What is a consumer proposal? No, it’s not when a meet-cute happens in the aisle of Walmart and ends with someone on bended knee. It’s simply one method Canadians can use to deal with overwhelming debt.
A consumer proposal can help you save money, get your creditors off your back, and provide the peace of mind you’ve been craving – but there’s a lot to consider before signing on the dotted line. It’s not as commonly discussed as bankruptcy but provides an equally effective solution for protecting yourself from creditors and paving the way to start fresh.
However, it isn’t going to be the right course of action for everyone.
Here, we’ll look at the pros and cons of entering into a consumer proposal, the process involved in filing such a proposal, and other alternatives you should consider.
- What is a consumer proposal?
- Pros and cons of a consumer proposal
- Consumer proposal vs. bankruptcy
- 7 steps to filing a consumer proposal
- Consumer proposal alternatives
- FAQ
So what is a consumer proposal?
A consumer proposal is a legally binding process of creating a proposal for paying off your creditors. It may involve paying them a percentage of the total owed, extending the deadline on your debt, or combining these ideas.
This way, you still maintain control of your assets, your creditors still get paid, and all parties are satisfied.
Creating and submitting a consumer proposal requires the help of a Licensed Insolvency Trustee (LIT). These individuals are federally regulated professionals who provide advice and service to anyone dealing with serious debt, and they will deal directly with your creditors so you don’t have to.
Essentially, if you’re overwhelmed by debt and can’t figure out what to do, creating a consumer proposal with an LIC can be a safe way to deal with the problem.
How to qualify for a consumer proposal
While a consumer proposal can offer the lifeline many people need, not everyone will qualify for this debt relief option. And it’s important to remember that it may not cover all of the debts you’re struggling with. There are a few exceptions to consider – but there’s a bit of good news about those exceptions too.
Take a look.
Consumer proposals – the qualification requirements
First of all, if you’re hoping to qualify for a consumer proposal, your debt load can’t be more than $250,000. This excludes your home, car, or any secured debts you may have. You must also have a stable, regular income and have no previous consumer proposals on record.
Consumer proposals are only available for individuals, not corporations. However, you can still file a joint proposal if you and a partner are both responsible for the debts. In this case, the max limit for a qualifying debt load is raised to $500,000.
Ultimately, though, it’ll be the LIT who decides if your circumstances meet the criteria for a consumer proposal.
Debts that are eligible for a consumer proposal
Essentially, creating a consumer proposal means that you can get relief for any unsecured debts you may have, including the following:
- Credit card debt
- Bank loans
- Personal loans
- Payday loans
- Tax debt
- Medical bills
- Some student loans
- Overdrafts
- Outstanding bills
- Accounts in collections
Types of debts a consumer proposal won’t cover
What it boils down to is that consumer proposals don’t cover any types of secured debt. Consider the following examples of secured debt that won’t be covered if you go this route:
- Mortgage debt
- Vehicle loans
- Home equity loans
- Home equity lines of credit (HELOCs)
The upside of this is that because your other debts will be easier to stay on top of once the consumer proposal is approved, you’ll most likely be able to maintain payments on any secured debt anyway.
How does a consumer proposal affect credit?
It’s an unfortunate fact that submitting a consumer proposal will negatively affect your credit – it’ll go on your credit report and anyone accessing your credit report will see it.
Credit bureaus measure your score on a scale of R1 to R9, and filing a consumer proposal or bankruptcy will cause your score to have an R7 rating. This means you’ll have a pretty low score during the term length of your proposal.
This means that it could be difficult for you to borrow money or get new credit cards for a while. For as long as this mark is on your credit report, really.
And how long will that be? Well, Equifax keeps such things on a credit report for 3 years after you finish paying off the debts listed in the proposal. And Transunion will either remove it at that same 3-year mark or 6 years after the proposal was initially signed.
A consumer proposal example
Let’s look at an example of what a consumer proposal might look like.
Davey and Gina have fallen on hard times – both were laid off from work last year and have been falling behind on their bills ever since. They’re now in debt to the tune of $25,000 and decide to contact an LIC about filing a consumer proposal.
