In the current cost of living crisis, an unexpected expense can leave you with no other option but to borrow money to cover the cost and this can be a slippery slope to debt.
However, if you’re experiencing financial hardship and wondering what to do about it, a debt solution known as a ‘Consumer Proposal’ could help.
A Consumer Proposal is a legally binding agreement between you and the people you owe money to (your creditors) to consolidate your unsecured debts into a single monthly payment based on what you can comfortably afford.
This guide will explore Consumer Proposals in more detail, from what they are and how they work to their various pros and cons, so you can determine if it’s the right debt solution for your current financial situation.
It is governed by the Bankruptcy and Insolvency Act (BIA), which is the federal law that regulates insolvency in Canada.
The Consumer Proposal process must be managed by a Licensed Insolvency Trustee (LIT), who is a financial professional whose role it is to review your financial situation and determine if it’s the right solution for you. They will then base your monthly payments on your income and expenses, ensuring you can afford your repayments alongside your other outgoings like housing and bills.
Consumer Proposals deal with various types of unsecured debt (debts not secured by assets). Examples of unsecured debts that can be included are credit cards, lines of credit, personal loans, payday loans, phone and utility bills, and income tax debt.
This means that, if you decide not to proceed, you won’t have to pay anything.
During this meeting, your LIT will review all aspects of your financial situation to determine if a Consumer Proposal is the best solution for your circumstances.
If you don’t meet the eligibility criteria or another solution would be more suitable, your LIT will discuss your options.
This includes information about your current financial situation, how much of the debt you plan to repay, how long your payment schedule will last, and what your monthly payments will be. Remember, your repayment amount will always fit around your existing expenses.
The paperwork will then be sent to the creditors listed in your proposal who will have 45 days to accept the terms or ask for a ‘creditors meeting’ to discuss them further.
During this meeting, your creditors will vote on whether they accept or reject the terms put forward or suggest a modified offer.
If the creditors representing 25% or more of your debt request a creditors meeting, it must be held within 21 days.
During your payment schedule, you’ll be expected to attend two mandatory credit counselling sessions to educate you on how to better manage your finances and avoid further debt.
Attending these sessions and sticking to your monthly payments are key to successfully completing your Consumer Proposal and being discharged on the expected date.
We’ve outlined the main pros and cons below:
This is because your repayment amount is based on a comprehensive review of your income and expenses.
The amount you pay monthly will be worked out by your LIT and negotiated with your creditors but you’ll never be forced to make payments that are outside of your budget.
In addition, your creditors can’t take legal action against you (including garnishing your wages) or shut your utilities off (e.g. phone or hydro).
This leaves you free to make a fresh financial start and signifies that all the included debts have been officially settled.
This can be used as proof that you’ve successfully completed your Consumer Proposal if you’re asked to verify your debt down the line.
They’ll also be prohibited from garnishing your wages or trying to collect the debt through other means.
Even if your financial situation improves, you’ll never be asked to pay more than what was originally agreed when your proposal was approved.
The average time it takes to complete a Consumer Proposal is between three and five years (equivalent to 36 to 60 monthly payments).
The length of your payment schedule can depend on several factors, such as your debt level, overall budget, and age and health.
This will negatively affect your credit rating and make it difficult to access most forms of credit, including a loan or a mortgage.
Most creditors will also impose stricter rules and higher interest to cover the extra risk.
This means that, if you have secured debts (e.g. mortgage, car loans), court fines, child support or student loans less than seven years old, they can’t be included and you’ll need to find another way to deal with them.
If the majority of your creditors reject your proposal, you’ll have to find another way to deal with your debts (e.g. by filing for bankruptcy) and this could have a bigger impact on your credit score.
Here are some of the most common alternatives:
One of the main benefits of debt consolidation is that you can usually also negotiate a lower interest rate, paying less towards your debt overall and speeding up the debt repayment process.
It is managed by a Licensed Insolvency Trustee (LIT) and can put a stop to enforcement action and collection calls so you can focus on dealing with your debt in a way that works for you.
However, before filing a Consumer Proposal, it’s important to familiarize yourself with the various pros and cons so you know how it could impact your finances.
For example, while your proposal payments will be fixed, your arrangement can take up to five years to complete.
