What is a Consumer Proposal?
A consumer proposal is an alternative to filing bankruptcy in Canada. It’s a legally binding agreement negotiated with your creditors through a Licensed Insolvency Trustee. Once a consumer proposal is filed, there is a legal stay of proceedings that provides you with immediate legal protection from creditors and debt collectors.
A consumer proposal may allow you to avoid filing for personal bankruptcy. A successful consumer proposal lets you keep control of your assets, while your unsecured creditors agree to accept less than what is owed to them in full satisfaction of their claim against you.
Why File For a Consumer Proposal?
If you’re drowning in financial difficulties and don’t know how to get out, but you don’t want to declare bankruptcy, a consumer proposal might be right for you.
With a consumer proposal, your debts are negotiated through the Licensed Insolvency Trustee – in other words, you have a mediator working in your corner to get you the best deal possible, while being fair to your creditors.
With a consumer proposal, you’ll be able to lower your debt payments and pay on a fixed schedule. Your payment amount will never go up. Also, you’ll likely be able to keep your secured assets (home and car), which you might have lost in a bankruptcy.
Not everyone should file a consumer proposal—for some people, bankruptcy is the best route – but if you are in the right situation you owe it to yourself to take advantage of this fully legal and responsible solution.
The main advantages of a consumer proposal
If you are in a serious financial situation where your debts feel overwhelming, you will appreciate the benefits of filing a consumer proposal.
Many consumer proposal candidates have high credit card debt, in particular.
Remember, the purpose of a consumer proposal is to give an honest but unfortunate debtor a fresh financial start. Similar to a bankruptcy, a consumer proposal is a solution – not a punishment.
Unlike in a bankruptcy, in a consumer proposal your assets do not “vest” with the Licensed Insolvency Trustee.
In a consumer proposal:
- You usually get to keep your assets (your Licensed Insolvency Trustee can give you more details)
- You avoid the issue of “surplus income” (in consumer proposals the payments are fixed, regardless of the debtor’s future income – unlike in personal bankruptcies where the more you earn the more you pay)
- Your consumer proposal payments are lower than you were paying on your combined debts
- You receive protection from your creditors
- You attend two financial counselling sessions as a requirement of your consumer proposal – this will help you with budgeting, both during and after your proposal
- You will avoid bankruptcy, and the consumer proposal process is easier than bankruptcy
- When you have successfully completed your consumer proposal, you will be debt free (unsecured debts)
The main disadvantages of a consumer proposal
Most of the disadvantages of filing a consumer proposal are common to all debt relief options.
- It can feel embarrassing to take this step to deal with your debts (but rest assured, it is a positive step and your Licensed Insolvency Trustee knows how you feel)
- Your credit score will be temporarily affected by a consumer proposal (more on this below)
- To successfully complete your consumer proposal, you will need to watch your budget and make your payments on time; for some, this means spending less, but for others, the single monthly payment may ease their budget
What Happens When You File a Consumer Proposal?
When you file a consumer proposal:
- A legal “stay of proceedings” takes effect immediately: most wage garnishment will stop, as will any lawsuits by your creditors
- Interest on your unsecured debt stops accumulating from the date you file your consumer proposal
- Collection agencies and creditors can no longer legally contact you for payment
- Your assets don’t immediately vest with the Licensed Insolvency Trustee, as they would in a personal bankruptcy
- You are offering a settlement to your unsecured creditors where you only need to repay a portion of your debt, with a maximum repayment period of five years
A Consumer Proposal Can Be Beneficial in the Following Ways:
- Typically, you maintain control of all of your assets, including your home, vehicle and furniture
- Lower monthly payments
- You only need to repay a portion of your debt
- Interest on your debts stops – even on credit card debt – while your proposal is in effect
- Once your proposal has been accepted, your payments will never increase; you will owe nothing more than what has been agreed to in the proposal
- Early in the process, you can negotiate with your creditors, via your Licensed insolvency Trustee
- Your creditors are legally bound to the proposal terms, if accepted – they cannot revive the debt in the future and request more money
The negative effect on your credit scoreis generally not as severe as in a bankruptcy
Not Sure if a Consumer Proposal is Right for You?
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How a Consumer Proposal Affects Your Credit Report
As mentioned above, filing a consumer proposal has a detrimental effect on your credit rating. However, keep in mind that if you have been struggling with your debts for months, and if you have exceeded your credit limit or missed payments on your debts, your credit score will already be negatively affected. Thus, when it comes to your credit report, you may not currently have all that much to lose!
