What is a consumer proposal?

Consumer proposal is a legally binding agreement made between you and your creditors to repay a portion of your total debt relative to your income, assets, and dependents. Consumer proposals are administered by a licensed insolvency trustee and are regulated by the Office of the Superintendent of Bankruptcy.

How much does consumer proposal cost?

How much you pay is calculated based on how much you earn, how many family members are dependent on your income, how much (if any) equity value you have in your home or other assets, and lastly, how much debt you must repay.
In all situations, you can expect to pay between 30% to 100% of your debt plus the cost of filing, which is $1500 regardless of total debt or province filed.

Why do people file consumer proposals?

In addition to reducing how much debt you owe, consumer proposals offer several legal benefits such as: stopping wage garnishment, halting a pending small claims case, or nullifying an existing judgement. Consumer proposals also offer additional benefits to those who–because of high earnings or valuable assets such as a house–cannot file personal bankruptcy without penalty.

How a consumer proposal works in Canada

If you live or work in Canada and have Canadian debt, you are eligible to file a consumer proposal, however, it is up to your licenced insolvency trustee (or accredited credit counsellor) to determine if it makes sense for you to file. In general, you can expect the following of a consumer proposal in Canada:

  • Your total debt amount will be reduced
  • You will make a single monthly payment
  • You will have up to 5 years to repay
  • Creditors will stop collection calls/letters
  • Creditors will not be able to garnish wages
  • You will not lose your house or vehicles
  • You will not lose your RRSPs, RESPs, or TFSAs

How long does a consumer proposal last?

5 years (or less) of repayment, plus 3 years of credit record once paid.

What happens when applying for consumer proposal?

The steps listed below are meant to provide a simplified overview of the consumer proposal process in Canada. For a more in depth understanding of the process to file a consumer proposal please reach out and speak with a certified credit counsellor. They will be able to help you determine if a consumer proposal is the right option for you, and answer any questions you may have about how it applies to your personal situation.

Step 1: Book your appointment

Make an appointment with a qualified non-profit credit counsellor or licensed insolvency trustee to review your options.

Step 2: Assess your options

Determine if consumer proposal makes sense based on how much you owe vs. how much you would be expected to repay.

Step 3: File your proposal with a trustee

If consumer proposal is the best option, you will file with the licensed insolvency trustee of your choice and your creditors will be given 45 days to respond to your proposal as outlined below:

  1. if any one creditor owns more than 25% of your debt, they may request a meeting which will allow all creditors a vote to either accept, modify, or refuse your proposal within 21 days
  2. if 51% of your creditors accept the proposal or none have rejected it within 15 days it will be approved by the court

Step 4: Make your payments

You will begin making your consumer proposal payments and will be required to attend an additional 2 credit counselling sessions.

Step 5: Rebuild your credit

Once your proposal is paid in full as agreed, you are debt free. You will need to rebuild your credit score if you’re looking to utilize credit again in the future for purchasing a house or a vehicle.

What can I include in a consumer proposal?

Just like a bankruptcy, a consumer proposal can include any type of unsecured debt such as credit cards, lines of credit, or payday loans. Consumer proposals can also include certain types of government debt but cannot help with child support, spousal support, or alimony. Consumer proposals also do not include secured debt such as your vehicle loan or mortgage unless surrendered.

What government debt can I include in consumer proposal?

Consumer proposal can help with personal income taxes, CERB, HST/GST, provincial disability repayment, social support repayment, ICBC repayment, and student loans older than seven years. Government debts or overpayments that were incurred due to fraudulent or criminal activity cannot be included.

Will I keep my car in consumer proposal?

Yes, you can keep your car in consumer proposal. However, if your vehicle is still financed you must continue making your regular financing payments.

Will I keep my house in consumer proposal?

Yes, you can keep your house in consumer proposal. However, you may have to pay more towards your debts based on the amount of home equity you have.

What is equity and why does it matter?

Equity is the value of an asset (like a house) less anything held against that value (like a mortgage or home line of credit). Depending on your province, you may be allowed to keep more or less of your equity—this is known as the exemption limit–but in general, the more equity you have the more debt you must repay in consumer proposal or bankruptcy. This is because if you had sold this asset, you could have theoretically repaid more of the debt to creditors.

