Consumer Proposal
Consumer Proposal Guide
We understand why you’re worried. You have debt, but you may also have assets you wish to keep and the idea of filing for bankruptcy is terrifying. You’re thinking about long-term financial impacts and wondering how to avoid them. If this sounds like you, a Consumer Proposal may be just the Life-Changing Debt Solution you’re looking for.
What debts are included in a Consumer Proposal?
How to file a Consumer Proposal in Canada
Consumer Proposal pros and cons
What Happens When You File a Consumer Proposal?
Is a Consumer Proposal the Right Option for Me?
What is a Consumer Proposal?
A Consumer Proposal is a federally regulated and legally binding process available to insolvent Canadian individuals. A Consumer Proposal provides for a reduction of debt owed to unsecured creditors, or an extension of time for repayment of the debt, or both.
What Debts are Included in a Consumer Proposal?
A consumer proposal includes unsecured debt. Unsecured debt is any type of debt not secured by an asset and generally includes the following:
- Credit cards – all balances as of the date of filing on your Visa, Mastercard, Amex, etc.
- Personal loans – lines of credit, consolidation loans, renovation loans, etc. providing no assets have been used to secure the debt
- Payday loans – both payday advances and installment loans obtained from a Payday lender generally unsecured
- Student loans – if you ceased to be a student at least seven years before you file a consumer proposal, those debts would be extinguished by the consumer proposal. If you haven’t ceased to be a student for at least seven years before you file a consumer proposal, a portion of the student loans may be included and discharged by the consumer proposal
- Income tax debt – amounts owing for personal income tax (including penalties and interest), GST debts, Canada Child Benefits overpayments, CPP and OAS overpayments, are unsecured debts and discharged
How to File a Consumer Proposal in Canada
The first step in determining whether a Consumer Proposal is the best choice for you is to meet with one of our Licensed Insolvency Trustees to review all of your options. The steps for a Consumer Proposal are as follows:
- Set up a Free, Confidential Consultation
- Prepare Your Consumer Proposal
- Proposal is Reviewed By Creditors
- Consumer Proposal Duties
- Debt-Free. For Life.
Learn more about the consumer proposal process.
Consumer Proposal Pros and Cons
| Consumer Proposal “pros” | Consumer Proposal “cons” |
|---|---|
| Avoid bankruptcy and associated consequences | Proposal is a legislated process requiring full disclosure of all aspects of your finances |
| Formal, legally binding process means clear rules and expectations | Rules and regulations can make some aspects of the process seem inflexible |
| Provides immediate protection from unsecured creditors (stay of proceedings) | Protection does not apply to secured creditors who may seize assets if you default on payment |
| Interest clock stops on debts included in the Proposal, except those falling under Section 178 | Interest continues to accrue on secured debts and debts falling under Section 178 |
| Deals with all unsecured debts including credit cards, lines of credit, payday loans, trade suppliers, government debts (income taxes, student loans, medical service plan premiums) and debts owed to family and friends | You cannot pick and chose who gets included in your consumer Proposal, which may cause embarrassment if you personally know one or more of your creditors |
| Limited ability to defer monthly payments | Proposal is deemed annulled when the payments are default in an amount equal to three months of payments |
| Impact on credit rating is less severe than bankruptcy | There is a negative impact on credit rating and credit rating will need to be rebuilt upon completion of Proposal |
| You maintain ownership and control of your assets, unless the Proposal provides otherwise | Proposal cannot deal with debts secured against specific assets and you will continue to be responsible for the maintenance and costs associated with your assets - this could be troublesome if a primary cause of your financial difficulties is related to maintenance of expensive assets |
| Can pay out Proposal term early if you have the financial ability | Too much focus on paying out Proposal early can sacrifice short term savings and other financial goals |
| Reduction of total unsecured debt is possible | Creditors vote on the Proposal and may reject an offer where it is perceived your Proposal is unfair or materially insignificant |
| You may hold a credit card during a Proposal | Due to impact on credit rating, access to credit may be limited during Proposal term |
| Proposal payments in good standing can be considered by some lenders as part of a credit check during your Proposal, such as when applying for a vehicle loan | Be prepared to pay high interest rates on loans obtained during Proposal |
What Happens when you File a Consumer Proposal?