A more pressing concern is how the consumer proposal will affect your credit rating once you have completed the process.
Filing a consumer proposal will affect your credit bureau report in two ways:
- A negative notation of R7 or R9 will be placed against each individual debt included in the consumer proposal
- A notation will be added to your credit report that you filed a consumer proposal, with the date
The negative notation (sometimes called derogatory information) placed against each account usually takes the form of an R7 or R9 rating. R7 is sometimes used for proposals and debt settlements; R9 is the worst rating, and is used for proposals, debt settlements, collections or bankruptcies.
Does it matter whether your credit bureau report shows R7s as opposed to R9s? In practical terms, it does not – all are bad ratings that would discourage lenders from offering you credit.
However, there is good news!
These negative notations, as well as the notation that you have filed a consumer proposal, will be removed from your credit report either six years after you sign your proposal, or three years after you complete your proposal terms – whichever is earlier. This applies to reports from both of Canada’s credit reporting agencies: Equifax and TransUnion.
Can I Rebuild My Credit Rating?
Yes! You can begin to rebuild your credit rating as soon as your consumer proposal is completed (or, in some cases, even sooner – ask your Licensed Insolvency Trustee).
When you complete your consumer proposal, your credit score will be low – as if you were just starting out again. And, just like a young person or new Canadian who builds a good credit rating in just a few years, you can as well.
Ask your bank about a secured credit card – one for which you keep funds in a special account for security. The funds you place in the account will protect the bank. The VISA or MasterCard you are offered will quickly improve your credit score if used responsibly. Be careful never to miss a payment. Eventually, the bank will remove the requirement for the security funds or simply switch you to a standard VISA or MasterCard. Other companies also offer secured credit cards, and can be searched online.
Another way to improve your credit score – although use this with caution – is with a personal loan. Your bank may be able to offer you a loan, or may refer you to another company. The interest rates for those with poor credit ratings tend to be high, so opt for a short-term loan and make sure to keep a perfect payment record. A car loan may be fairly easy to get – and if you need a vehicle, a car loan may make practical sense. It is wise to steer clear of payday loans, as they may not rebuild your credit and carry very high interest.
If you are able to establish two or three “lines of credit” (accounts with different companies), and you manage these debts with perfect payment records, your credit rating will be quite good within three years of completing your consumer proposal.
Alternatives to Consumer Proposal
If you are facing overwhelming debt and have decided to take action, you’ll want to know what debt relief solutions are available to you.
Attending a no-obligation, free, confidential meeting with a Licensed Insolvency Trustee is a great next step, as Trustees are trained to analyze your situation and offer the most beneficial courses of action. Here are some alternatives to consumer proposal you may hear about.
Various organizations, including both for-profit and non-profit agencies, offer credit counselling and “consumer proposal services”.
Some of these agencies are simply businesses that will profit from referring you to a Licensed Insolvency Trustee. This is something to watch for, since you can easily contact and meet with a Trustee independently, and your first meeting is free.
Better credit counselling agencies, especially non-profit ones, do offer constructive and knowledgeable advice and help with budgeting, and will help you develop a debt management plan. If your debts are not too severe, what you learn from a good credit counsellor could be enough to turn your situation around – and even help you become debt free.
Debt consolidation loans
Among the debt relief options is the debt consolidation loan.
If you have numerous debt payments and it is difficult to juggle and organize them, you can ask your bank about a debt consolidation loan. With this type of loan, you use the funds advanced to pay off all your credit accounts. With that done, you will have one monthly payment for the loan itself.
Although these loans work well if used responsibly and paid off on time, many debtors are disappointed to learn that their bank will not approve them for a loan to consolidate their debts. If your finances are stretched to the limit, or if your credit bureau report notes any missed payments, you may not qualify.
Although it sounds like “doing nothing,” wait-and-see can be useful if any of your debts are approaching the end of your provincial statute of limitations on debt collection.
Once a debt is older than the applicable statute defines, you are no longer legally required to pay it. This is what “statutes of limitations” legally define, in reference to debts.
As these statutes vary between provinces and can be difficult to interpret, making a free first appointment with a Licensed Insolvency Trustee is a good idea. The Trustee can let you know if this approach might work for you.
