Consumer Proposal Explained: What It Is and How It Works in Canada

A consumer proposal is a legally binding debt settlement process available in Canada that allows you to repay a portion of your unsecured debts through a single monthly payment, typically over a period of up to five years. It is a formal alternative to bankruptcy, designed to help individuals who are struggling with debt but want to avoid the full impact of bankruptcy. The consumer proposal is filed through a Licensed Insolvency Trustee, and it stops most collection actions, including wage garnishments and calls from creditors. Once accepted by creditors, you make one affordable monthly payment to the trustee, who then distributes the funds to your creditors. This guide explains how a consumer proposal works, its benefits and drawbacks, and how it compares to other debt relief options like debt consolidation.

How Does a Consumer Proposal Work?

When you file a consumer proposal, you work with a Licensed Insolvency Trustee to create a formal offer to your creditors. The offer typically proposes to pay back a percentage of what you owe or to extend the time you have to pay. Creditors vote on the proposal; if a majority (by dollar value) of creditors who vote accept it, the proposal becomes binding on all unsecured creditors, including those who voted against it. During the proposal, you keep your assets (such as your home or car) as long as you continue making payments on secured debts like a mortgage or car loan. The consumer proposal will appear on your credit report from Equifax and TransUnion Canada for three years after completion, or six years if you default, which can affect your credit score. However, once the proposal is completed, the debts included are legally discharged.

Key Benefits of a Consumer Proposal

• Stop collection actions: Once filed, creditors cannot garnish wages, seize assets, or continue phone calls and letters.
• Lower monthly payment: You combine all unsecured debts into one affordable monthly payment, often much lower than the total of your original payments.
• No interest charges: During the proposal, interest on included debts stops accruing, which can save you money over time.
• Keep your assets: Unlike bankruptcy, you can generally keep your home, car, and other essential property.
• Shorter impact on credit: The consumer proposal stays on your credit report for a shorter period than bankruptcy (which can remain for six to seven years after discharge).

Consumer Proposal vs. Debt Consolidation

Debt consolidation is a different approach where you combine multiple debts into a single new loan, usually with a lower interest rate. This can be a good option if you have a stable income and a good credit score, because you might qualify for a debt consolidation loan with a lower APR. However, debt consolidation does not reduce the amount you owe; it simply reorganizes the payoff. In contrast, a consumer proposal can reduce the total debt amount, but it has a more significant negative impact on your credit score and requires filing with a trustee. Both options involve a monthly payment, but the consumer proposal is a legally binding process that stops collection efforts, while debt consolidation relies on your ability to secure a new loan. The best choice depends on your income, debt level, and credit history. For general guidance, consult a licensed insolvency trustee or a financial advisor to evaluate your situation.

What Debts Can Be Included in a Consumer Proposal?

Most unsecured debts can be included in a consumer proposal, such as credit card balances, personal loans, payday loans, and some student loans (if you have been out of school for at least seven years). Secured debts like mortgages, car loans, and HELOC balances typically cannot be included, but you can continue making payments on those separately. Government debts (e.g., taxes, student loans under seven years, and child support) have special rules and may not be dischargeable. It is important to discuss all your debts with your trustee to understand what can be included.

Consumer Proposal Costs and Timeline

These are general guidelines; your specific situation will determine the exact terms. Always consult with a licensed insolvency trustee for personalized advice.