What Is a Consumer Proposal and How Does It Work?

A consumer proposal is a formal debt solution in Canada. It provides a legally binding agreement between a debtor and their creditors, overseen by a Licensed Insolvency Trustee (LIT). This process aims to help individuals resolve unsecured debts by offering to pay back a portion of what is owed, or a set amount over a defined period. It offers a structured path toward financial stability, serving as an alternative to bankruptcy without the complete forfeiture of assets.

Understanding a Consumer Proposal

A consumer proposal is a formal, legally binding arrangement between a debtor and their unsecured creditors in Canada. Administered by a Licensed Insolvency Trustee (LIT), this debt restructuring option involves an impartial intermediary. The debtor offers to repay a percentage of outstanding unsecured debts, or a fixed amount, over a period not exceeding five years.

This solution is an alternative to personal bankruptcy for individuals who can afford to repay a portion of their debts. Unlike bankruptcy, it generally allows debtors to retain assets while benefiting from debt relief. Upon filing, a “stay of proceedings” is triggered, halting collection calls, freezing interest, and stopping most legal actions by unsecured creditors. The objective is to help individuals avoid bankruptcy, consolidate unsecured debts, and regain financial control.

Eligibility and Requirements

To qualify for a consumer proposal in Canada, individuals must meet specific conditions. Individuals must be insolvent, meaning they cannot meet debt obligations or their total liabilities exceed assets. They must also reside, carry on business, or own property within Canada.

Unsecured debts must be greater than $1,000 but generally not exceed $250,000, excluding a principal residence mortgage. Common unsecured debts include credit card balances, lines of credit, personal loans, payday loans, and income tax debts. Student loans can be included if seven years have passed since ceasing to be a student.

A Licensed Insolvency Trustee (LIT) assesses eligibility and advises on the best course of action. Individuals need to gather comprehensive financial information, including proof of income, a list of creditors and amounts owed, income and expense statements, and asset values. This helps the LIT determine if a proposal is appropriate and formulate a repayment plan.

The Proposal Process

The process begins with an initial consultation with a Licensed Insolvency Trustee (LIT). The LIT reviews the financial situation, discusses debt relief options, and determines if a consumer proposal aligns with their circumstances. Once the decision to proceed is made, the LIT prepares legal documents, including a Statement of Affairs, Statement of Income and Expense, Assessment Certificate, and the Consumer Proposal.

The LIT electronically files these documents with the Office of the Superintendent of Bankruptcy, initiating the formal process. This filing triggers a “stay of proceedings,” protecting the debtor by stopping collection calls, freezing interest on unsecured debts, and preventing further legal action or wage garnishments. Creditors are notified of the proposal and given 45 days to review terms and submit their vote.

For acceptance, a majority (more than 50%) of creditors, based on dollar value of debts owed, must vote in favor. If creditors representing at least 25% of the total debt object within 45 days, a meeting must be held within 21 days to discuss and negotiate terms. If no objections are raised or the proposal is accepted by the majority, it is deemed approved by the court 15 days after creditor acceptance.

Following approval, the debtor makes monthly payments to the LIT, who distributes funds to creditors. Payments are typically spread over up to 60 months, or five years. Throughout repayment, the debtor attends two mandatory financial counselling sessions focusing on budgeting and financial management. Upon successful completion of payments and counselling, the debtor receives a Certificate of Full Performance, legally releasing them from included debts.

Financial Implications of a Proposal

A consumer proposal alters a debtor’s financial landscape by restructuring unsecured debts. Once filed, interest on unsecured debts ceases to accrue, and creditors are prohibited from contacting the debtor for collection. The debtor makes a single, consolidated payment to the Licensed Insolvency Trustee, who distributes funds to creditors according to the accepted proposal. Secured debts, like mortgages or car loans, are generally not included; debtors must continue payments to retain associated assets.

One advantage of a consumer proposal, compared to bankruptcy, is the ability to keep assets. Debtors typically retain ownership of homes, vehicles, investments (like RRSPs and TFSAs), and other personal possessions, provided they maintain payments on secured loans tied to these assets. This protection of assets makes a consumer proposal an attractive option.

The filing of a consumer proposal impacts an individual’s credit report and score. It appears on the credit report with an R7 rating, indicating a formal debt repayment arrangement. This notation remains on the credit report for up to three years after completion, or six years from filing, whichever is shorter. While this can make obtaining new credit challenging, it is considered less severe than the R9 rating associated with bankruptcy. Rebuilding credit after a consumer proposal is possible through diligent financial management and responsible use of new credit.