A consumer proposal is a legally binding agreement between you and your unsecured creditors, set up and administered by a Licensed Insolvency Trustee (LIT) under the federal Bankruptcy and Insolvency Act. You offer to repay a portion of your debt, or the full amount over a longer period, and once the proposal is accepted, all your unsecured creditors are bound by it. It's the main legal alternative to bankruptcy.
Key facts
- Who can file: individuals with unsecured debts of $250,000 or less, not counting the mortgage on your principal residence
- Who files it: only a Licensed Insolvency Trustee
- Length: up to five years
- Immediate effect: interest stops, and most collection action and wage garnishments end once it's filed
- Credit report: removed 3 years after it's paid off, or 6 years after you signed, whichever comes first
How it works
- Free consultation. An LIT reviews your finances and explains all options, including whether a proposal is realistic.
- The offer. The trustee drafts a proposal based on what you can afford and what creditors would likely get if you went bankrupt instead.
- Filing. Once filed, a "stay of proceedings" stops most collection action.
- Creditor vote. Creditors have 45 days to respond. The proposal is accepted if creditors holding a majority of the debt value who vote, vote in favour, or if no meeting is requested.
- Payments. You make regular payments to the trustee, who distributes them.
- Counselling. You attend two mandatory financial counselling sessions.
- Completion. When all payments are made, the remaining unsecured debt included in the proposal is legally released.
How much you repay
There's no fixed percentage. The amount depends on your income, assets and what creditors would recover in a bankruptcy, since creditors generally have to be better off accepting the proposal. The trustee's fees are regulated and are paid out of your proposal payments rather than as a separate upfront charge.
Only trustees can file. Some debt consultants charge fees to "refer" you to a trustee, or present themselves as settlement experts. You can go directly to a Licensed Insolvency Trustee for a free consultation.
What it covers, and what it doesn't
A proposal covers most unsecured debt: credit cards, lines of credit, personal loans, payday loans, and most tax debt owed to the CRA. It doesn't cover secured debts such as your mortgage or car loan, which you keep paying normally. Certain debts, including child and spousal support, court fines and some student loans less than seven years old, generally aren't eliminated.
Proposal vs bankruptcy
| Consumer proposal | Bankruptcy | |
|---|---|---|
| Keep your assets? | Generally yes | Non-exempt assets may be surrendered |
| Payments | Fixed amount you agree to | Can depend on income, with surplus income rules |
| Length | Up to 5 years | Typically 9 to 21 months for a first bankruptcy |
| Credit report (first time) | 3 years after completion, or 6 after filing, whichever first | Usually 6 years after discharge, 7 in some provinces with TransUnion |
Rebuilding afterwards
Many people start rebuilding credit during or soon after a proposal, often with a secured credit card, by making every payment on time and keeping balances low. Check that your credit reports show the proposal as completed and that included debts show zero balances.
Frequently asked questions
What is the maximum debt for a consumer proposal?
$250,000 of debt, not including the mortgage on your principal residence. Above that, a different type of proposal applies.
How long does a consumer proposal stay on your credit report?
Three years after you finish paying, or six years from the date you signed, whichever comes first.
Can I keep my house in a consumer proposal?
Generally yes, as long as you keep up your mortgage payments. The proposal amount may take your home equity into account.
What happens if creditors reject my proposal?
You can revise and resubmit it, look at other options, or consider bankruptcy. Your trustee will explain the choices.
Sources
- Office of the Superintendent of Bankruptcy, Office of the Superintendent of Bankruptcy Canada
- Financial Consumer Agency of Canada, How long information stays on your credit report