Thinking About a Consumer Proposal? Questions to Ask First

This blog is proudly presented by easyfinancial as part of the Future You Money Project. 

If you're overwhelmed by unmanageable debt, you're likely looking for a way to get relief without having to file for bankruptcy. A consumer proposal may be worth exploring if you can't repay your debt in full but can afford to make partial repayments. However, it is a formal insolvency process with a temporary impact on your credit rating and score.

Both a consumer proposal and bankruptcy are formal insolvency processes under Canada’s Bankruptcy and Insolvency Act. Both can provide relief from eligible debt, but both can also significantly affect your credit history and future access to credit. They differ in how repayment, income, assets, and other obligations are handled.

A consumer proposal isn't the right fit for everyone. It can affect your finances for years, and only a Licensed Insolvency Trustee (LIT) can administer one.

Before you decide how to move forward, it's worth understanding how the consumer proposal process works, what it costs, and what alternatives may be available.

Making an informed decision about debt means considering more than immediate relief. Credit Canada's Future You Money Project, proudly presented by easyfinancial, encourages Canadians to look beyond today's financial pressures and consider how their financial decisions can shape their future.

What is a consumer proposal? 

A consumer proposal is a formal, legally binding arrangement under Canada's Bankruptcy and Insolvency Act, administered by a Licensed Insolvency Trustee (LIT). It allows an eligible person who cannot repay their debt in full to propose paying creditors a percentage of what they owe, extend the repayment period, or both.

A consumer proposal fixes the amount you agree to repay, stopping interest from accumulating on the debt included in the proposal. This can provide significant relief if you're struggling with high-interest debt.

Filing also provides immediate legal protection through a stay of proceedings. This generally prevents creditors included in the proposal from pursuing collection calls, wage garnishments, and most legal action over the debt.

A consumer proposal is a regulated legal process, not a loan or a debt consolidation product. If creditors accept the proposal and you meet its conditions, you can be legally released from the debt included in it. You must still keep up with your regular payments on secured debt, such as a mortgage or car loan, if you want to retain the associated property.

Who qualifies for a consumer proposal? 

To qualify for a consumer proposal in Canada, you must be insolvent (meaning you cannot pay your debt as they come due), meet the legal debt limit, and be able to make payments under an arrangement your creditors accept.

This generally means you must owe at least $1,000 in debt and meet the legal definition of an insolvent person under the Bankruptcy and Insolvency Act. Your total debt must not exceed $250,000, excluding a mortgage secured by your principal residence. You must be unable to pay your debt as they come due or otherwise meet the legal definition of insolvency.

If your debt exceeds the consumer proposal limit, a Division I proposal may be an alternative. Available to individuals and businesses, this formal arrangement allows debtors to negotiate repayment terms with creditors without a maximum debt limit. However, creditors must approve the proposal, and it must also receive court approval.

“A good candidate for a consumer proposal is someone who tried to manage the debt on their own, spoke with a non-profit credit agency first and realized that they cannot afford to repay 100% of their debt through a Debt Consolidation Program, but is able to make partial repayments and wishes to avoid filing for bankruptcy,” says Mike Bergeron, Counselling and Client Services Manager at Credit Canada.

Avoiding bankruptcy should not be the only factor in the decision. A consumer proposal is also a formal insolvency process that has a significant impact on your credit rating and score. Your income and essential expenses also matter. You need to be able to sustain the proposed payments, even if you can't repay the full amount you owe. A Licensed Insolvency Trustee (LIT) can assess your finances and explain whether a proposal is feasible.

If you cannot afford even partial repayments, personal bankruptcy may be worth discussing with an LIT. They can also help determine whether your income and assets are protected from most creditor collection efforts, which may affect whether bankruptcy is necessary.

How does a consumer proposal work, step by step? 

The consumer proposal process involves five main steps, from your initial assessment with a Licensed Insolvency Trustee to completing your payments and fulfilling the proposal's requirements.

