Consumer Proposals in Canada: A Complete Guide

For Canadians struggling with crippling debt, filing for insolvency through bankruptcy or a consumer proposal may seem like the only way out. In fact, there were more than 35,000 consumer insolvencies in the first quarter of 2025 alone. While most people have some general knowledge about bankruptcies, many are less familiar with consumer proposals.

What Are Consumer Proposals?

A consumer proposal, sometimes called a consumer debt proposal, is a legal agreement to repay a portion of a debt to a creditor in exchange for some debt forgiveness. It is a legal option for insolvent debtors that isn't as severe as filing for bankruptcy. Administered by a Licensed Insolvency Trustee (LIT), a consumer proposal allows someone to pay back only a percentage of their total debt, extend the amount of time they have to pay it back, or both. This, of course, depends on whether or not creditors accept the consumer proposal and the repayment terms.

Who Qualifies for a Consumer Proposal?

A consumer proposal isn’t meant as an easy way out for lowering your debt. It’s a near-last resort (before filing for bankruptcy) to become solvent again.  

You may be eligible for a consumer proposal if you:

• Are a Canadian resident or have property in Canada
• Have debts of greater value than your assets
• Can’t keep up with debt payments
• Can afford to pay some of your debt back
• Have unsecured debt between $5,000 and $250,000 (not including mortgages)
• Do not already have an open or voided proposal, or are still in active bankruptcy proceedings

As an example, someone with $50,000 in credit card and personal loan debt who has recently lost their job and fallen behind on payments may qualify.

What Debts Can Be Included in a Consumer Proposal?

Not all debts qualify for a consumer proposal. Secured debts like a mortgage or vehicle loan, alimony, and fines cannot be included. However, the following unsecured debts are included:

• Credit card debt
• Bank loans
• Lines of credit
• Account overdrafts
• Payday loans
• Tax debt
• Medical bills
• Student loans (only after seven years from your official end-of-study date or the final day you attended classes if you did not complete your program)

How Do I File a Consumer Proposal?

The process of filing and seeing your consumer proposal through to debt relief can be summarized in five steps:

Step 1: Meet with a Licensed Insolvency Trustee (LIT)

The consumer proposal process starts with speaking to a LIT. This is a legal professional who’s experienced at dealing with extreme debt cases. Your trustee will work with you to come up with a legally binding proposal to submit to your creditors. 

Step 2: Draft your proposal and submit to creditors

Your LIT will help you draft your proposal for creditors. They can be written as flexibly as you need, as long as they don’t run longer than five years. Your trustee will submit the paperwork to your creditors and explain why the proposal should be accepted. 

Step 3: Creditors Vote and Decide

It’s now up to your creditors to review your proposal and vote to accept or reject it. You can expect a response from the creditors within 45 days from your filing date.

If you have multiple creditors, votes are counted via majority rules (if the majority of dollars owed is accepted, all creditors are bound by the decision, regardless of their vote). Your LIT will now coordinate any amendments to rejected proposals and help you make payment arrangements. 

Step 4: Make Your Payments

Your proposal can last up to 5 years (or be paid off sooner), when you’re expected to make regular payments. If you miss 3 months of payments, your agreement may be nullified. This means that creditors can resume collections and legal activity, and you no longer have protection under the Bankruptcy and Insolvency Act (BIA).

Step 5. Complete Two Mandatory Financial Counselling Sessions

You must attend two required financial counselling sessions with your LIT during the proposal process. The purpose of these sessions to help the you understand the causes of their financial situation and build better financial habits.

Step 6: Complete the Proposal and Receive Debt Discharge

After your payments have been completed and your debt owing has been paid, your credit rating will begin to rise, assuming you maintain solvency. It may take several years to restore your credit, but your financial advisor can assist. 

What Happens After I File a Consumer Proposal?

If the proposal is accepted by your creditors, all collection efforts will immediately stop, as well as mounting interest and penalties, and any wage garnishments. Then, you will begin making monthly payments through your Licensed Insolvency Trustee, who will disperse the money to your creditors. Upon filing a consumer proposal, a stay of proceedings is put in place, stopping all legal and collection activity, giving the debtor peace of mind while attempting to settle their debt.

What if My Proposal Is Rejected?

A consumer debt proposal is typically a last resort for creditors, who perceive that the debt may not be repaid. In many cases, creditors agree because they want to recover some of the funds that would otherwise be lost forever. Creditors accept most consumer proposals; however, they have the right to reject a consumer proposal. 

When a creditor rejects a consumer proposal, it’s typically because they believe the proposal is not a better solution than bankruptcy.