Upon filing the Consumer Proposal, there is an immediate stay of proceedings. This means that creditors cannot commence or continue collection activity for unsecured debts. The consumer proposal is a new arrangement with the unsecured creditors that allows an individual to pay less than the amount owing to their unsecured creditors. Once the creditors agree to the new payment arrangement, the individual proceeds to make the agreed payment(s) to the Licensed Insolvency Trustee’s office for the term of the consumer proposal. The individual also has to attend two (2) financial counselling sessions during the term of the consumer proposal which deal with budgeting and setting and achieving financial goals.
Is a Consumer Proposal the Right Option for Me?
A Consumer Proposal may be the right choice if you:
- Have debt that totals less than $250,000, excluding the mortgage on your principal residence. If your debt is higher than this amount, you still have options
- Need more time or a realistic plan to pay back your debts
- Want relief from accumulating interest and wage garnishments
- Want to keep assets that may not be exempt or protected in a bankruptcy
Alternatives to Consumer Proposal
A Consumer Proposal is one of many options available to consumers who are looking for a manageable way to eliminate debt while avoiding Bankruptcy. It is important for consumers to carefully consider all options before choosing a debt solution, as the options available to consumers need to fit an individual’s unique financial situation.
Bankruptcy
Bankruptcy is a legal process that provides immediate relief from your unsecured debts, the most common example being credit card debt. It is important to note that certain types of debt are not extinguished or addressed by declaring bankruptcy, which means it's not necessarily an all-encompassing solution for your financial challenges. A Licensed Insolvency Trustee will explain exactly how bankruptcy works, so you can make the best decision for your unique financial situation.
Orderly Payment of Debts (OPD)
Orderly Payment of Debts (OPD) is a debt repayment arrangement available only in the provinces of Alberta, Saskatchewan, and Nova Scotia. OPD begins with an application to the court for an order consolidating unsecured debts into one monthly payment, with an interest rate of five percent and a payment period of up to three years. OPD is legally binding on many types of unsecured creditors, providing that they have consented to be included in the arrangement when they are owed more than $1,000. Certain types of debts such as income taxes or business debts are not included. OPD is administered by provincial credit counsellors.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is an informal (i.e., not legally binding) debt repayment plan which is arranged through a licensed, accredited, non-profit credit counselling organization. A credit counsellor works with the debtor and creditors to develop a more manageable and affordable debt repayment plan. Under a DMP, credit card and similar unsecured debt payments are consolidated into one payment which is made to the credit counselling agency, which then distributes the payment to the creditors. Licensed, accredited, non-profit credit counsellors are effective in negotiating with creditors to reduce or eliminate interest, which helps reduce overall costs. Many types of debts, such as unpaid income taxes, student loans, and other government debts cannot be part of DMP. Your debts must be in good standing or not in collections, in order to qualify for a DMP.
Consolidation Loan
A Consolidation Loan is a loan provided by a bank, credit union, or finance company to pay out other debts and consolidate several monthly payments into one monthly payment. A consolidation loan requires an application and approval by the lender, who will consider the debtor’s credit rating, income, assets, and debts. Many lenders require the debtor to provide security or collateral for a consolidation loan. Interest rates on consolidation loans can be high and will vary from lender to lender.
Deciding which strategy will work best can be difficult without professional advice, as the right strategy will depend on an individual’s income and expenses, assets and liabilities, family situation, and other factors. A Licensed Insolvency Trustee is qualified to provide an assessment and explain the various debt repayment strategies, including the merits, consequences, and costs of the various options. A meeting with a Licensed Insolvency Trustee is free, confidential, and unbiased, and can help you find the best debt solution for your unique financial situation.
Frequently Asked Questions
When it comes to costs involved in filing a Consumer Proposal, there are a couple of important points. First, costs are federally regulated and prescribed by a tariff contained in insolvency legislation. Second, all costs associated with filing a Consumer Proposal are paid from the Consumer Proposal funds, so the consumer is not billed for costs at any time during the Consumer Proposal. In effect, the Consumer Proposal funding covers administration costs and payments to creditors. For more details, visit our Cost of a Consumer Proposal page.
