A consumer proposal is a formal, legally binding agreement between you and your creditors to repay a portion of what you owe over a certain time period – usually 5 years. You need a Licensed Insolvency Trustee to set up and manage a consumer proposal for you, but if you do, it can be an attractive alternative to bankruptcy, allowing you to keep your assets while making manageable monthly payments.
In this detailed guide, we’ll take a deeper look at consumer proposals – including what kinds of debts can and can’t be included, how much a consumer proposal costs, and the process involved with putting a consumer proposal in place.
What is a Consumer Proposal? A Clear Explanation
Although we’ve given a quick overview above, it’s useful to know a little more about consumer proposals and how they work.A consumer proposal is a way to manage and reduce your debts without going bankrupt. It’s referred to as a “formal agreement” because, if it is put in place, both you and your creditors (the companies or people you owe money to) are legally required to follow the agreement that’s set out. This means you’ll be required to make the debt payments agreed upon, and they agree to stop any collection efforts – such as calls or legal action.
Since everybody’s circumstances are different, the Licensed Insolvency Trustee (LIT) will take a detailed look at your financial situation and help you decide if a consumer proposal is the right kind of solution for you. If it is, your LIT will help you make an affordable offer to your creditors – explaining how much of your debt you can pay and over what period.
After receiving your offer, your creditors will vote on whether to accept your proposal. If the majority agree, the proposal is accepted, and all your creditors are bound by its terms. You’ll make a regular monthly payment to the LIT, who will distribute the money to your creditors – usually over a period of 5 years.
During the consumer proposal’s active period, your LIT will help you manage it and handle all communication with your creditors. When the consumer proposal has run its course, all the debts will be cleared, regardless of whether they’re paid in full or not. This will then let you start rebuilding your finances.
Comparing a Consumer Proposal to Bankruptcy
A Consumer Proposal and bankruptcy are both ways to deal with overwhelming debt, so they often get mentioned in the same kinds of conversations – but they work differently.With a Consumer Proposal, you repay a portion of your debt over up to five years and keep your assets, such as your home and car. It has less impact on your credit score than bankruptcy and gives you more control over your finances.
Bankruptcy, on the other hand, involves surrendering certain assets to pay off your debts and usually lasts 9 to 21 months. It can significantly affect your credit rating and is often seen as a last resort.
Both options provide legal protection from creditors, but a consumer proposal is usually seen as a less severe approach to getting on top of debt problems.
How Much Does a Consumer Proposal Cost?
There are two “costs” associated with a consumer proposal – the amount you pay back to your creditors and the fee a Licensed Insolvency Trustee charges for setting up and managing your consumer proposal.Let’s take a look at each:
1. How Much You’ll be Paying Back to Your Creditors
Since everyone’s finances are unique, a consumer proposal has no fixed amount or percentage – however, the amount you’ll pay back to your creditors in a consumer proposal will be less than the total debt you owe. The exact amount of the debt repayment program depends on your financial situation and what your creditors agree to.Your LIT will work with you to create a repayment plan that you can afford – in many cases, this can mean reducing a person’s debt by as much as 70%-80%. The proposal payments will typically be spread over a period of up to five years – making it more manageable for you.
2. How Much a Licensed Insolvency Trustee Charges
The LIT gets paid for handling a consumer proposal through the payments you make as part of the proposal. When you agree on a repayment plan with your creditors, a portion of each payment goes towards covering the LIT’s fees.These fees are regulated by the government and are included in the total amount you agree to pay. You don’t pay the LIT separately; their fees are built into the overall consumer proposal, making it easier to manage your payments without additional costs.
This way of working makes sure the LIT is compensated fairly for their services – while helping you through your debt relief process.
What Debts Are Included in a Consumer Proposal?