Common Reasons for Rejection

Your creditors will give you their reasons for rejecting your proposal. Common rejection reasons include:

• Low repayment offer (if the creditor believes that it can get more money through other channels)
• Incomplete or inaccurate financial disclosure (or lack of transparency or honesty)
• Non-realistic proposed repayment schedule
• Concerns about the consumer’s ability to pay
• Recent credit purchases

Negotiation Options

Rejection isn’t the end. There may be negotiation options, including:

• The amount of debt to be repaid
• The length of the repayment period
• Monthly (or bi-weekly) payment amounts
• Adding creditor-specific terms

If you cannot negotiate a successful consumer proposal, you may need to consider filing for bankruptcy. 

Filing for Bankruptcy as a Fallback

If your consumer proposal doesn’t go as planned, you can still file for bankruptcy. This may happen if:

• Your creditors reject your proposal
• You become unable to make your payments
• If you incur new debts that can’t be repaid

Remember, your trustee can help advise you on the best course of action throughout your debt settlement process. 

How Long Does a Consumer Proposal Last?

You have a maximum of five years to complete the proposal. You also have the ability to pay off your consumer proposal early if you choose to (more on that in a bit), but you cannot fall behind by more than three months’ payments; otherwise the consumer proposal is automatically deemed annulled.

How Much Does a Consumer Proposal Cost? 

Consumer proposal fees and expenses must be in accordance with the Bankruptcy and Insolvency Act (BIA) and should be discussed directly with the Licensed Insolvency Trustee (LIT) you are working with. Under the BIA, the LIT receives a $1,500 base fee, plus 20% of the funds distributed to creditors, which are included within the total consumer proposal amount, not added on top.

Typically, an LIT will work with you to determine the monthly amount you can offer your creditors in a consumer proposal. This will vary based on other factors like income, equity, assets, and includes the LIT’s fees. 

For example, $36,000 over 5 years or 60 months works out to $600 per month. However, this payment is only an estimate and can vary, as previously mentioned.

Note:  You should never be billed directly for any services related to filing a consumer proposal. 

Beware of Debt Relief Scams

Only a Licensed Insolvency Trustee (LIT) can file a consumer proposal. There are “debt relief” companies offering consumer proposals, which may try to charge you massive fees only to refer you to an LIT, who will then charge their own fees. Never trust a company or agency that charges for referrals, including referrals to qualified LITs. Consumers can contact LITs directly without the need to go through an agency.

Other red flags indicating a debt relief scam may include:

• Requests for advance payment or fees to the advisor
• Promises that feel too good to be true
• Pressure to act quickly
• Unsolicited contacts (if they contact you without your permission)
• If they give vague answers or don’t have information to provide
• If their website is poorly designed or lacks a physical address

Always make sure your LIT has a positive rating with the Better Business Bureau and is registered as an active Insolvency Trustee.  

How Does a Consumer Proposal Affect Your Credit?

A consumer proposal is a process that allows insolvent debtors to settle their debts and avoid bankruptcy. It’s not considered a “good” thing per se, but it’s also not viewed as negatively as a bankruptcy. 

Credit Impact During the Proposal (R9 Rating)

During the time you’re bound by the proposal, your credit rating will show as an R9, which is the worst credit rating you can have (credit bureaus use an R1-R9 scale, with R1, of course, being the best and R9 being the worst). But remember, it's only temporary. 

Credit Impact After Proposal (R7 Rating)

After you’ve completed the consumer proposal, your credit rating moves up to an R7 for three years. A consumer proposal remains on your credit report for six years from the filing date or three years after completion, whichever comes first. A bankruptcy, on the other hand, is an R9 during the period of bankruptcy, and it remains an R9 for six to seven years following your discharge, depending on the province. The credit impact could also be longer if you're filing a second or third bankruptcy (14+ years).

Can I Get Credit While in a Consumer Proposal?

Because a consumer debt proposal drops your credit rating down to the aforementioned R9, the lowest rating, lenders are unlikely to take you on as a borrower. Your best bet is to attempt to obtain a secured credit card, which may require a small deposit to secure the card, such as $75 for a $500 line of credit.  Once your credit improves, they return the secured amount and register your card as unsecured. Additionally, a secured credit card can help to rebuild your credit following the completion of your consumer proposal.

Can I Pay Off a Consumer Proposal Early?

After you’ve entered into a consumer proposal and made on-time payments for a while, you may just want it to be over with. The good news is that you can pay off a consumer proposal early, before the deadline date, without a penalty charge or interest. The sooner you complete the payment obligation, the sooner your credit rating will move up from an R9 (the worst credit rating) to an R7. 

Is Early Repayment Allowed?

Yes. Work with your LIT to write a flexible proposal that allows for early repayment without penalty. Just make sure you can pay it off within five years. 

Can I Use Personal Loans or Refinancing?

Some people might think they can get a loan to pay off their consumer proposal sooner, but the truth is, once you're in a consumer proposal, you probably won't qualify for a loan. And remember, you'll have to pay interest on that new loan, whereas the consumer proposal is interest-free. It doesn't make much sense to get a loan to pay off a consumer proposal if you're going to pay interest on that loan.