If none of the other debt relief options is suitable, and if you are considering filing a consumer proposal but are not certain that you will succeed in making up to five years of regular payments, bankruptcy might be a better option for your financial situation. Although you may lose more assets, bankruptcy is usually shorter than a consumer proposal. It can be a viable way of getting a new financial start. When you are released from your bankruptcy, you will be debt free. As with the other alternatives, a Licensed Insolvency Trustee is your best source of information.
How to File a Consumer Proposal in Canada
A consumer proposal is a legal process under the Bankruptcy and Insolvency Act that must be administered by a Licensed Insolvency Trustee (LIT). Accordingly, your first step is to set up a meeting with someone from an LIT’s office.
An LIT can help you negotiate a fair settlement with your creditors via a consumer proposal, with manageable fixed monthly payments for up to five years or a lump-sum payment. A proposal is approved when the creditors who own the majority of your debt have agreed to the terms of your proposal and the courts approve it. Once accepted, the proposal is binding on all parties. As long as you then fulfill the terms of your proposal, you will be released from the unsecured debts you owed.
Why Would your Creditors Accept a Consumer Proposal?
Your creditors don’t want you to go bankrupt. Creditors typically receive very little from a bankrupt customer. The creditors have no choice in the bankruptcy process – they only get their share, as determined by the courts, of the assets the creditor gives up in the bankruptcy. This is where a consumer proposal comes in.
A consumer proposal will typically allow creditors to recover more of the money you owe them than they would if you were to declare bankruptcy. This is largely because instead of giving up your assets and possibly paying surplus income payments for nine or 21 months, as you would do in a bankruptcy, you pay into a consumer proposal for up to five years. Thus, a consumer proposal allows you to work to resolve your debts as honorably as possible, and pay your creditors more (or in rare cases, all) of what you originally owed them.
Note that there are special rules around student loans, and debts to the federal government (CRA). If you have a student loan or tax arrears, a Licensed Insolvency Trustee can advise you.
What Are the Qualifications to File a Consumer Proposal?
Among debt relief options, a consumer proposal may be a viable solution for you if:
- You have debts exceeding $5,000, but not more than $250,000 (excluding secured debt such as your mortgage).
- You can afford to make a payment each month.
You cannot repay all of your creditors in full with interest.
- You can’t get a debt consolidation loan because your debts are too high.
You would like to be debt free but cannot pay your current debts.
- You don’t want to declare bankruptcy, because:
- You would be subject to surplus income payments; and / or
- You don’t want to lose control of your assets.
Consumer Proposal FAQs
How much does a Consumer Proposal cost?
In most cases, the proposal administrator will be paid from the proceeds of the consumer proposal, rolled into your regular monthly payments. The administrator’s fees are set by the Office of the Superintendent of Bankruptcy.
What are the qualifications to file a Consumer Proposal?
- You are insolvent (your debts are greater than the value of your assets or you are unable to make payments as those payments are due)
- You have total unsecured debts of less than $250,000 (excluding the mortgage on your principal residence and other secured debts such as vehicle loans)
- You have no prior consumer proposal proceedings still open
How does a Consumer Proposal affect my mortgage?
A consumer proposal does not affect secured debt, such as a mortgage. You will continue to make your monthly payment. Your secured creditors will be informed of your proposal, but if there have been no problems with your mortgage payments most banks or mortgage companies simply renew your mortgage normally when the time comes.
You will still need to make your regular mortgage payments if you make a consumer proposal.
Are there special rules around student loan payments, and debts owed to Canada Revenue Agency?
Yes. A Licensed Insolvency Trustee is highly qualified to advise you in these areas.
Is a Consumer Proposal the Right Option for Me?
Compared to other debt relief solutions, a consumer proposal could be a viable option if you are earning income but still struggling to get out of debt. A consumer proposal can help you get out of debt and start fresh.
A consumer proposal administrator can help you by meeting with you and working out a payment plan, and then presenting that plan to your creditors. If your creditors and the court accept your proposal, it becomes a legally binding settlement of your unsecured debts.
Meet with a Licensed Insolvency Trustee
Contact us to arrange a no-charge, no-obligation, confidential consultation with a Licensed Insolvency Trustee to review your financial situation and all of your options. Rest assured that the Trustee knows this is a stressful process – you will be in good hands.
Not Sure if a Consumer Proposal is Right for You?
Get a Free & Confidential Consultation with a Trustee