types of debts can be eliminated

Not all debts can be discharged through filing a consumer proposal, like secured debts, property taxes, fines, child support and some student loans.

What happens after a consumer proposal?

After you complete your consumer proposal payments, any outstanding balance from your debt is forgiven, and your Licensed Insolvency Trustee will release you from these obligations.

You will receive a Certificate of Full Performance to show that you have completed the terms of the consumer proposal. If you get a call from a debt collector after completion, show them this certificate as proof.

Consumer proposal eligibility requirements

You qualify for a consumer proposal in Canada if you meet these eligibility requirements:

• Your total debts are less than £250,000 (excluding your mortgage). If you owe more, you can file a Division I proposal instead.
• You live in Canada (a permanent resident or under a work permit or another status) or own property in Canada.
• You cannot pay your debts as they become due and owe more than your assets are worth (you are insolvent).
• You can afford to make a monthly repayment towards your debt after essential bills.

Your proposal to your creditors must offer more money than they would receive if you filed for bankruptcy.

How to file a consumer proposal

You must appoint a Licensed Insolvency Trustee to file a consumer proposal.

A Licensed Insolvency Trustee is a professional licensed and regulated by the Office of the Superintendent of Bankruptcy. Unlike credit counsellors and debt settlement agencies, a trustee is the only person who can file and administer a consumer proposal.

They are responsible for working with your creditors to negotiate a repayment amount that is affordable to you and acceptable to your creditors. This amount will depend upon your income and your assets.

A trustee protects the rights of you and your creditors and will ensure you receive the best possible financial advice.

During the consumer proposal process, a trustee will complete and file paperwork, liaise with creditors and arrange your financial counselling sessions.

Still curious? Read more about the consumer proposal process.

The first step is to arrange a free consultation with a trustee who will listen to your problems and recommend the best option for your situation.

Frequently Asked Questions

Do I have to include all creditors in a consumer proposal?

You must include all unsecured debts in a consumer proposal to ensure that all creditors are treated equally. This also ensures that you are entirely free from debt.

How much debt can be included in a consumer proposal?

A consumer proposal can eliminate unsecured debts up to $250,000. This amount doesn’t include your mortgage. If your debts exceed $250,000, consider filing a Division I proposal instead.

What happens to my utility bills in a consumer proposal?

Utility bills such as your cell phone are usually not affected as long as your account payments are up to date and you continue to make your monthly payments. Any services you wish to include in your consumer proposal should be cancelled so that you can add the final balances.

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