If you’re struggling with your debts and looking for options, then a consumer proposal may be a good option. Many people want to pay their fair share and avoid bankruptcy, so a consumer proposal is a great option.
In 2023, approximately 128,000 people in Canada filed for personal insolvency, with about 77% filing a consumer proposal. Therefore, many people choose to use this option to reduce their debts.
To decide if a consumer proposal is right for you, below is a comprehensive guide on the process and what to expect before, during and after filing a consumer proposal.
Table of Contents
1) INTRODUCTION
What is a Consumer Proposal?
A consumer proposal is a legally binding contract between you and all your unsecured creditors to pay off all or a portion of your outstanding debts. It is a formal agreement regulated by the Office of the Superintendent of Bankruptcy, ensuring all your creditors comply with the agreed terms. If you are struggling with your debts and want to avoid bankruptcy, this can be a great option to pay off your debts.
A consumer proposal must be filed with a Licensed Insolvency Trustee in Canada. While in a consumer proposal, you agree to make a fixed payment, such as a monthly payment to the Licensed Insolvency Trustee, who will distribute the funds to your creditors. The consumer proposal must be completed within five years from when it started.
Can I Qualify for a Consumer Proposal?
To qualify for a consumer proposal, you must have debts between $1,000 and $250,000 of debts in Canada (excluding mortgage for your primary residence).
If you have debts more than $250,000, then you can consider filing a Division 1 Proposal.
What Debts Can and Cannot be Included in a Consumer Proposal?
Consumer proposals can include most unsecured debts, such as the following: (picture)
Credit cards
Lines of credit
Personal loans
Payday loans
Tax debts
Student loans – more than seven years from last attending school
Car loans – balance owing if returned
Other debts, such as secured debts, would not be included in a consumer proposal, such as a car loan or mortgage.
There are also other debts which will not be discharged in a consumer proposal, such as:
Court fines
Spousal and child support arrears
Debts arising from fraud
Student loans – Less than seven years from last attending school
What are the Benefits of Filing a Consumer Proposal?
Filing a consumer proposal can be a great way to take control of your finances and get a fresh start. Below are some of the benefits of filing a consumer proposal:
Can reduce your total debts owing up to 80% depending on your financial situation;
Immediately stops all interest on your debts;
Immediately stops all collection actions by creditors;
Stop all wage garnishments and judgements by creditors;
Keep all of your assets;
It can be paid off sooner with no penalties.
What are the Disadvantages of Filing a Consumer Proposal?
The most significant disadvantage of filing a consumer proposal is it will impact your credit rating. Filing a consumer proposal will assign an R7 rating to your credit record. This means you are on a payment plan with your creditors.
Also, you will have to stop doing business with the creditors included in your consumer proposal. For example, if you owe money to a credit card with the same bank where you hold your bank account, you will likely need to open a new one at another financial institution. This is because of the right to offset.
Lastly, a consumer proposal is a legal document, so you must complete all the agreed terms, or you will be unsuccessful. Before filing a consumer proposal, you should review your finances and ensure that you can complete it, or you may find yourself back in the same position you started before filing it.
What is a Licensed Insolvency Trustee?
Licensed Insolvency Trustees (LITs) are federally regulated professionals providing advice and services to individuals and businesses with debt problems. They help individuals and companies make informed choices to support their financial difficulties.
Licensed Insolvency Trustees are federally regulated by the Office of the Superintendent of Bankruptcy (OSB). They will work on your behalf to deal with your creditors, including stopping any collection or legal action against you.
What is a Licensed Insolvency Trustee’s Responsibility in a Consumer Proposal?
The Licensed Insolvency Trustee represents you and your creditors and ensures the manages the consumer proposal process until completion. You cannot file a consumer proposal independently and must use a Licensed Insolvency Trustee.
A Licensed Insolvency has two primary responsibilities in a consumer proposal: monitoring the terms of the proposal and collecting and disbursing the proceeds from your payments to the creditors.