There are also instances where it might make sense to pay off your consumer proposal early through new financing. For example:

• When your mortgage renews, you could add the balance of your consumer proposal to the amount you are remortgaging. This would save you the monthly consumer proposal payment, but remember, you could be paying off your mortgage for the next 20 years.
  
  
• If you are buying a home and need to take on insurance, the Canada Mortgage and Housing Corporation (CMHC) wants you to be out of a consumer proposal for 2 years (plus have job stability, etc.). In this case, if you can’t clear the consumer proposal early using the methods listed above, you may want to try to get a loan from your bank or credit union. But make sure you can afford the loan payments and eventually the mortgage payments, too. After all, you filed a consumer proposal in the first place because you ran into financial difficulties, so don't set yourself up for failure by taking on too much.

Creative Ways to Pay Off Your Proposal Sooner

There are a number of ways to pay off your consumer debt proposal sooner than your scheduled completion date:

1. Put any new earnings or new funds towards the consumer proposal. This could include improved circumstances (like no longer having to cover daycare, or paying off your car loan), tax refunds, or income from a side job or side hustle. 

2. Decrease your expenses, and increase your monthly payments..Make bi-weekly payments to the LIT instead of monthly payments, so you can pay it off a little earlier.

3. Put any extra funds you get, like your tax return or overtime pay, and towards your proposal. 

4. Put any money family members give you towards the consumer proposal.

Pros and Cons of Repayment

There are no penalties for paying off a consumer debt proposal early, either as a lump sum or with advanced payments. It also gets you out of debt quicker and speeds up the process of having negative information come off your credit report. However, you need to make sure that you aren’t jeopardizing your finances by paying off your consumer proposal earlier. If you’re making bigger payments, this could make it harder to afford other expenses. Plus, if your income doesn’t support a larger payment, you could wind up defaulting on your proposal and other debts. 

The only consideration of repaying early (a potential con) is that you may have less money available for your daily necessities and living expenses. You may need to adjust your lifestyle and spending habits more drastically to repay your loan quicker. 

Another option is to park extra money in a high-interest savings account and make a lump sum payment to the proposal every 4-6 months.  This way, if you need the money for an emergency, it's available, but if not, you can make a larger payment towards your proposal.

What Happens If I Default on My Consumer Proposal?

If you do not consistently make your payments or default on your consumer proposal for three months (three months in arrears), the proposal can become void. Reopening your proposal will require the approval of the LIT and may result in additional upfront payments.  It's best not to default, as the reinstatement process can be complicated and costly.

What Happens After You Complete a Consumer Proposal?

You’ll likely feel a huge weight lifted off your shoulders once you successfully complete your consumer proposal and are out of debt. It’s an exciting time, but also a critical time to make sure you don’t fall back into debt. 

Continue with credit and financial counselling to help you stay on track and live within your means. The more responsible you can be with your credit and finances, the faster you can earn back a positive credit score. 

Consumer Proposal vs Bankruptcy: What’s the Difference?

If you’re still unsure if a Consumer Proposal or Bankruptcy is right for you, consult this quick reference chart:

Pros and Cons of Consumer Proposals

There will be pros and cons to consider before entering into a consumer proposal:

Pros

• You have support and counselling to repay your debt
• You can have a portion of your debt forgiven (typically 50-60% but can be upward of 70%)
• You have the option to move to bankruptcy at any time if needed.
• You can keep your assets 
• You can consolidate your debts into a single predictable payment
• Emotional relief and reduced stress from juggling snowballing debt

Cons

• Doesn’t include secured debts like mortgages or those backed by collateral
• It will affect your credit rating during the proposal and for a total of approximately 6 years after it has been completed.
• Your proposal can be nullified if you default on 3 months of payments
• Your proposal requires creditor acceptance
• There is a longer repayment term than bankruptcy
• You need to pay monthly trustee fees

Is a Consumer Proposal Worth It?

Is it worth it? That really depends on your personal circumstances, so be sure to weigh the pros and cons of each of the consumer proposal questions above. Many consumers prefer the flexibility of entering into a consumer proposal over filing for bankruptcy. 

If you are not ready to enter a consumer proposal, there are other debt management options, such as debt consolidation loans and Debt Consolidation Programs (DCPs), that may be more suitable for you. A credit counsellor can help you make the right decision based on your unique circumstances.

Need Help Deciding If a Consumer Proposal Is Right for You?

If you have other questions about debt or you're just seeking debt relief in general, give us a call at 1(800)267-2272, and we'll set you up with a free credit counselling appointment. One of our certified Credit Counsellors will be able to lay out all of your debt consolidation options for paying off your debt, giving you the pros and cons of each option, and then provide you with your next steps. Alternatively, chat with our AI-powered debt management agent Mariposa for 24/7 support.