Consumer Proposal Pros and Cons

What is a consumer proposal?

A consumer proposal is the only government-approved debt settlement program in Canada. It is governed under Canada’s Bankruptcy and Insolvency Act (BIA) and allows you to eliminate unsecured debt while repaying only a portion of what you owe, rather than the total amount due.

The debt payments are affordable and interest-free, and you can keep your assets. In 2024, consumer proposals accounted for 79% of all Canadian consumer insolvencies, with 137,295 consumer filings.

Source: Government of Canada – Canadian Consumer Debtor Profile 2024

This guide outlines the pros and cons of a consumer proposal to help you make an informed decision about whether it’s the right solution for your financial situation.

Advantages of a consumer proposal

A consumer proposal offers several key advantages over other debt relief options, such as a debt consolidation loan or a debt management plan.

1. Reduce and eliminate your debt

A consumer proposal could reduce your total debt to what you can realistically afford. Sometimes, you can have your debts reduced by up to 80%.

For example, if you owe $50,000 in unsecured debt, your proposal might require you to repay only $10,000 to $15,000 over the repayment period. Then, after you make all your proposal payments, your debts are eliminated and you become debt free.

As it’s a legal agreement with your creditors, they forgive the remaining dollar value of your debt. This is different from a debt consolidation loan, which combines multiple loans into a single payment but does not reduce the total amount owed.

Source: Government of Canada – Office of the Superintendent of Bankruptcy, Consumer proposals

2. One fixed monthly payment

Through a consumer proposal, your unsecured debt is restructured into a single, affordable monthly payment over up to 60 months, making it one of the best debt consolidation options around.

No interest is applied to your proposal payments. Once your consumer proposal is filed, interest stops accruing on all debts included in the proposal. The amount will never increase, even if your income increases.

This is the opposite of bankruptcy, where surplus income payments mean you pay more if your household income rises.

3. Stop creditor hassle immediately

Once you file a consumer proposal, your unsecured creditors can’t take legal action against you, and any current legal action must stop. Interest on your debt is frozen, collection calls will stop, and wage garnishment will be lifted.

This creditor protection is called a stay of proceedings and provides legal protection for all your unsecured creditors. However, secured creditors can seize assets if you default on your payments.

Source: Government of Canada – Bankruptcy and Insolvency Act, Part III, Division II

4. Keep your assets

One of the key benefits of a consumer proposal is that you won’t lose your assets.

By agreeing to a repayment plan, you can protect assets such as your home equity, your car, investments and savings. A consumer proposal allows you to keep all your assets, including money in your bank account.

In a bankruptcy, you are required to surrender all non-exempt assets, while a consumer proposal allows you to keep everything.

Secured loans aren’t affected as long as you continue making monthly payments to them.

5. Protect future income

A consumer proposal protects against future income increases.

Once your creditors approve your proposal, you make a fixed monthly payment that never increases, regardless of any change in your income. There are no surplus income payments in a consumer proposal, even if you earn significant income.

This is the opposite of bankruptcy, where you must pay more into your bankruptcy estate if your income exceeds the government threshold. If you have surplus income in bankruptcy, your payments increase, and the process takes longer.

Source: Government of Canada – Office of the Superintendent of Bankruptcy, Consumer proposals

If you think your income might increase further down the road, a consumer proposal is a better option than declaring bankruptcy.

6. You only need a majority of creditors to accept

You only require creditors owning more than 50% of the total debt to agree to the consumer proposal.

Once the proposal is prepared, your trustee submits it to creditors for approval. Creditors have 45 days to vote on it. If the majority approve, all creditors are bound by its terms, and you begin making the agreed-upon payments.

7. A trustee will deal with your creditors

A Licensed Insolvency Trustee (LIT) will deal with your creditors on your behalf and liaise with them during the term of your consumer proposal. Licensed Insolvency Trustees are the only professionals authorized to administer consumer proposals in Canada.

Your proposal administrators will guide you through the process and ensure your creditors are notified at each stage. Once the process begins, you won’t have to deal with financial institutions directly.

The first step is to arrange a consultation with a trustee to discuss a consumer proposal, who will assess your financial situation, determine eligibility, and explain your repayment options.

Your trustee will then prepare a proposal for your creditors, detailing payment terms, the amount you’ll pay back and a monthly payment schedule.

8. You do not have to declare bankruptcy

By filing a consumer proposal, you can avoid filing personal bankruptcy.

If you file bankruptcy, you may be required to surrender certain exempt assets and make surplus income payments.

A bankruptcy filing results in the lowest possible credit rating, which remains on your credit report for six to seven years for first-time filers.

Creditors are generally happy with consumer proposals because a consumer proposal requires you to offer more than they would receive in bankruptcy.

9. Governed under federal legislation

A consumer proposal is a government-regulated debt relief program under Canada’s Bankruptcy and Insolvency Act (BIA) and administered by Licensed Insolvency Trustees.