The Trustee will collect your proposal payments and keep them in a consolidated trust account which will go towards the Trustee’s fees and issuing cheques to your creditors. The Trustee will also keep track of your missed payments. For example, if you fall behind three months of payments, they will notify your creditors and the Office of the Superintendent of Bankruptcy that your consumer proposal has been annulled. This means you will lose the protection from your creditors, and they can collect from you again and charge you interest.
How Much Debt Can You Reduce With a Consumer Proposal?
Depending on your financial situation, you can reduce your debts by up to 80%. Creditors will look at your assets, income, liabilities, budget and whether you have filed for bankruptcy before to determine whether they will accept your consumer proposal.
Generally, creditors are motivated to accept a consumer proposal if they will receive more money than if you file for bankruptcy. Therefore, the Trustee will assist you in determining an amount that your creditors are likely to accept.
How Much Does a Consumer Proposal Cost?
The cost to file a consumer proposal includes a government filing fee of approximately $100, plus the Licensed Insolvency Trustee’s fees as the consumer proposal administrator. These fees are set by a tariff pursuant to the Bankruptcy & Insolvency Act and are the same for all Licensed Insolvency Trustees in Canada.
The Trustee’s fees are deducted from your payments towards the consumer proposal agreed with your creditors. This means there are no additional fees or costs required to be paid by you. The tariff allows the Administrator to pay fees of $750 upon filing the consumer proposal and $750 upon the proposal being approved by the creditors, plus 20 percent of the available funds for creditor distributions, plus applicable taxes. There are also counselling fees of $85 per session for the two sessions you are required to attend to complete the terms of the consumer proposal.
2) FILING A CONSUMER PROPOSAL
What Should I Do Before Filing a Consumer Proposal?
Before you file a consumer proposal, you must prepare to live without credit. This means preparing a budget and seeing where your money is going throughout the month for expenses. You should then determine if you were cut off from your credit cards and loans and rely solely on your income, could still pay all of your monthly expenses plus the consumer proposal payments.
For example, suppose you compare your current monthly debt payments, such as payments to credit cards and lines of credit, to your proposed consumer proposal monthly payment. In that case, it will give you a good proxy if you can manage your personal expenses and consumer proposal payments.
Another essential step before filing a consumer proposal is to see if you need to change financial institutions for your day-to-day banking. For example, if you currently have your chequing account at the same bank where you owe money on your credit card, upon filing your consumer proposal, that bank will close your account and take any money in that account.
Therefore, in this situation, you should move your banking to another financial institution and notify your company’s payroll department and any other monthly payments, such as car loan payments, to the new bank account so there are no interruptions.
Where Do You File a Consumer Proposal?
To file a consumer proposal in Canada, you must use a Licensed Insolvency Trustee (LIT). You will need to provide the Licensed Insolvency Trustee with all their requested documents for the Trustee to prepare the government forms for you to sign and file your consumer proposal.
The documents can be signed with the Licensed Insolvency Trustee in person or virtually over a video call using electronic signing software.
How to File a Consumer Proposal
Before filing a consumer proposal, you should meet with a Licensed Insolvency Trustee for a consultation to review your financial situation, explore your options and help you determine if the consumer proposal is the best option, and give you the next steps.
The Licensed Insolvency Trustee will provide a list of documents required to prepare your consumer proposal for signing. Typical types of documents include:
ID – driver’s license or passport
Vehicle ownership
Pay stubs
Investment statements
Pre-authorized payment form for your monthly payments
When the Licensed Insolvency Trustee has received and reviewed all your information, they will prepare the required documents for you to sign. These documents include the following:
Statement of Affairs – This document lists all your assets, liabilities, and personal information about yourself. This includes your birthdate, employment, whether you have disposed of any assets in the past five years, and if you have previously filed a bankruptcy or consumer proposal. You will then have to swear to a Commissioner of Oaths that all your information provided is correct.