The process at a glance: Financial assessment → Proposal filed → Creditor review (45 days) → Payments and counselling → Certificate of full performance.

Meeting with a Licensed Insolvency Trustee 

The first step is meeting with a Licensed Insolvency Trustee (LIT) to review your financial situation and discuss your options.

LITs and non-profit credit counselling agencies offer free, confidential initial consultations, so you can get professional guidance without committing to a particular debt solution.

The trustee will assess your income, debt, assets, and the reasons why you're struggling to repay what you owe. If a consumer proposal appears suitable, they'll help develop an offer that reflects what you can realistically afford to pay. You'll need to provide a complete picture of your finances so the trustee can assess your circumstances and prepare the necessary documents. This can include:

• Proof of income, such as recent pay stubs or benefit statements
• Your most recent CRA Notice of Assessment
• Statements for credit cards, loans, and other debt
• Bank account statements
• Details of your monthly expenses, including housing, utilities, and transportation

Filing and the creditor vote 

If you decide to proceed, the Licensed Insolvency Trustee (LIT) files your proposal with the Office of the Superintendent of Bankruptcy (OSB) and sends it to your creditors.

Once filed, a stay of proceedings generally stops collection action on the unsecured debt included in the proposal, including wage garnishments and lawsuits. Creditors then have 45 days to review the terms.

Most consumer proposals are accepted without a meeting of creditors. A meeting is only required if creditors representing at least 25% of the value of proven claims (debt formally submitted by creditors) request one, or the official receiver (an OSB representative overseeing the process) directs one.

Despite the name, a meeting of creditors isn't a courtroom hearing or interrogation. It may be held virtually and provides creditors an opportunity to discuss and vote on the proposal. They may also suggest changes, such as a slightly higher monthly payment, rather than reject the proposal outright. Your LIT will negotiate with creditors on your behalf.

If no meeting is requested or directed within 45 days, the proposal is deemed accepted. If a meeting is held, creditors vote on whether to accept the proposal, and your LIT can explain what the outcome means for your options.

Making payments and completing the proposal 

The repayment term cannot exceed five years, but you don't necessarily have to take that long. You can pay off your proposal early without a prepayment penalty, so extra money from a tax refund, raise, or bonus could help you complete it sooner.

You must also complete two mandatory financial counselling sessions before your Licensed Insolvency Trustee (LIT) can issue your Certificate of Full Performance, confirming that you've fulfilled the proposal's terms.

Keeping up with payments is essential. If you miss three monthly payments, whether consecutively or at different points during the proposal, it will be automatically deemed annulled under the Bankruptcy and Insolvency Act. This means the debt covered by the proposal can become payable again, and creditors may resume collection activity.

If you lose your job or face an unexpected financial emergency, contact your LIT immediately. They may be able to arrange an amendment or discuss other options before you default.

What it costs and how it affects your credit 

The settlement offer: how much you agree to repay 

A consumer proposal allows you to repay a portion of your eligible unsecured debt, rather than the full balance.

The amount repaid varies based on your income, assets, debt, ability to pay, and what your creditors are willing to accept. Your Licensed Insolvency Trustee will help develop an offer based on your circumstances. Creditors then consider whether the proposed repayment is acceptable.

The administrative fee: how the Licensed Insolvency Trustee (LIT) is paid 

The LIT's fees are regulated by federal law and included in the payments you make under the proposal. You don't pay a separate trustee fee on top of your agreed repayment amount.

Watch out for debt consultant fees: You don't need to pay a third-party debt settlement company or consultant an upfront fee to connect you with an LIT. You can contact a trustee directly, and initial consultations are free. Ask your LIT to explain the total amount you'll repay and your payment schedule before deciding whether to proceed.

A consumer proposal also affects your credit report. “Since a consumer proposal is administered under the Bankruptcy and Insolvency Act, the credit impact is quite similar to bankruptcy,” explains Mike Bergeron.

