A consumer proposal is a legal debt settlement option available to Canadians who find themselves overwhelmed by their financial obligations. Consumer proposals allow debtors to negotiate new repayment terms with their creditors to make monthly payments more manageable for a period of up to five years. They are a popular bankruptcy alternative as they can reduce your unsecured debts by up to 80%, allow you to keep your assets, and offer protection from your creditors. Like any financial procedure, consumer proposals come with questions and concerns. In this article, we will address some of the most common consumer proposal FAQs to help you better understand this debt relief option, as well as some alternative options that might work better for you.
What is a consumer proposal?
To begin with, you might be wondering ‘what is a consumer proposal?‘ A consumer proposal is a legal form of debt settlement that is in line with the Bankruptcy and Insolvency Act. It is a deal that is put in place with your creditors to repay a percentage of your total amount of debt, in exchange for debt forgiveness for the remainder. For most Canadians, it can reduce your debt by up to 80% while enabling you to keep your assets. Once you have completed your consumer proposal, all of your unsecured debts included in the proposal are forgiven, and you are free to enjoy life after consumer proposal. It is a good opportunity for Canadians to manage their debts and avoid bankruptcy. Consumer proposals must be filed with the support of a Licensed Insolvency Trustee who will support you through each step of the process.
Who can file a consumer proposal?
In order to be able to file a consumer proposal, there are a few eligibility criteria you must meet:
- You must be insolvent
- Your unsecured debts must be valued at $250,000 or less – excluding a mortgage
- You must be able make manageable payments each month, or have an asset that can be sold to fund your consumer proposal
Who is best suited to filing a consumer proposal?
Consumer proposals are Canada’s #1 bankruptcy alternative. They are ideal in the following circumstances:
- If you think you will have surplus income, and will need to pay more each month in bankruptcy as a result
- If you have assets you are afraid to lose in a bankruptcy
- If you do not want more severe impact on your credit score
In order to learn if a consumer proposal is the right option for you, you should speak to a Licensed Insolvency Trustee to review your financial circumstances and understand what is best for you and your situation. See our consumer proposal examples to understand what might be possible for you.
How does a consumer proposal work?
A Licensed Insolvency Trustee will work with you to review your financial circumstances and will advise you on your debt relief options. If you agree that a consumer proposal is the best option for you, your trustee will help you to create a proposal outline a debt repayment plan. This will be a affordable monthly payment for you, and one that is much more affordable. The consumer proposal is then sent to your creditors for approval. If the majority of your creditors agree, the consumer proposal is accepted. From this point, you make your monthly payments to your Licensed Insolvency Trustee, who then distributes the funds to your creditors as per the agreed terms.
What are the advantages of a consumer proposal?
There are a number of advantages of a consumer proposal:
- Unsecured debts reduced by up to 80%
- You keep your assets
- Extended payment periods which can reduce your monthly payments
- Protection from creditors and legal action like wage garnishment via a stay of proceedings
- It is a legal program, meaning your creditors are more compelled to comply
- You can repay a consumer proposal early
- You avoid bankruptcy
Consumer proposal vs bankruptcy – what are the differences?
Here are the common differences between bankruptcy and a consumer proposal:
| Consumer proposal | Bankruptcy | |
| Assets | You do not need to surrender assets, including tax refunds | You will need to surrender any non-exempt assets, but can keep some essential assets up to a certain value threshold |
| Monthly payments | Usually lower than a bankruptcy | Usually higher than a consumer proposal |
| Approval of creditors | Required via a voting process | Not required |
| Payments | Negotiated upfront | Defined by legislation, and can increase in line with any income increases |
| Early repayment | Possible | Not possible – bankruptcy has a pre-defined length determined by legislation |
| Required duties | Fewer than bankruptcy – no need to report your income and expenses | Must report your income and expenses |
Can tax debts be included in a consumer proposal?
Yes – tax debts are considered unsecured debts, and the Canada Revenue Agency (CRA) is a regular creditor in the sense they are bound by a consumer proposal. The primary difference between the CRA and other creditors are the extreme collection measures it is able to take to regain tax debt payments. For many Canadians, this is all the more reason to include tax debts in a consumer proposal.
Are there risks involved in filing a consumer proposal?
As consumer proposals are legal debt settlements, generally they are a safe option. As with anything, there are some risks:
- Not all debts can be included, like secured debts and obligations like child support payments
- Impact on credit score – this will remain on your credit report for three years from the date you complete your consumer proposal. Once you have filed your consumer proposal, you will likely be saving money each month and can begin saving money – this will help you to rebuild your credit sooner
How much should you offer in a consumer proposal?
There are a few considerations to make when it comes to how much you should offer. Think about the following questions:
- Does your offer mean that your creditors will receive more than they would should you file bankruptcy?
- Do you think your offer is what your creditor is looking for? Is it an acceptable offer?
- Is your offer realistic and affordable?
Remember that the primary purpose of a consumer proposal is to reduce what you are paying each month, and remain affordable. By striking the right balance between what a creditor expects and what you can afford, you can find the sweet spot of a consumer proposal.
How long does a consumer proposal last?
A consumer proposal typically lasts between three to five years, depending on the terms and your financial situation. During this period, debtors make regular payments as outlined in the proposal. Legally, a consumer proposal can run for no longer than give years. This means you can figure out from the outset what your creditors want, and your payments can then be distributed evenly across this time span, allowing for affordable payments.