Now we know a little more about how a consumer proposal works, it’s useful to understand the kinds of debts that can and can’t be included in this kind of agreement.Unsecured Creditors
A consumer proposal can typically include “unsecured debts” – such as:- outstanding bills
- credit card debt
- overdrafts
- bank loans or personal loans
- unsecured lines of credit
- payday loans
- accounts in collection
- tax debts
- some student loans
Secured creditors
A consumer proposal cannot be used to clear “secured debt payments” – such as:- mortgages
- home equity loans
- a home equity line of credit (HELOC)
- car loans
- vehicle lease agreements
A Quick Note About Student Loans
You’ll notice where we’ve talked about student loans above that we’ve said “some student loans” can be included in a consumer proposal. This is because the status of your student loan matters when looking at debt relief options like consumer proposals.If you’ve been out of school for seven years or more, your student loan payments are considered to be “discharged” and can be included in a consumer proposal. If you haven’t been out of school for seven years yet, the student loan isn’t discharged – so they can’t.
When you talk to a professional about a consumer proposal as a debt relief option, they’ll help you decide the best way forward. Waiting until your student loan limitation period expires is one option – but they might instead suggest dealing with your other debts to give you enough breathing space to deal with your student loans separately.
Pros and Cons of Consumer Proposal Plans
Every debt relief solution has pros and cons – and a consumer proposal is no different.Here, we’ve explored those pros and cons in some detail, to help you better understand whether a consumer proposal is likely to work for you.
Advantages of a Consumer Proposal
A consumer proposal will:- Stop calls, letters, and all other communications from creditors and debt collection agencies
- Stop any legal action or lawsuits from creditors
- Freeze the interest on your debts so the amount you owe won’t increase
- Make all creditors legally bound to your proposal payments if the majority agree
- Turn all your debts into one affordable monthly payment
- Keep all your assets – including your home, equity in your home, and your car
- Significantly reduce the overall amount you pay back – often by up to 70% or more
- Get you out of debt and give you a financial fresh start in between 3-5 years
- Stop wage garnishments
- Avoid bankruptcy
- Keep your payment terms the same, even if you earn more money
- Your LIT will help you put together a repayment plan that works around your paycheque schedule and can, if you wish, include lump sum payments
Disadvantages of Consumer Proposals
- Although rare, you are not guaranteed to be accepted
- Your credit score will go down before recovering over the coming years
- Not all debts can be included – for example, alimony, child support, fines, some student loans, and debts that relate to fraud
- A consumer proposal can be “annulled” (canceled) if you do not stick to the legal terms. If you miss three monthly payments in a row, it will be annulled and your debts (and contact with creditors) will return.
Does a Consumer Proposal Affect Your Credit Report?
Like virtually all debt repayment solutions, a consumer proposal in Canada will affect your credit rating. That said, the impact often isn’t as bad as people think it will be.When a consumer proposal is filed in your name, it will also be recorded on your credit report. While this might sound negative, it can actually be seen as a positive. Since people explore consumer proposals because their debt is unmanageable, it often means your credit report is already damaged by late or missed payments, arrears, and other alerts from lenders. While a consumer proposal makes a short term impact, it’s also a clear indication that your financial challenges are being attended to.
When your consumer proposal is complete, the record on your credit report will be removed by credit bureaus. Typically, it will be removed 3 years from the date of completion – although it can sometimes happen a little quicker.
Your credit rating doesn’t just shoot back up when the proposal is removed though – your rating is likely to have been steadily increasing over the full term. In practice, this means people who done everything they can to improve their rating are often eligible for a mortgage or low-interest loan within 2 years of completion.
How Does a Consumer Proposal Work? Step-by-Step
Creating Your Repayment Plan
The Licensed Insolvency Trustee you choose to work with will help you take a detailed look at your finances and create a repayment plan that’s affordable, realistic, and will be acceptable to your creditors.Preparing Paperwork and Documentation
When your LIT has helped you put together your repayment offer plan, they will prepare the documents you need to sign. When signed, your consumer proposal is filed with the government, and your creditors are all notified. This starts the process officially.Stay of Proceedings
As soon as your documents are filed, this creates temporary legal protection from creditors – which means they must put a pause on any action they are taking against you. This is outlined by the Bankruptcy & Insolvency Act. This means all the stresses of calls, messages, lawsuits, and possible wage garnishments will stop.Voting and Approval
After receiving your offer, your creditors have 45 days to make a decision whether to accept, reject, or request a meeting. If less than 25% request a meeting, your consumer proposal is automatically approved. If a meeting is held, each creditor will vote on whether to accept or reject your proposal.A vote is based on the dollar amount of each debt, not the number of votes cast – to make sure the consideration is fair. So, as a simple example, if you have 3 creditors and you owe 2 of them $3,000 and the third $7,000, this final creditor has the majority vote since you owe them more than the others combined.
