Consumer Proposal In Canada

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When you cannot pay off your debts, bankruptcy isn’t the only option. A consumer proposal may give you the debt relief you need. In a consumer proposal, you and your creditors agree on the amount you owe and a payment schedule. Only a licensed insolvency trustee (LIT) can negotiate a consumer proposal on your behalf.

What Is a Consumer Proposal?

It’s important for those experiencing financial debt to understand that a consumer proposal is not a contract or agreement that can be created alone. Unlike a debt consolidation loan that has no legal protection, a consumer proposal is a binding legal agreement between a debtor and their creditors that must be crafted by a Licensed Insolvency Trustee (LIT). During the consumer proposal process, the insolvency trustee will work with you to make an offer to pay your creditors a percentage of what you owe them. Trustees can also get you more time so that you can pay off your total debt. It’s a better option than simply paying off the minimum payments on your own, as a consumer proposal can include freezing your interest.

A consumer proposal cannot exceed five years. The payments you make are submitted through the Licensed Insolvency Trustee, who then distributes the money to your creditors. The insolvency trustee is also permitted by law to hold a portion of each payment for their fees.

When filing a consumer proposal, there are some responsibilities that you’ll have:

Give your trustee a complete list of all of your assets and liabilities, such as properties or debts.
Attend the meeting of creditors if a meeting is requested.
Begin to pay a lump sum or a periodic payment to the insolvency trustee.
Adhere to any of the conditions made in the consumer proposal.
Attend two counselling sessions either in-person or by video conferencing.
Advise the LIT of any changes to your financial situation.

If you neglect to follow the terms of your consumer proposal, you will forfeit the protection and debt relief that the proposal can provide. In the event that a consumer proposal is not accepted, your Trustee will give you advice on other options for debt solutions, such as declaring bankruptcy.
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Definition & Legal Framework

A consumer proposal is a formal, legally binding process administered by a licensed insolvency trustee (LIT). In a consumer proposal, your LIT will work with you to make an offer to your creditors; this offer can reduce the amount of debt you have to pay, extend the amount of time you have to pay off your debts, or both. The legal framework for consumer proposals is maintained by the Office of the Superintendent of Bankruptcy.

Who Is Eligible?

Individuals with unsecured debts that do not exceed $250,000 may be eligible for a consumer proposal.

Benefits Of Filing A Consumer Proposal

Debt Reduction Potential

Filing a consumer proposal can substantially reduce the amount of debt owed to your creditors. The amount a consumer proposal can reduce your debt varies depending on a number of factors; a 10%-80% reduction in debt is a typical range, with most debt reduction falling somewhere in the middle (40%-60%).

Fixed, Affordable Payments Over Up To 5 Years

Part of the advantage of a consumer proposal is that your debt is paid off with fixed monthly payments that you can afford. The goal of a consumer proposal is compromise; with proper budgeting, debtors who agree to a consumer proposal should be able to make their monthly payments while still being able to pay for essentials.

Stops Interest, Collections, & Wage Garnishment

When a consumer proposal is filed, a stay of proceedings is put into place. This legal order means that creditors cannot garnish your wages, freeze accounts, or take other collection actions. You also stop paying interest when a consumer proposal is accepted; it is a flat, interest-free monthly payment plan.

Asset Protection & You Keep Your Home & Car

Unlike in bankruptcy, your assets are protected in a consumer proposal; you keep all of your personal property, household items, your home, and your car. These assets influence the terms of your consumer proposal, but they cannot be seized by creditors if the proposal is accepted.

Consumer proposals only affect unsecured debt; debtors with collateral can still seize the collateralized (secured) assets for non-payment.

Consumer Proposal Vs. Other Debt Solutions In Canada

There are a variety of different debt relief solutions in Canada, each with its own advantages and disadvantages. A licensed insolvency trustee (LIT) can help you choose the right debt solution for your situation. We created this comparison table to help you learn more about the advantages and disadvantages of each debt solution:

Debt Solution	Bankruptcy	Consumer Proposal	Debt Consolidation	Credit Counselling
Asset Protection?	Some	Yes	N/A (though assets may be used as collateral in some cases)	No
Negatively affects credit score?	Yes	Yes	Situation specific	If enrolled in a debt management plan, your credit score will be negatively affected
Stay of proceedings?	Yes	Yes	No (but debt is paid off by new loan proceeds, so collections may stop)	No
Debt reduction	Yes	Yes	No (but interest rates may be lower)	No
Requires an LIT?	Yes	Yes	No	No
Best when	No other options	Can afford to budget for fixed monthly payments	You have a high credit score and can make monthly payments	You need to get your budget under control, but aren’t in unmanageable debt

How A Consumer Proposal Works

A consumer proposal begins with a free, confidential consultation with a licensed insolvency trustee (LIT). Your LIT will review options with you, including credit counselling, debt consolidation, bankruptcy, and consumer proposals.

During this initial consultation, you and your LIT will list all of your debts, assets, income, and expenses. Should a consumer proposal be the right choice for you, your LIT will work with you to create a proposal that makes sense to both you and your creditors; with your approval, they will file the consumer proposal.

Your creditors have to accept the consumer proposal; they have 45 days to vote on the proposal. Votes are not equal between creditors; the ones who you owe the most money have the most say. Should the majority of the dollars owed vote in favour of the proposal, it is accepted; if not, a creditor meeting is called to see if terms can be agreed upon.

Once the consumer proposal is accepted, you must make the agreed-upon payments and attend two credit counselling sessions. The payment period for the proposal cannot exceed 5 years. Once your creditors are paid and the counselling session is complete, you receive a certificate of full performance, and any remaining balance on the debts is extinguished.