There is no additional cost to you over and above your proposal payments. Proposal fees are set out in the bankruptcy law and determined by way of a tariff calculation. This means that the fees are deducted from your payments into the proposal.
For three years after your final payment, a note will appear on your credit report indicating that you entered into an arrangement to settle your debts. This may make it more difficult to secure new loans, credit cards, and other forms of financing. It may cause lenders to require a co-signer to issue new debt or mean you will be charged higher interest rates if you do get approved. As part of the Consumer Proposal, you are required to attend two financial counselling sessions where we budgeting and setting and achieving financial goals. We also discuss credit rebuilding, if having access to credit is necessary for you to achieve your financial goals.
For more details, visit our Cost of a Consumer Proposal page.
A Consumer Proposal can be an excellent option to eliminate your unsecured debt while protecting certain assets you may otherwise have to give up in a Bankruptcy. It will not impact your secured creditors, and you can generally choose which property to keep and which (if any) to sell to fund your Consumer Proposal.
- Home (or other real property)
- Vehicles
- Personal possessions
- Investments and savings
- Tax returns and government benefits
For more details, visit our What Do You Keep In a Consumer Proposal page.
At the time of filing a proposal you will generally be required to turn over all your credit cards to your Licensed Insolvency Trustee. You may not be able to obtain a new credit card until after your proposal term is complete. However, you can usually continue to use or obtain a prepaid or secured credit card during your proposal.
Normally, secured creditors are not affected by a proposal. In most instances, you will continue to make payments to the secured creditors as per your usual arrangements.
However, in your proposal you may choose to surrender and return your secured assets and stop making payments to secured creditors. In these circumstances, any resulting shortfall that may arise from the sale of the asset held as security by the secured creditor will be included as an unsecured debt in your proposal. This means you will not be responsible for any further payments to the secured creditor.
If you are insolvent, you may be able to file a Consumer Proposal. However, in order to file a Consumer Proposal your total debts, excluding the mortgage on your principal residence, must not exceed $250,000 as outlined by the Bankruptcy and Insolvency Act. For more details, visit our Are You Eligible for a Consumer Proposal page.
A Consumer Proposal is for individuals whose debts have become unmanageable, but are still able to make some form of payment to creditors. With revisions to their payment plans they will be able to pay back their unsecured debts partially or in full within a maximum term of five years.
A Consumer Proposal allows you to make arrangements to pay all, or part, of your unsecured debt in monthly payments over a specified period of time. It also allows you to change the payment arrangement with your creditors by extending the timeframe, eliminating the interest or reducing the total amount to be paid.
When a Licensed Insolvency Trustee drafts the proposal to your unsecured creditors for you, it must offer your unsecured creditors more money than they would receive if you were to file for bankruptcy. In completing a financial assessment, your Licensed Insolvency Trustee will be able to determine the amount of money you can afford each month to make payments under your proposal to your unsecured creditors.
The federal government provides guidelines to Licensed Insolvency Trustees that enables them to calculate your surplus income. That amount depends on the number of members in your family and your total family income. If you do not have surplus income under these guidelines, it is unlikely you will be able to submit a proposal that your creditors will approve.
When your total debts (excluding the mortgage on your principal residence) exceeds $250,000 you will not be eligible to file a Consumer Proposal. However, you would be able to file a Division I Proposal. Just like a Consumer Proposal, you will be making a formal offer to creditors to settle your unsecured debt.
Upon filing a Division I Proposal, your Licensed Insolvency Trustee will call a First Meeting of Creditors (FMC) within 21 days. At that meeting, the creditors will have a chance to ask the debtor questions and consider the terms of the proposal. The creditors will then vote on the proposal. The creditors who are owed the most will exercise greater influence when deciding whether your proposal is accepted or rejected. For every $1 of unsecured debt you owe them, creditors receive one vote.
The creditors can accept, reject or adjourn the meeting to further consider the proposal or request an amended proposal.