A Licensed Insolvency Trustee is licensed by the Office of the Superintendent of Bankruptcy, which regulates and manages the Canadian bankruptcy and insolvency industry.

A consumer proposal must offer creditors more than they would receive if you declared bankruptcy, but the amount is typically significantly less than the original debt owed.

Disadvantages of a consumer proposal

Now, let’s look at the cons of a consumer proposal. While it offers many benefits, there are some drawbacks to consider compared to other debt relief solutions.

1. It will affect your credit

Like most debt relief options, a consumer proposal does impact your credit rating.

When you file a consumer proposal, your credit accounts are marked to reflect the arrangement. Revolving credit accounts (like credit cards) receive an R7 rating, while installment accounts (like loans) receive an I7 rating. The “7” indicates you’re making payments through a special arrangement to settle your debts.

This is lower than ratings for on-time payments (R1 or I1) but less severe than an R9 or I9, which is assigned in bankruptcy or when debts are sent to collections. You may find it difficult to obtain new credit for a while.

Source: Equifax Canada – Consumer Credit Report User Guide

A record of your consumer proposal will appear in the public record section of your credit report for three years after you complete the proposal. This can affect your credit history during that time.

However, if your credit rating is already negatively affected by missed or late payments, a consumer proposal won’t cause much further damage.

Your credit won’t be damaged forever, and you can rebuild credit sooner after a consumer proposal because you have cleared your debts. A consumer proposal will cause less damage to your credit report than bankruptcy.

2. You need disposable income

A consumer proposal requires you to have some income left over after essential monthly bills to make proposal payments to your creditors.

Your proposal offer must offer creditors more than they would get if you declared bankruptcy. The monthly amount is affordable because the total repayment is paid over a longer repayment period.

Your Licensed Insolvency Trustee will determine an amount that creditors will likely accept.

A consumer proposal means you pay lower debt payments, potentially freeing up money and helping you save money compared to your current situation.

Filing for personal bankruptcy may be a better option if you have no assets or low income. Your trustee can explain the other alternatives available to you.

3. A consumer proposal takes longer

A consumer proposal takes longer to complete than bankruptcy because you pay your creditors a lower amount over a longer repayment period. The consumer proposal process can last up to five years, while bankruptcy typically takes about nine months.

If your financial situation improves, you can pay more to complete your consumer proposal early and achieve financial freedom faster.

4. You can only include unsecured debts

You can eliminate unsecured debts in a consumer proposal, including credit card debt, personal loans, lines of credit, payday loans, and CRA debts.

If you’re looking to include secured loans, such as a mortgage or car loan, you must continue to make payments on these debts to keep the asset tied to the loan.

A consumer proposal consolidates your unsecured debt into an affordable monthly payment, which could free up funds to pay your secured debts.

However, you can surrender an asset if you cannot afford the secured debt attached to it. You can include any shortfall you are liable for in your consumer proposal.

5. All of your creditors must be included

All applicable unsecured creditors must be included in a consumer proposal. You cannot choose or exclude creditors; you must include all creditors.

6. Not all student loans can be eliminated

You can eliminate student loan debt in a consumer proposal if you have been out of school for seven years or more.

Source: Bankruptcy and Insolvency Act, Section 178(1)(g)

If your student debt is less than seven years old, it won’t go away if you file a proposal.

You will remain responsible for paying the student loan debt after the consumer proposal ends, and interest will accrue on the debt during this period.

7. You must keep up with payments

If you default on three payments in your consumer proposal, the proposal is annulled, and you cannot file another consumer proposal. You would then need to consider other debt relief options, including bankruptcy.

It’s important to contact your Licensed Insolvency Trustee immediately if you’re having trouble making payments, as they may be able to amend your proposal terms.

Consumer proposal vs bankruptcy: quick comparison

Factor	Consumer Proposal	Bankruptcy
Assets	Keep all your assets	May lose non-exempt assets
Income changes	Fixed payments, no surplus income	Surplus income payments if income exceeds threshold
Duration	Up to 60 months	9 to 21 months (first bankruptcy)
Credit impact	R7/I7 rating, 3 years after completion	R9/I9 rating, 6 to 7 years after discharge
Monthly reporting	Not required	Must report income monthly to the trustee
Cost	Fixed, agreed upfront	Surplus income payments if income exceeds the threshold

Source: Government of Canada – Office of the Superintendent of Bankruptcy, Compare debt solutions

Is a consumer proposal right for me?

In most cases, the advantages of a consumer proposal outweigh the disadvantages, but a Licensed Insolvency Trustee (LIT) can advise further and offer tailored debt help for your specific needs.

A consumer proposal lets you keep your assets, make fixed monthly payments, and avoid the surplus income payments required in bankruptcy. It’s the right solution for many Canadians who want debt relief without declaring bankruptcy.

To learn more about whether a consumer proposal is worth it for you, arrange a free consultation with a Licensed Insolvency Trustee to discuss your debt relief options.