What Debts Are Included And Excluded From A Consumer Proposal

Eligible Unsecured Debts

Consumer proposals eliminate almost all unsecured debts, including debts incurred through:

Credit cards
Lines of credit
Personal loans and payday loans
Income tax

Consumer proposals can also eliminate government-issued student loan debts, provided you have been out of school for at least 7 years.

Ineligible Debts

If you plan to keep the collateral, secured debts are ineligible for consumer proposals. For example, debts such as:

Mortgages
Car loans
Debts secured by other collateral (RV, quad, etc.)

Mortgages and car loans are always considered secured, because the house or car purchased with the loan is the collateral.

If you don’t plan to keep the asset/collateral, then you can include these secured amounts in a proposal, and any shortfall the creditor incurs following liquidation of the asset will be included in your proposal.

Government-issued student loan debt is ineligible for relief through a consumer proposal, even though it is typically not secured. In some circumstances, your licensed insolvency trustee may be able to discharge student loans if you have been out of debt for 5 or more years using the hardship provision.

Impact On Your Credit Rating

Consumer proposals have a negative impact on your credit score. Consumer proposals will appear on your credit report; potential creditors can see that you have filed a consumer proposal for six years after the date the proposal is filed, or three years from the final payment under the consumer proposal, whichever of these dates is earlier.

You will likely find it difficult to take out loans or get credit cards while you are paying the consumer proposal, and the credit cards and loans that you get after the proposal is paid off, but still reporting on your credit bureau, may have higher than average interest rates.

Fortunately, all consumer proposals come with two mandatory credit counselling sessions. In these sessions, you will learn how to rebuild your credit score.

FAQ

What Happens When You File a Consumer Proposal?

Your Licensed Insolvency Trustee will file the proposal with the Office of the Superintendent of Bankruptcy (OSB). After filing, any payments you have to make with your creditors will be halted. If there are any legal actions relating to the debt you may be facing, they will be stopped as well.

A report will be submitted to the creditors, which outlines your situation and the cause of your debt problems. The report will include your LIT’s opinion on whether the proposal should be accepted.

How Much Debt Do You Need for a Consumer Proposal?

To file for a consumer proposal, you must owe at least $1,000 in unsecured debt to qualify. It’s important to know how much you have in total debt. To qualify as a single individual, the maximum debt that you can have is $250,000. As for married couples, you can owe up to $500,000 together.

Do Most Consumer Proposals Get Accepted?

When a proposal is filed, your creditors will have 45 days to vote on whether they accept or reject the consumer proposal. If there’s no meeting of creditors requested, that means that the proposal will be accepted by the creditors and binds all of those creditors under the consumer proposal terms, even those that didn’t vote before the deadline.

For a meeting of creditors to be held, creditors owed at least 25% of the total value of the proven claims, as filed on the 45th day after the initial proposal was filed, must request a meeting. LITs can also be directed by the Office of the Superintendent of Bankruptcy (OSB) to call for a meeting of creditors during the same time frame. A meeting of creditors must be held within 21 days after being called. The creditors will then vote to either accept or reject the proposal, or request that you make a change to the proposal terms. If the majority of the creditors vote to accept the proposal either as it was originally filed, or following a change to the terms, then the proposal will have been approved.

If the consumer proposal was not accepted, you may also have to consider other debt consolidation options or declare bankruptcy.

What Is the Difference Between Consumer Proposal & Bankruptcy?

A consumer proposal is a binding agreement made between you and your creditors. This proposal is administered by an LIT, who helps negotiate the terms of your debt repayment. The legally binding agreement protects you from debt collectors and can freeze the accumulated interest.

Bankruptcy is a legal process that relieves you of the debts you’re facing in your financial situation. You can get a free consultation with an LIT to go over your debt-relief options; in this appointment, a Trustee will discuss if bankruptcy might be your best option. Filing for bankruptcy will show on your credit history for six years following your discharge from the process, but the process of bankruptcy can be accomplished in as little as nine months.

There are some differences involved between these two alternatives, such as:

With bankruptcy, you will have to submit monthly reports on your income and expenses. Consumer proposals don’t require any reporting duties.
Consumer proposals allow you to keep all of your assets, while bankruptcy may require you to surrender any non-exempt assets.
The duration varies for these two debt solutions, with consumer proposals taking up to 5 years and bankruptcy taking as little as 9 months.
The cost associated with consumer proposals is covered as you make your monthly payments. If you’ve declared bankruptcy, the cost involved will depend on your average monthly income, and is calculated specifically for each case.
Consumer proposals will show for no longer than 6 years on your credit score (sometimes less), where bankruptcy can remain on your history for 6-7 years.

Will a Consumer Proposal Affect My Credit Rating?

If you’ve filed a consumer proposal, it will show on your credit report. The proposal will be removed after three years from the date you have completed the proposal or six years from the date it was filed, whichever comes first.

What Happens If You Miss Payments on a Consumer Proposal?

Consumer proposals allow you to make monthly payments. If you were to miss three payments, or your payment is three months past due, the proposal will be annulled. When annulled, the agreement made on paying your debts will cease, allowing your lenders to once again be able to collect the money you owe them.

What Happens When the Consumer Proposal Is Satisfied?

When the conditions involved in your consumer proposal are satisfied, you will be released from the debts included in the proposal. You won’t be required to pay anything further on your debts. You will then receive a certificate of full performance.

Seeking debt relief can be a difficult task, especially if those debts are weighing you down. No matter how hard of a struggle it can be, we assure you that there are debt solutions available to assist you. Make an appointment for a free consultation today, and we can see if a consumer proposal is the right option for you.

Speak With A Licensed Insolvency Trustee Now

Ready to break free from debt? Book your free, confidential consultation with a Licensed Insolvency Trustee today and explore your consumer proposal options. We can also help you explore other debt relief solutions.

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