Monthly Income and Expense Statement – Your personal income and your family’s income (if they choose to disclose it) will be listed here, along with a list of the discretionary and non-discretionary expenses you spend in a typical month.
Consumer Proposal – This is the contract you are making with your creditors. The consumer proposal includes how you will pay your secured and unsecured creditors. For example, it will consist of the total amount you offer to your unsecured creditors and your monthly payments. It also includes how the Licensed Insolvency Trustee will be paid and when they will distribute payments to creditors on your behalf. Finally, it will include any additional terms you may want to include in the proposal.
Assessment Certificate – The Trustee will review this document to confirm you understand the options between a consumer proposal, division 1 proposal and bankruptcy and which option you have chosen. The assessment will also note how it was completed by video or in person and whether you received and paid for financial advice in the past six months.
Once you and the Licensed Insolvency Trustee sign all these documents, the Trustee will file the documents with the Office of Superintendent of Bankruptcy and send a copy of your consumer proposal to all listed creditors.
What Are My Responsibilities During the Consumer Proposal?
Your primary responsibilities during the consumer proposal are simple:
1) Make all of your agreed payments without falling behind three months of payments at any point; and
2) Attend the two financial counselling sessions.
What to Expect After Filing a Consumer Proposal?
Once your consumer proposal is filed, you will feel immediate relief that your debts are being handled. You should also be relieved of no longer dealing directly with your unsecured creditors, as you will immediately stop all payments to them. This is because upon filing the consumer proposal, there is an automatic stay against all your creditors, which means they can no longer charge you interest or collect from you.
It may take a couple of weeks or more, but you should stop receiving collection calls or letters from your creditors, as these debts have been included in your consumer proposal.
If your wages were garnished before filing the consumer proposal, you should expect that to stop soon after and start receiving your full pay again.
Lastly, you will start making your agreed payments, if not already done so, to the Licensed Insolvency Trustee on the agreed date.
Meeting of Creditors
Once the consumer proposal is filed, all creditors will have 45 days to file a proof of claim and voting letter with the Licensed Insolvency Trustee to be eligible to vote. The creditors will file a claim for the balance owing on your account as of the date the consumer proposal was filed with the OSB and vote either for or against the consumer proposal.
If 25% of the creditors vote against the consumer proposal, the Licensed Insolvency Trustee must call a meeting of creditors within 21 days from the 45th date of filing the proposal. At the meeting, if more than 50% of the creditors in dollar value vote in favour of the proposal, it will be accepted.
On the 45th date, if the proposal doesn’t have enough votes to pass, the Licensed Insolvency Trustee will help negotiate between the debtor and the creditors to come to an agreement for an amount that both parties will agree to. Suppose the debtor agrees to an increased amount. In that case, they must sign an amended consumer proposal and have the creditor provide an amended voting letter to support the new amount.
Acceptance of Consumer Proposal
Once your creditors accept the consumer proposal, there is a 15-day period to obtain court approval; thus, the total time from filing the proposal to being fully accepted is at least 60 days. After court approval, the Licensed Insolvency Trustee can send you an email or letter letting you know your proposal was accepted, or you could follow up with the Trustee on the status.
What Happens When a Consumer Proposal is Approved?
Once your consumer proposal has been approved, everything stays the same from when it was initially filed. Upon filing the proposal, you would have stopped all payments to your creditors, preventing them from collecting and charging interest.
The main change is that your payments to the Trustee will officially start. This means starting in the month the consumer proposal is approved, you now can’t fall behind three months of payments, or your proposal will be deemed annulled or cancelled.
What Happens if the Consumer Proposal Is Not Accepted?
Suppose your proposal is not accepted by the majority of your unsecured creditors by the 45th day of filing your consumer proposal. That’s still okay because the Licensed Insolvency Trustee can initiate negotiations between you and your creditors. Generally, the creditors who voted “No” will advise the Trustee on their voting letter an amount that they would accept the consumer proposal.