Make Payments and Duties
As part of your consumer proposal, you’ll be expected to make your scheduled payments and attend two credit counselling sessions. These sessions are designed to help you better manage your finances moving forward – and almost all attendees find them useful.You’ll have to agree to do these things – as well as comply with any information requests your LIT makes. It might sound like a bit of effort – but it’s significantly easier and less involved than bankruptcy proceedings.
Certificate of Full Performance (Become Debt Free)
When you have made all the payments through the term of your consumer proposal, you’ll be issued a “Certificate of Full Performance” – an official notification that you’ve fulfilled everything that was expected of you. This also confirms that your debts are eliminated, even if the agreed consumer proposal didn’t cover the full amount outstanding before it was in place.Eligibility: Who Can File a Consumer Proposal?
A consumer proposal is an option available to individuals who are struggling with unmanageable debt in Canada. To be eligible, you must:- Resident or Property Owner: You must be a resident of Canada (or have property in Canada) or be working in Canada under a work permit or other immigration status.
- Owe Between $1,000 and $250,000: Your total unsecured debts must fall within this range. If you owe more, you might need to consider other debt relief solutions.
- Be Insolvent: This means you’re unable to pay your debts as they come due, or your total debts exceed the value of your assets.
- Have a Stable Income: While you don’t need a high income, you should have enough regular income to make the proposed monthly payments.
Consumer Proposal FAQs
We’ve covered some answers to common questions about consumer proposals here. Got a question that’s not on the list? No problem—you’re always welcome to contact one of our friendly advisors.How does a consumer proposal affect my mortgage and car loan?
A consumer proposal cannot include your mortgage or car loan payments as these are secured debts. However, people find that reducing unsecured debts with a consumer proposal often makes these other debts more manageable. Crucially, a consumer proposal won’t require you to sell your house or car – so there’s far less disruption to life compared to bankruptcy.What happens if I co-signed a loan with someone else?
If you have debts that are co-signed, your co-signer will become responsible for these debts if you file a consumer proposal. However, depending on your circumstances, you may be able to file a joint consumer proposal that covers joint debts as well as each individual’s debts.Will I be able to use my credit cards under a consumer proposal?
When you file a consumer proposal, you’ll hand over your credit cards to your LIT. You won’t be able to apply for new credit cards or lines of credit unless they’re prepaid or secured.What will happen to current wage garnishments if I get a consumer proposal?
Any wage garnishments currently in place will stop when you file a consumer proposal. A consumer proposal stops any collection action or legal action that’s being taken or has been taken against you – including wage garnishments.Will my spouse be affected if I get a consumer proposal?
In terms of their credit report – no, your spouse will not be affected by your consumer proposal. However, if you have any co-signed debt together, they will become entirely responsible for that, so that could change their financial arrangement with you a little. Since everyone’s circumstances are unique, it’s worth talking to an advisor to see exactly who’d be responsible for each debt.Is there an upfront fee with a consumer proposal?
No, there’s no upfront fee with a consumer proposal. To make consumer proposals as accessible as possible for the people who need them, there’s no money to find before you get started. Instead, the Licensed Insolvency Trustee will take their fee from the affordable overall monthly amount that you’re paying towards your debts.Taking the Next Steps with a Consumer Proposal
If a consumer proposal sounds like it could be a good solution for you, the next step is to connect with the right Licensed Insolvency Trustee.It’s important to recognise that only appropriately licensed and government-approved LITs can legally help you with a consumer proposal. Some other credit counselling services and debt consultants may connect you with LITs, but they cannot file a consumer proposal on your behalf, nor should they charge you for recommending an LIT or helping you prepare any consumer proposal paperwork.