If your LIT determines that a Consumer Proposal isn’t the right solution for you, they may suggest bankruptcy, debt consolidation, or credit counselling.
However, if you’re experiencing financial hardship and wondering what to do about it, a debt solution known as a ‘Consumer Proposal’ could help.
A Consumer Proposal is a legally binding agreement between you and the people you owe money to (your creditors) to consolidate your unsecured debts into a single monthly payment based on what you can comfortably afford.
This guide will explore Consumer Proposals in more detail, from what they are and how they work to their various pros and cons, so you can determine if it’s the right debt solution for your current financial situation.
What is a Consumer Proposal?
A Consumer Proposal is a formal debt solution that can help you repay your unsecured debt by consolidating it into smaller, more manageable monthly payments based on what you can afford.It is governed by the Bankruptcy and Insolvency Act (BIA), which is the federal law that regulates insolvency in Canada.
The Consumer Proposal process must be managed by a Licensed Insolvency Trustee (LIT), who is a financial professional whose role it is to review your financial situation and determine if it’s the right solution for you. They will then base your monthly payments on your income and expenses, ensuring you can afford your repayments alongside your other outgoings like housing and bills.
Consumer Proposals deal with various types of unsecured debt (debts not secured by assets). Examples of unsecured debts that can be included are credit cards, lines of credit, personal loans, payday loans, phone and utility bills, and income tax debt.
How do I apply for a Consumer Proposal?
If you’re considering a Consumer Proposal, it’s important you know what to expect before you apply. We’ve outlined the main steps below:Meet with a Licensed Insolvency Trustee (LIT)
The Consumer Proposal process can’t be undertaken without a Licensed Insolvency Trustee (LIT). In Canada, all LITs provide a free initial debt assessment.This means that, if you decide not to proceed, you won’t have to pay anything.
During this meeting, your LIT will review all aspects of your financial situation to determine if a Consumer Proposal is the best solution for your circumstances.
If you don’t meet the eligibility criteria or another solution would be more suitable, your LIT will discuss your options.
Complete all the relevant documents
Once it has been decided that a Consumer Proposal is right for you, your LIT will prepare all the necessary paperwork which will be sent to your creditors for approval.This includes information about your current financial situation, how much of the debt you plan to repay, how long your payment schedule will last, and what your monthly payments will be. Remember, your repayment amount will always fit around your existing expenses.
Submit proposal to creditors
Most LITs file documents electronically with the federal government and the court. Once this has happened, you’ll receive a ‘stay of proceedings’, which means that your creditors can no longer pursue you for payment and you don’t need to make any more payments towards your unsecured debts.The paperwork will then be sent to the creditors listed in your proposal who will have 45 days to accept the terms or ask for a ‘creditors meeting’ to discuss them further.
During this meeting, your creditors will vote on whether they accept or reject the terms put forward or suggest a modified offer.
If the creditors representing 25% or more of your debt request a creditors meeting, it must be held within 21 days.
Start making payments
If more than 50% of your creditors accept the proposal (original or modified), your arrangement will be confirmed and you’ll start making the agreed-upon monthly payments.During your payment schedule, you’ll be expected to attend two mandatory credit counselling sessions to educate you on how to better manage your finances and avoid further debt.
Attending these sessions and sticking to your monthly payments are key to successfully completing your Consumer Proposal and being discharged on the expected date.
Consumer Proposal pros and cons
Before committing to a Consumer Proposal – or any type of debt solution – it’s important to familiarize yourself with the various benefits and drawbacks.We’ve outlined the main pros and cons below:
Pros of a Consumer Proposal
Lower monthly payments
One of the main advantages of a Consumer Proposal is lower monthly payments based on what you can comfortably afford.This is because your repayment amount is based on a comprehensive review of your income and expenses.
The amount you pay monthly will be worked out by your LIT and negotiated with your creditors but you’ll never be forced to make payments that are outside of your budget.
Asset protection
Under a Consumer Proposal, you don’t need to worry about giving up your home, car, furniture, pension funds, investments, tax refunds or any other assets to your LIT to repay your debts.In addition, your creditors can’t take legal action against you (including garnishing your wages) or shut your utilities off (e.g. phone or hydro).