SCENARIO 1:

Manpreet Singh owns a home in Ontario worth $500,000. She currently has a $475,000 mortgage. In Ontario, the exemption limit is $10,000 in home equity. This means Manpreet has $15,000 in possible equity ($500,000 – $475,000 – $10,000) therefore Manpreet must offer her creditors at LEAST $15,000 consumer proposal, or more depending on her income level/debt amounts.

Differences between consumer proposal and bankruptcy

The most important thing to understand about consumer proposal is that it is NOT a personal bankruptcy, even if it follows many of the same general rules.

Consumer proposal is a proposal by you, the consumer, to pay less than what is owed to your creditors because you cannot currently afford to repay what you owe them in full. Bankruptcy, on the other hand, is the acknowledgment that you cannot pay ANY of your debt and are asking (legally) to throw it away.

Consumer proposal:

  • 30% to 100% of the debt repaid
  • 60-month repayment term
  • Amount does not change after filing
  • Income reporting not required monthly
  • Easier to repay equity penalties
  • Less credit impact than bankruptcy

Bankruptcy

  • As low as 0% percent of debt repaid
  • 9-or-21-month repayment term
  • Amount can change if income increases
  • Income reporting required monthly
  • Harder to repay equity penalties
  • Most credit impact of any option

Key advantages and disadvantages of consumer proposals

Pros of consumer proposal:

  • Typically relieves a portion of the debt
  • Spreads the payments out over time
  • Stops collection calls and efforts
  • Protects against legal action/garnishment
  • Provides an alternative to bankruptcy
  • Payment won’t change if income increase

Cons of consumer proposal

  • Homeowners with equity may pay more
  • Higher-income earners may pay more
  • Creditors may push the payment higher
  • Payment won’t change with income decrease
  • Will negatively affect credit score
  • Can make future borrowing difficult

Can you get credit while in a consumer proposal?

Yes and no. While you can get some types of credit while in consumer proposal, typically you will be restricted as to what type. For example, vehicle financing or leasing is typically permitted, as are mortgages, property rentals, and secured or prepaid credit cards, but other types of borrowing will not be allowed.

What about interest rates?

Filing a consumer proposal will affect your credit score. This means that future lenders will base their interest rates on the assumed risk of lending to you. In other words, the last time you borrowed the creditors you borrowed from did not get repaid in full, so the next creditor willing to lend to you is going to charge an interest premium (higher interest rate) to extend this ‘high risk’ credit.

Conclusion: Is a consumer proposal actually worth it?

Whether consumer proposal is worth it depends on what you need your consumer proposal to do. Consider the three L’s of consumer proposal:

  1. Do I need LEGAL protection from my creditors to stop wage garnishment or prevent a pending small claims court case?
  2. Will I pay LESS than the total amount of debt that I owe if I file consumer proposal based on my income, assets, and dependents?
  3. How will filing a consumer proposal LIMIT my ability to meet future financial goals such as homeownership or retirement?

Remember, the goal of a consumer proposal should always be to improve the situation. If you do not need legal protection from your creditors, will not benefit from reduced debt, or are concerned with credit impact, a credit-sparing alternative such as a Debt Management Program may be more appropriate.

What is a Debt Management Program?

Debt Management Programs offer a low-or-no-interest repayment plan with your creditors. These programs are considered a type of ‘negotiated consolidation’ and are administered on your behalf by a credit counselling agency. In addition to having no impact on income, assets, or equity, debt management programs are voluntary, do not involve an insolvency trustee, and are less credit impacting than consumer proposal or personal bankruptcy.

Debt management programs:

  • Repay 100% of your unsecured debt
  • Repay your debt in 5 years or less
  • Repay with a single monthly payment
  • Reduce interest (most often to 0%)
  • Do not impact income, assets, or equity

How do I know what is the best option?

Ask a credit counsellor!

Debt solutions come in many shapes and sizes and an accredited, not-for-profit credit counsellor can review your financial situation at no cost, keeping your personal needs and financial goals in mind. If consumer proposal is NOT the best choice, your credit counsellor will offer a variety of debt management alternatives such as: self-managed options, debt management programs, settlements, or in some cases, non-payment options that protect your immediate financial safety. If filing a consumer proposal make sense you, a warm referral to a licensed insolvency trustee in your area is also 100% free.