A consumer proposal will affect your credit history and may make it harder to access new credit while it appears on your credit report. According to the Financial Consumer Agency of Canada, Equifax and TransUnion generally remove a consumer proposal three years after the included debt is paid or six years after the proposal is signed, whichever comes first.

Five things Canadians get wrong about consumer proposals 

Consumer proposals are often misunderstood, which can make it harder to assess whether one fits your circumstances. Here are five common misconceptions worth clearing up before you decide.

1. Myth: Consumer proposals aren't part of the Bankruptcy and Insolvency Act 

Reality: Consumer proposals are a formal legal process governed by the Bankruptcy and Insolvency Act (BIA).

In fact, they are a formal legal process governed by the Act, which sets out the eligibility requirements, filing process, and role of the Licensed Insolvency Trustee (LIT). Mike Bergeron, Counselling and Client Services Manager at Credit Canada, identifies this as the most common misconception his team encounters.

2. Myth: You'll lose your home or car if you file a consumer proposal 

Reality: Filing a consumer proposal doesn't automatically mean losing your home or vehicle.

A consumer proposal primarily addresses unsecured debt, such as credit card debt and personal loans. You can generally keep assets secured by a mortgage or car loan as long as you continue making the required payments.

However, if you fall behind, the secured lender may still have the right to repossess the vehicle or take steps to enforce its mortgage.

3. Myth: You have to repay everything you owe 

Reality: A consumer proposal allows you to negotiate repayment of only a portion of your unsecured debt.

Rather than repaying your creditors in full, you offer an amount you can reasonably afford over a period of up to five years.

Once accepted, the proposal becomes legally binding on the creditors covered by it. If you complete the agreed payments and meet the other requirements, you can be released from the included debt.

4. Myth: A consumer proposal is the same as bankruptcy

Reality: A consumer proposal and bankruptcy are separate legal processes, but both are formal insolvency proceedings with significant impact on your credit report and score.

Both processes are administered by a Licensed Insolvency Trustee under the Bankruptcy and Insolvency Act. Both can provide legal protection from collection activity on eligible debt, and both can result in a legal release from certain debt when their requirements are completed.

A consumer proposal reduces your total debt to one lower, interest-free monthly payment based on what you can realistically afford and gives you fixed, predictable payments agreed upon with your creditors.

In bankruptcy, certain non-exempt assets may be sold to repay creditors, and you may have to make additional payments if your income exceeds a government-set threshold. The length of the process depends on your circumstances, including whether it's your first bankruptcy.

Neither option is appropriate in every situation. A Licensed Insolvency Trustee can explain the expected payments, treatment of assets and income, credit implications, and other obligations under each option.

5. Myth: A consumer proposal ruins your credit forever 

Reality: A consumer proposal affects your credit, but you can rebuild your credit history after completing it.

A consumer proposal is recorded on your credit report and can make it harder to qualify for new credit while it remains there.

However, its impact isn't permanent. Once you've completed the proposal, you can begin rebuilding your credit over time through consistent payments, responsible borrowing, and good financial habits.

Questions to ask a Credit Counsellor or Licensed Insolvency Trustee 

Before committing to a consumer proposal, ask questions that clarify your eligibility, obligations, costs, and alternatives. These questions can help you compare your options and make an informed decision.

1. Do I qualify for a consumer proposal? A good answer should explain how your debt, income, assets, and financial circumstances affect your eligibility.
   
2. Could I repay my debt another way? Ask whether a Debt Consolidation Program through a non-profit credit counselling agency or changes to your budget could help you repay your unsecured debt in full.
   
3. How much would I repay in total? Get a clear breakdown of your proposed payments, repayment term, and how the trustee's regulated fees are covered.
   
4. What happens if creditors reject my proposal? Understand what happens next, whether revised terms may be possible, and which alternatives are still available to you.
   