The Trustee will then assist in negotiations between the debtor and the creditors to agree on an amount for both sides. The proposal will fail if no agreement can be reached with your creditors. However, it is very rare not to agree on an amount.
If no agreement is reached, all your creditor’s rights will be revived, which means they can start collection actions and charge interest against you. In the future, you can file another consumer proposal or consider another insolvency option to manage your debts.
Can I File a Consumer Proposal with Someone Else?
Yes, you can file a consumer proposal with your spouse or another individual, called a joint consumer proposal, but you must have all or substantially all the debts that are similar. There is no specific amount determining what percentage to be substantially similar, so it would be best to consult with a Licensed Insolvency Trustee and see if it makes sense to file a consumer proposal jointly or separately.
Can I File Another Consumer Proposal?
You can file as many consumer proposals as you would like, but you can’t file a new one until the previous one is completed by meeting all the terms. Filing a new consumer proposal would include all debts currently owing since previously filing a proposal. If you are now in a consumer proposal and have new debts you cannot pay, you would first need to complete your current consumer proposal or speak with a Licensed Insolvency Trustee to review other insolvency options.
You can find out more about filing multiple consumer proposals here.
Can I Withdraw or Cancel My Consumer Proposal?
You can withdraw your consumer proposal at any time before the proposal is court approved.
Typically, the court will approve a consumer proposal 60 days from filing, but it could be longer if a meeting of creditors is called. Once the consumer proposal has been court approved, it can no longer be withdrawn.
If you don’t want to continue with the consumer proposal, you can stop making payments, and after three months of missed payments, your proposal will be deemed annulled or cancelled. At that point, your proposal will be cancelled, and all your creditors can resume their collection activity that was paused during the proposal.
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Are you struggling with your debts? Are your monthly payments only going towards interest?
Call Litvack Group, Licensed Insolvency Trustee, for a Free Consultation to review your financial situation and help you decide if a Consumer Proposal is the best option for you.
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3) CONSUMER PROPOSAL & CREDIT
How Will a Consumer Proposal Impact My Credit Score?
When you file a consumer proposal, your credit score will be affected. The consumer proposal is reported to the credit bureaus, and it remains on your credit report as an R7 rating for three years after you have completed the proposal or six years from when filed, whichever is first. This can make it challenging to get approved for credit in the immediate future. However, you can rebuild your credit score while in the consumer proposal and have a higher score than before filing the consumer proposal. Before, during and after filing a consumer proposal, it is always a good idea to continue monitoring your credit score.
Can I Apply for New Credit While in a Consumer Proposal
Yes, once you are in a consumer proposal, you can still apply and obtain new debt. If you want a new credit card or car loan, you can still do that while in a consumer proposal. However, as your credit score was reduced by filing the consumer proposal, it may become more challenging to get approved, or you may get approved with higher interest rates.
4) CONSUMER PROPOSAL PAYMENTS
What Happens if You Miss Payments?
It is okay to miss payments during a consumer proposal as long as you don’t fall behind three months of payment at any point during the proposal.
If something happens one month and you have an unexpected expense and miss your consumer proposal payment, you should contact the Licensed Insolvency Trustee and arrange for a make-up payment or a payment plan to make up for the missed payment in the future.
You may also want to consider making additional payments when you have extra money for those months when you don’t have enough money for a monthly payment.
If I Fall Behind 3 Months in Payments, Can I Still Continue the Consumer Proposal?
If your proposal is deemed annulled for three missed payments, and you would like to continue the proposal, then you should speak immediately with the Licensed Insolvency Trustee.
Within 30 days of your proposal becoming annulled, the Licensed Insolvency Trustee can automatically revive your consumer proposal. This means the proposal will continue, and the three missed payments will reset to zero, but you must complete the consumer proposal within 60 months of filing.
