A consumer proposal is a formal, legally binding debt-relief solution in Canada that allows individuals struggling with unmanageable debt to negotiate an affordable repayment plan directly with their creditors. Governed by Canada’s Bankruptcy and Insolvency Act (BIA) and administered exclusively by a Licensed Insolvency Trustee (LIT), a consumer proposal provides individuals with the opportunity to significantly reduce their total debt obligations, avoid bankruptcy, and regain control of their finances.
What’s Included In a Consumer Proposal
Consumer Proposal Decision
A Licensed Insolvency Trustee (LIT) would typically recommend and decide to move forward with a consumer proposal in Canada when it clearly represents the most suitable, responsible, and beneficial solution to manage an individual’s debt situation.
Specific circumstances could include:
- Debts are Substantial but Manageable
- Bankruptcy is Avoidable and Not Ideal
- You Need Immediate Legal Protection
- You Want to Protect Certain Assets
- Your Debts are Primarily Unsecured
- Creditors Likely to Accept a Proposal
- You Want Predictable Payments
- You Want to Preserve Your Credit Rating
Debts are Substantial but Manageable
A consumer proposal is ideal when your debts have become overwhelming, yet you still have sufficient income or resources to repay a reasonable portion of them. If your income allows manageable monthly payments over a defined period (up to five years), a consumer proposal is often the preferred option.
Bankruptcy is Avoidable and Not Ideal
If the trustee believes bankruptcy is overly severe given your financial circumstances, or if you have assets you wish to protect from liquidation, they will likely suggest a consumer proposal as an effective alternative. A consumer proposal allows you to avoid the harsher consequences and stigma of bankruptcy.
You Need Immediate Legal Protection
If you’re experiencing aggressive creditor actions such as garnishment, account seizures, collection calls, or lawsuits, a trustee would recommend a consumer proposal because it immediately halts these actions through a legally binding “stay of proceedings.”
You Want to Protect Certain Assets
If you have significant assets—such as equity in your home, investments, or a vehicle exceeding provincial exemption limits—that you would lose in bankruptcy, a consumer proposal becomes the preferable option. A consumer proposal allows you to retain and protect these assets while still reducing your debt burden.
Your Debts are Primarily Unsecured
Consumer proposals work best when your debts are primarily unsecured debts, such as credit cards, personal loans, payday loans, or income tax arrears. Secured debts (e.g., mortgages or car loans) typically remain separate from the proposal but become easier to manage when unsecured debts are significantly reduced.
Creditors Likely to Accept a Proposal
Trustees recommend consumer proposals when they believe creditors will accept a reasonable repayment offer. Since a consumer proposal requires creditor approval (by dollar majority), the trustee assesses creditor attitudes and typical acceptance thresholds to create a viable proposal likely to gain approval.
You Want Predictable Payments
Consumer proposals offer predictable monthly payments tailored to your affordability over a defined term (usually up to five years). If you prefer clear structure and certainty rather than uncertain informal negotiations, your trustee will recommend a consumer proposal as a structured, professional approach.
You Want to Preserve Your Credit Rating
While a consumer proposal does impact your credit score, it typically has a shorter and less severe impact compared to bankruptcy. Trustees often recommend a consumer proposal if your financial goal includes faster credit rebuilding after dealing with significant debt.
Consumer Proposal Process
The consumer proposal process in Canada is structured, legally regulated, and involves several clear, professional steps.
- Consultation with a Licensed Insolvency Trustee (LIT)
- Preparing and Filing the Consumer Proposal
- Stay of Proceedings
- Creditor Review and Voting
- Approval and Legal Binding
- Structured Repayments
- Credit Counselling Sessions
- Completion and Debt Discharge
- Credit Rebuilding
Consultation with a Licensed Insolvency Trustee (LIT)
During the initial consultation with a Licensed Insolvency Trustee (LIT), you will experience a professional, thorough, and confidential meeting designed to assess your financial situation clearly and objectively. The goal is to determine your best path forward to address overwhelming debt.
When an individual files a consumer proposal, their Licensed Insolvency Trustee reviews their financial situation, assessing income, expenses, assets, and total debts. Based on this assessment, the trustee prepares a formal proposal to creditors outlining a reduced amount to repay, typically a portion of the original debts owed. This amount is structured into monthly payments over a period of up to five years (60 months), tailored specifically to the debtor’s affordability.
Once the consumer proposal is filed, a legal “stay of proceedings” immediately comes into effect. This halts all creditor actions, such as collection calls, wage garnishments, lawsuits, and enforcement activities, providing immediate relief and protection to the debtor.
Creditor Review and Vote
Creditors have 45 days from the filing date to review and vote on the consumer proposal. For a proposal to be accepted, it must receive approval from creditors holding a simple majority (over 50%) of the total dollar amount of debts included. If approved, the consumer proposal becomes legally binding on all creditors involved, even those who voted against or did not respond to the proposal. After approval, creditors are prohibited from seeking additional payments beyond what is outlined in the agreed-upon terms.
What’s Included In a Consumer Proposal
Consumer proposals typically include unsecured debts such as credit cards, unsecured personal loans, lines of credit, payday loans, and even income tax debts. However, secured debts (mortgages, car loans, etc.) are generally not included, although the reduction in unsecured debts often helps make secured payments more manageable. Certain debts, like child support or court-ordered fines, are excluded from a consumer proposal and must still be paid separately.
Completion and Debt Discharge
Upon successfully completing all payments under the consumer proposal, the individual is legally released from the remainder of the included debts. This provides significant debt relief and the chance to rebuild financial stability without the full consequences of bankruptcy.
A consumer proposal will be noted on a person’s credit report, typically remaining for three years after the final payment has been made. While this impacts credit initially, successfully completing a proposal helps individuals rebuild their credit faster and more effectively than declaring bankruptcy, which has a longer-lasting impact on credit.
Summary
A consumer proposal provides Canadians struggling with unmanageable debt an effective, legally protected means of significantly reducing their financial obligations without the need for bankruptcy. It allows individuals to regain financial stability through structured, affordable repayments, ultimately facilitating a fresh financial start.