Are there interest payments on a consumer proposal?
No, consumer proposal payments are completely interest free! Whatever figure creditors agree to accept is what you will pay. No additional fees or interest are added. Once you have made all of your payments in full, that is it – your unsecured debt is eliminated.
Can you pay off a consumer proposal early?
Yes, you can pay off your consumer proposal early if your financial situation improves. You can make lump-sum payments or increase monthly payments to settle the debt sooner. Once your creditors have agreed on a repayment amount, you can repay it as quickly as you like.
What does a consumer proposal cost?
Generally, you will need to offer your creditors more than they would expect to receive in a bankruptcy. When you and your Licensed Insolvency Trustee are deciding how much to offer, your bankruptcy trustee will look at your assets and income to see how much your creditors could gain in a bankruptcy. Together, you will also assess your budget and what you think you can afford each month. In consumer proposals, there are no additional fees – your Licensed Insolvency Trustee is paid from the amount you agree to repay to your creditors. Learn more about the cost differences between consumer proposals and bankruptcy.
What is the acceptance rate for consumer proposals?
There are a few key factors for a successful consumer proposal:
- Offering creditors more than they would receive in a bankruptcy
- Meeting the minimum requirements of your creditors
- Ensuring your payments are affordable
At Spergel, we have a 99% acceptance rate on any consumer proposals we file. This means you have a 99% chance of having your unsecured debts reduced by up to 80%.
How long does it take to have your consumer proposal approved?
Once your consumer proposal has been filed, a stay of proceedings will be generated and you will automatically be protected from your creditors. At this point, you also stop making payments to your creditors. A consumer proposal will be approved if most of your creditors (based on the value of their claims) vote in favour of your consumer proposal, before it goes to the court for approval. A meeting may be required if at least a quarter of your unsecured creditors request one. They have 45 days to do so. If a creditor chooses not to vote, it is assumed they are happy with your proposal. For this reason, you will usually know if your consumer proposal is approved within 45 days or less.
Can you choose to leave a creditor out of your consumer proposal?
Unfortunately not – you cannot pick and choose which debts you include in your consumer proposal. All unsecured debts are eliminated, including credit card debts, lines of credit, payday loans, and so on. Secured debts cannot be included in consumer proposals, nor student loan debts that are less than 7 years old and some types of debt including fines, alimony, and child support payments.
Do consumer proposals stop collections and legal action?
Yes! Consumer proposals generate a stay of proceedings once filed. This is a legal action that immediately ends any creditor activity. This prevents creditors from making collection calls, or pursuing legal action like wage garnishments, placing a lien on your property, or freezing your bank account. Once you have signed your consumer proposal documents and they are filed, a stay of proceedings begins and you receive immediate protection from your creditors.
Do you have duties during your consumer proposal?
Thankfully, the duties associated with a consumer proposal are far less than those required in a bankruptcy. There are a couple of duties you need to fulfil:
- Make all your required payments, as agreed in your consumer proposal
- Attend two credit counselling sessions
- Comply with any other requirements included in your consumer proposal — your Licensed Insolvency Trustee will explain these thoroughly if they apply
You will receive a Certificate of Full Performance upon completion of your consumer proposal and your debts will be legally discharged.
What if you miss your consumer proposal payments?
It is possible to defer up to two consumer proposal payments, but if you have three payments in arrears, your consumer proposal will be annulled. This means you will owe your debts once again, creditors can contact you once again, and you are back at square one. It is really important to avoid this situation.
How does a consumer proposal affect my credit?
When you file a consumer proposal, the debts included will receive a R9 rating on your credit report, which is the worst rating you can receive. This rating will remain until the end of your proposal, then change to R7 for a further three years. If you pay your consumer proposal off sooner than agreed, you will begin to rebuild your credit.
Can I access credit while in a consumer proposal?
Yes, it is possible to obtain credit while in a consumer proposal. Some financial institutions will tread very carefully when it comes to lending once they become aware that you have previously filed a consumer proposal. For this reason, secured credit cards are a good way to begin rebuilding your credit. You should also be very careful when taking on credit again if debt was the primary reason you needed to file a consumer proposal. Some Canadians choose to wait months — or even years — before they feel confident obtaining or using credit again.
Who can help you to file a consumer proposal?
Licensed Insolvency Trustees are the only professionals in Canada legally able to file bankruptcy or a consumer proposal in Canada. With their extensive experience and in-depth knowledge of the Bankruptcy and Insolvency Act, Licensed Insolvency Trustees can review your financial circumstances and recommend an appropriate form of debt relief. When it comes to consumer proposals, they can structure a custom proposal that works with your budget and provides a satisfactory return to creditors. You should be very careful of other individuals claiming they can file a consumer proposal for you – anyone without a license is not able to.
Is a consumer proposal right for me?
It is very difficult to answer this without knowing your exact circumstances. A no obligation, confidential consultation with one of our expert Licensed Insolvency Trustees at Spergel will help you decide if a consumer proposal is the right debt solution for you, or if an alternative might work better for you.
Consumer proposals offer a viable pathway to debt relief for many Canadians struggling with financial burdens. Hopefully our consumer proposal FAQs have helped you to understand the process, eligibility criteria, benefits, and potential risks involved. If you are considering a consumer proposal, book a free consultation with one of the expert Licensed Insolvency Trustees at Spergel to explore the best debt relief options available to you.