In this situation, you should speak with the Trustee and see if you can work out a payment plan for the three missed payments to be paid by the 60th month.
If it has been more than 30 days since your proposal was deemed annulled, you can only revive it by obtaining a court order. This would require hiring a lawyer who goes to court on your behalf to request for it to be revived. You would be responsible for hiring and paying a lawyer for their costs on your own to try to get your consumer proposal revived.
Can I Pay Off My Consumer Proposal Early?
Once your creditors and the court accept and approve a consumer proposal, it can be paid early as you want with no penalty. For example, if you win the lottery after filing the consumer proposal, you can pay off the proposal as soon as you want.
A common strategy is to make additional monthly payments to pay off the proposal sooner, and the additional amount will help ensure your proposal won’t get annulled if you miss payments in the future. For example, if you agreed to payments of $250/month x 60 months = $15,000, you could increase the payment to $300/month x 50 months and pay off the proposal 10 months sooner.
5) CONSUMER PROPOSALS & LOANS
Consumer Proposals can include government student loans but depends on when you last attended school if it will be discharged. If it has been more than 7 years since you last attended school, your government student loans will be discharged after you complete the consumer proposal. Also, you won't make any more monthly payments while in the proposal.
If you finished school less than seven years from the date your consumer proposal is filed, you must continue monthly payments to your student loan during and after the consumer proposal is completed. However, National Student Loans would be entitled to dividends from your proposal to help reduce your debts owing.
You should contact National Student Loans to confirm your last date of study before signing your consumer proposal documents. This could affect your decision of when to start your consumer proposal.
Can I Get a Loan After Filing a Consumer Proposal?
Once you file a consumer proposal, you can still apply for new credit, such as a credit card or loan. However, as the consumer proposal will place an R7 rating on your credit record, it won't be easy to obtain a new loan immediately. You could consider getting a secured credit card and start repairing your credit. As your credit score improves, you can obtain further credit in the future.
What if I Need a Car Loan?
If you need a car loan, you can still get one while in a consumer proposal. Getting approved for a car loan may be easier. Car loan lenders prefer borrowers who have recently filed a consumer proposal over those with large debts outstanding. This is because the borrower would have reduced their monthly debt payments and thus would have more money to pay monthly payments for a new vehicle.
If you want to keep your current car for the duration of the consumer proposal, consider discussing your options with the Licensed Insolvency Trustee. You could return your current vehicle, and the balance owing would be included in the consumer proposal. Upon filing the consumer proposal, you could then finance a new vehicle.
6) CONSUMER PROPOSAL & MORTGAGES
How Does a Consumer Proposal Affect My Current Mortgage?
Many homeowners are concerned about how a consumer proposal will affect their mortgage. If you currently have a mortgage for your home, you may be worried about how that will affect your mortgage. The good news is the mortgage is not part of a consumer proposal because it is a secured liability. Similar to financing a vehicle, if you want to keep your house and mortgage, you must continue making the payments during the consumer proposal.
Will a Consumer Proposal Affect My Mortgage Renewal?
If you have a mortgage, your mortgage will likely come up for renewal while in a consumer proposal. You shouldn’t be concerned with renewing your mortgage, as most lenders will allow you to review at the renewal date without reapplying based on your current financial circumstances. However, suppose you want to shop for a better rate with another lender. In that case, you must requalify, which may become more difficult as your credit score will likely decrease upon filing the consumer proposal. Therefore, staying with your current lender upon the renewal may be best while in a consumer proposal.
Can I Purchase a Home While in a Consumer Proposal?
Yes, you can purchase a home while in a consumer proposal. A mortgage is like any other form of debt which you can apply for during a consumer proposal. However, getting approved for a mortgage or at a higher interest rate may be more challenging because your credit score will likely decrease upon filing the consumer proposal.
Focus on paying off your consumer proposal and saving for a down payment while in a consumer proposal. Hopefully, when your consumer proposal is completed, you will have begun rebuilding your credit score and will be offered a competitive mortgage rate when you purchase a home.