Fresh financial start
Once you’ve made your final agreed-upon payment, you’ll be issued with a ‘certificate of full performance’ releasing you from your debt.This leaves you free to make a fresh financial start and signifies that all the included debts have been officially settled.
This can be used as proof that you’ve successfully completed your Consumer Proposal if you’re asked to verify your debt down the line.
Creditor protection
Once your Consumer Proposal has been approved, your creditors won’t be able to contact you, ask you for payment, or take legal action against you.They’ll also be prohibited from garnishing your wages or trying to collect the debt through other means.
Fixed payments
Unlike other debt solutions where your repayments can vary based on your income, your monthly payments will be fixed for the duration of your payment schedule with a Consumer Proposal.Even if your financial situation improves, you’ll never be asked to pay more than what was originally agreed when your proposal was approved.
Cons of a Consumer Proposal
Lengthy process
Consumer Proposals can last anywhere from sixty days to five years, which is longer than some other debt relief solutions (e.g. bankruptcy).The average time it takes to complete a Consumer Proposal is between three and five years (equivalent to 36 to 60 monthly payments).
The length of your payment schedule can depend on several factors, such as your debt level, overall budget, and age and health.
Credit impact
A Consumer Proposal will remain on your credit report until three years after you’ve completed your arrangement or six years after you file, whichever comes first.This will negatively affect your credit rating and make it difficult to access most forms of credit, including a loan or a mortgage.
Most creditors will also impose stricter rules and higher interest to cover the extra risk.
Included debts
One of the main disadvantages of a Consumer Proposal is that it can only be used to settle unsecured debts, such as credit cards, personal loans, and utility bills.This means that, if you have secured debts (e.g. mortgage, car loans), court fines, child support or student loans less than seven years old, they can’t be included and you’ll need to find another way to deal with them.
Potential rejection
Even if your LIT thinks a Consumer Proposal would be the best option for your financial situation, there’s no guarantee that your creditors will agree.If the majority of your creditors reject your proposal, you’ll have to find another way to deal with your debts (e.g. by filing for bankruptcy) and this could have a bigger impact on your credit score.
What are alternatives to a Consumer Proposal?
A Consumer Proposal can help you deal with your debt in a way that’s more manageable for you, but it isn’t the only option available.Here are some of the most common alternatives:
Bankruptcy
Bankruptcy is a legal process that allows you to be released from your unaffordable debts. It is designed to give you a period of relief from your creditors (nine months if it’s your first time filing) before writing off your debts after this time if your financial situation doesn’t improve.Debt consolidation
Debt consolidation is the process of combining multiple debts into a single monthly payment, meaning you only make one payment a month as opposed to several.One of the main benefits of debt consolidation is that you can usually also negotiate a lower interest rate, paying less towards your debt overall and speeding up the debt repayment process.
Credit counselling
Credit counselling is designed to provide tailored advice for people struggling with debt. It works by matching you with a credit counsellor who will review your financial situation and help you find a way to deal with your unaffordable debt, whether that’s a formal solution or a budget readjustment.Conclusion
A Consumer Proposal is a formal solution designed to align your debt repayments with your financial situation.It is managed by a Licensed Insolvency Trustee (LIT) and can put a stop to enforcement action and collection calls so you can focus on dealing with your debt in a way that works for you.
However, before filing a Consumer Proposal, it’s important to familiarize yourself with the various pros and cons so you know how it could impact your finances.
For example, while your proposal payments will be fixed, your arrangement can take up to five years to complete.
If your LIT determines that a Consumer Proposal isn’t the right solution for you, they may suggest bankruptcy, debt consolidation, or credit counselling.
Key Takeaways
- A Consumer Proposal is a legally binding agreement between you and your creditors to repay your overwhelming debt in manageable monthly instalments
- Consumer Proposals are managed by Licensed Insolvency Trustees (LITs)
- The main pros of a Consumer Proposal are lower monthly payments, asset protection, fresh financial start, creditor protection, and fixed payments
- The main cons of a Consumer Proposal are the lengthy process, credit impact, included debts, and potential rejection
- Alternatives to a Consumer Proposal include personal bankruptcy, debt consolidation, and credit counselling