If the Division I Proposal is accepted, the Trustee will book a Court date and notify all stakeholders that the creditors are in agreement. The Trustee will then seek a Court Order to confirm the Proposal. In a Consumer Proposal, no Court attendance is required.
If the Division I Proposal is rejected by the Creditors, then there is an automatic Bankruptcy. A Bankruptcy FMC will immediately follow. If a Consumer Proposal is not accepted by the creditors, there is no automatic Bankruptcy.
Voluntary deposits are designed for debtors who reside in Quebec to make regular, monthly payments to the Court based on their income and dependents. The Court then ensures that these payments are distributed to creditors. This arrangement lasts until 100% of your debts are paid in full, along with a 5% interest per year.
The voluntary deposit protects the debtor against salary garnishments and seizure of furniture found in the residence. It does not however, protect the debtor from seizure of the home, assets and/or furniture financed by an installment sales contract, bank accounts or a vehicle. Because of the limited protection from seizures, continued interest payments, the obligation to pay a relatively high percentage of your income and receiving an R9 credit rating, this is often not the most sought-after debt solution for Quebecers looking to make a fresh financial start.
Your spouse will not be affected by you filing a Consumer Proposal. If there are joint assets or joint debt, it may be appropriate to file a joint proposal as the non-filing spouse will still be liable for joint debt.
When you file a proposal, unsecured creditors deal directly with your Licensed Insolvency Trustee. Unsecured creditors must stop contacting you directly. If an unsecured creditor persists in contacting you, notify your Licensed Insolvency Trustee immediately.
A consumer proposal cannot last more than five years, but the exact length depends on the type of proposal you submit. Your credit rating reflects this for three years after your final payment.
In making a proposal to your creditors, it is important you make your monthly payments on time. If you default on three payments during the term of the proposal, the proposal is annulled. This means the proposal is brought to an end by default. In certain circumstances, an amended proposal may be filed prior to the default occurring. However, when a default occurs and an amended proposal is not filed and accepted by the unsecured creditors in time, the debts owing to the unsecured creditors are not discharged. In this case, the unsecured creditors will begin to seek payment from you directly for the full amount of your pre-proposal debts. If you have defaulted and the proposal is annulled you are prohibited from filing another Consumer Proposal for those debts, however, you can file for Bankruptcy at that time.
No, filing a Consumer Proposal will have no affect on your job. Section 66.36 of the Bankruptcy and Insolvency Act states that, “No employer shall dismiss, suspend, lay off or otherwise discipline a consumer debtor on the sole ground that a consumer proposal has been filed in respect of a consumer debtor.”
As you do not typically give up your assets in a proposal, you will continue to be responsible to file your annual Income Tax returns. Any eligible tax refunds for years before the proposal will continue to be sent to you by Canada Revenue Agency, unless you have other tax debts owing to them. Any tax debt arising in the tax years prior to the proposal year will be included as a creditor in the proposal. For the year of the proposal and future years you will be responsible for any future income taxes due and entitled to receive any income tax refunds.
There are certain debts that survive a Consumer Proposal filing as outlined in Section 178 of the Bankruptcy and Insolvency Act. These include:
- Court fines, penalties and restitution orders
- Alimony, child support and maintenance
- Any award by the Court for intentional bodily harm, sexual assault or wrongful death
- Any debt or liability arising out of fraud, embezzlement, misappropriation or misconduct while acting in a fiduciary capacity
- Any debt or liability for obtaining property under false pretences or fraudulent misrepresentation
- Liability for any dividend a creditor would have been entitled to receive when you fail to disclose the creditor to your trustee
- Student loans in certain circumstances
Consumer Proposal vs Bankruptcy
Consumer Proposals and Bankruptcies are both government legislated options which can provide you with relief from significant debt problems. In addition, both debt solutions can only be administered by a Licensed Insolvency Trustee and provide a legal stay of proceedings which require creditors to discontinue harassing collection calls, garnishment or other legal proceedings.
Determining which, if either, option is an appropriate solution in your own unique situation depends on a number of variables. Let’s explore the advantages and disadvantages of both a Consumer Proposal and a Bankruptcy.
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