7) CONSUMER PROPOSAL VS OTHER OPTIONS
Consumer Proposal vs Bankruptcy
Consumer proposals and bankruptcy are similar as they both provide protection from creditors and help you become debt free. Below is a comparison of the two options:
| Consumer Proposal | Bankruptcy |
Eligibility | Up to $250,000 of unsecured deb (excluding principal residence) | Minimum of $1,000 of unsecured debt |
Time to Complete | Up to 5 years, can be completed early | 9 to 36 months depending on income and if previously bankrupt |
Reporting Requirements | No reporting after filed | Monthly reporting of income to Trustee |
Assets | Keep all assets | Surrender all non-exempt assets to Trustee |
Cost | Monthly payments on the total settlement with your creditors. Total settlement/60 months = monthly payment | Monthly payments based on your average net income, as per government regulations |
Credit Rating | R7 rating on credit record for 3 years after completion date or 6 years after filing date, whichever comes first | R9 rating on credit record for 7 years after completion |
Consumer Proposal vs Debt Consolidation
Before considering a consumer proposal, you may consider a debt consolidation loan. In debt consolidation, you will still be charged interest on your debt, but at a lower interest rate than before consolidating your debts. This can ensure more of your monthly payments go toward the principal amount and less to interest.
A debt consolidation has advantages and disadvantages over a consumer proposal. The main benefits of consumer proposal vs debt consolidation are:
Credit rating may not be negatively affected;
Can keep using your same bank account and credit cards; and
The total interest paid each month will be reduced.
Debt consolidation can be helpful if you are making additional payments to reduce the principal balance to pay off the loan, not just paying minimum payments. Otherwise, you may reduce your monthly payments, but the debt will not be repaid.
Frequently Asked Questions
How Do You Know If a Consumer Proposal Is Right For You?
If you are considering filing a consumer proposal, bankruptcy or using another option for your debts, it is important to consider the advantages and disadvantages before deciding. You should carefully consider your financial situation and see which option will most likely help you and which one you can complete.
A consumer proposal is a good option for those struggling with their monthly debt payments and prefer to avoid bankruptcy which could hurt their credit more. If your proposed monthly payments in the consumer proposal are similar to or less than you currently pay every month, you will likely be successful.
Can you Still File a Consumer Proposal if You Have Already Declared Bankruptcy?
Yes, you can still file a consumer proposal if you have filed for bankruptcy. To become eligible, you must have been discharged from your previous bankruptcy. The Licensed Insolvency Trustee can verify if you were discharged before filing a consumer proposal.
It is important to note that if you previously filed for bankruptcy, your consumer proposal may be more costly than if you have not filed for one. The reason is if you were to file for another bankruptcy, it could last from 24 to 36 months, which means the total payments would be higher, thus providing greater realizations for the creditors. Therefore, your creditors will expect a higher proposal amount than if you had not filed for bankruptcy before to accept your proposal.
Will a Consumer Proposal Affect My Current Employment?
What if I Lose My Job or Get a New Job?
What Happens to My RRSP and Other Investments During a Consumer Proposal?
Can I Exclude Certain Creditors From My Consumer Proposal?
Can I Keep My Assets While in a Consumer Proposal?
Conclusion
This guide provides an overview of everything you can expect to happen before, during and after filing a consumer proposal. This can help you decide if this is the right option for you to reduce your debts. However, everyone's situation is unique, so it is advised to speak with an expert, a Licensed Insolvency Trustee, to review your situation and discuss your options and answer all of your questions.
If you are considering a consumer proposal to reduce your debts, the Litvack Group would be happy to have a Free Consultation to discuss your financial circumstances and review your options. Contact us today!
Litvack Group has helped and guided me in narrowing down my big responsibilities in paying my current debt. They are angels without wings. I am truly happy with their support and continued guidance.
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