5. Which debt would be included? Ask which debt the proposal covers and which obligations, including secured debt like a mortgage or car loan, you would remain responsible for.
   
6. How would a proposal affect my credit? Ask how it would appear on your credit report, how long it would stay on your credit report, and what to expect after completion.
   
7. What if I miss a payment or my income changes? A useful answer should explain the consequences of missed payments and what options you may have if your circumstances change.
   
8. What happens to debt I've co-signed, or debt I share with someone else? A consumer proposal generally doesn't release a co-signer, guarantor, or joint borrower from their responsibility for the debt. Creditors may still pursue them for the outstanding balance, even if your proposal is accepted.
   
9. How can I verify the trustee's credentials? Only an LIT can administer a consumer proposal, and you can verify credentials through the federal directory.

Call a certified Credit Counsellor for a free, confidential review of your debt relief options, including a consumer proposal, at 1 (800) 267-2272.

Alternatives worth comparing first 

A consumer proposal is one way to address unmanageable debt, but it isn't the only option.

A Debt Consolidation Program (DCP), also known as a Debt Management Plan (DMP), can help you consolidate and repay eligible unsecured debt in full, often with interest relief negotiated with creditors. You make payments through a non-profit credit counselling agency, which distributes them to your creditors. If you can afford to repay the principal but need help managing interest and payments, Credit Canada's Debt Consolidation Program may be worth comparing before pursuing formal insolvency.

Bankruptcy is another option that can provide relief when your debt is unmanageable, and repayment isn't realistic. However, it comes with its own legal requirements and has different implications for your credit report and score. Compare the differences between bankruptcy and a consumer proposal with a Licensed Insolvency Trustee (LIT) before deciding which option might be best.

Restructuring your budget may also be enough if your financial shortfall is temporary. Reviewing spending, negotiating bills, or increasing income could help you get back on track without a formal debt-relief process. This works best when your debt remains manageable, and you can meet your other financial obligations.

Future You: What to weigh before you file 

A consumer proposal can make monthly payments more manageable. Bankruptcy can provide relief when repayment is not realistic. However, both are significant legal and financial decisions that can affect your credit history, access to new credit, and financial plans for years.

The Future You Money Project, proudly presented by easyfinancial, encourages Canadians to consider not only the immediate relief a financial decision offers, but also what it means for the future.

During a consumer proposal, access to new credit may be limited. Lenders may be reluctant to approve applications, and taking on additional borrowing can make it harder to keep up with your proposal payments.

If you are planning a major financial step, such as buying a home, your ability to qualify for a mortgage may be affected. Requirements vary by lender and mortgage insurer, so consider speaking with a qualified mortgage professional about your longer-term homeownership plans.

Rebuilding your credit history and demonstrating consistent repayment habits during this period can help put you in a stronger position when you're ready to apply.

Before filing a consumer proposal, consider your priorities, upcoming expenses, and longer-term financial goals. The right debt-relief option should address today's financial pressure while still leaving you with a workable path toward tomorrow's plans.

Conclusion

You don't have to decide alone whether or not to file a consumer proposal. Understanding the costs, obligations, and alternatives can help you choose a path that fits your circumstances and future plans.

Before committing to any formal process, speak with a certified Credit Counsellor at Credit Canada for a free, confidential review of your debt relief options. Call 1 (800) 267-2272 to talk through your next steps. Or, chat with Credit Canada’s AI-powered debt management agent, Mariposa, to learn more about your options anytime.

The Future You Money Project 

The Future You Money Project is proudly presented by easyfinancial. We thank easyfinancial for its support in helping bring free financial tools, real stories, and practical resources to Canadians, empowering them to make more informed decisions and take positive steps towards a stronger financial future.

easyfinancial offers access to credit, including personal and home equity loan options, to Canadians who are underserved by traditional financial institutions. Beyond lending, easyfinancial provides financial education resources, tools, and calculators designed to help Canadians better understand their finances, explore their options, and make confident financial decisions.