After negotiations, their LIC tells them that their creditors have agreed to bring down the amount owing by 40%, so Davey and Gina only have to pay 60% of their initial debt over a period of 5 years.
This means that the new total amount owed is $15,000 and is a much more manageable sum. The couple will make monthly payments of $250 to their LIC to cover the debt.
Advantages and disadvantages of a consumer proposal
As with pretty much any financial decision, there are pros and cons to using a consumer proposal. You’ll want to weigh them all before making a decision on whether this is the right move for you, your family, and your financial future.
A few consumer proposal benefits
There are some significant benefits to submitting a consumer proposal, not the least of which is that you’ll once again be able to enjoy peace of mind regarding your finances.
Here are a few specific upsides of a consumer proposal.
- It can significantly reduce your total amount of debt.
- Interest on all qualifying debts is frozen.
- You make one larger monthly payment on the debt, which is easier than making several smaller ones all at the same time.
- You’re protected from calls and threatening actions from collections agencies.
- Bankruptcy and other more serious, long-lasting situations can be avoided.
- Any property used for secured debts is protected from being sold.
- Your monthly payment amount won’t go up for the length of your agreement.
- It’s usually a less expensive option when compared to other repayment possibilities.
- Gets you out of debt faster than other options since the max length is 5 years.
Some disadvantages of a consumer proposal
You’ll need to compare the good alongside the not-so-good points of consumer proposals, of course. Being aware of these disadvantages can be just as powerful as understanding the positive points.
- The fact that you’ve filed a consumer is public information, which can affect professional licenses or possibly even employment opportunities.
- There are some processing and associated costs you are responsible for.
- Your credit report is negatively affected.
- The proposal will be void if you miss 3 payments, which can create significant pressure for you.
- If joint debts are included, your spouse runs the risk of being responsible for the entire debt if you fail to make payments.
Explaining consumer proposal vs. bankruptcy
Many people don’t know the differences between a consumer proposal vs. bankruptcy, and this isn’t a surprise since bankruptcy is a more widely-discussed concept. However, there are both differences and similarities that are important to consider.
| Feature | Consumer proposal | Bankruptcy |
|---|---|---|
| Requires LIT consultant | Yes | Yes |
| Required to report monthly income | Yes | No |
| A matter of public record | Yes | No |
| Prevents your creditors from calling/harassing | Yes | Yes |
| Income level can affect payments | No | Yes |
| Type of debt covered | Unsecured only | Unsecured only |
| Monthly budget reports | Not required | Required |
| Length of impact to credit report | 3 years | 6 – 7 years |
| Debt amount limits | Up to $250,000 ($500,000 for couples) | More than $1,000 |
Now, let’s take a look at each of these in more detail.
4 bankruptcy and consumer proposal similarities
Here are a few examples of how bankruptcy and consumer proposals are similar.
1. Requires the help of an LIT
The first of the bankruptcy and consumer proposal similarities is the fact that you’ll need to consult an LIT before anything can be made official. These are the only type of financial professionals in Canada who are licensed to administer bankruptcies and will ensure that both the debtor and creditors are treated fairly.
In fact, the title LIT is a relatively new one – they used to be called Bankruptcy Trustees.
2. A matter of public record that affects your credit
Both courses of action will be a matter of public record once the paperwork is filed. And this leads to another similar point: both options will affect your credit score.
As bankruptcy and consumer proposals are listed in the public records section of your credit report, anyone viewing this report will see these notations and they’re viewed by most financial institutions as pretty much the same thing.
It’ll be difficult to borrow money or be offered credit for a while after filing for either a consumer proposal or for bankruptcy.
3. Prevents your creditors from calling/harassing
Both bankruptcy and consumer proposals will put an end to any creditors that might be calling and/or threatening you with legal action. Any interest charges are frozen, wage garnishing ceases (or is prevented), and the creditor(s) can’t pursue any legal action.
Any complaints your creditors do have will be dealt with by the LIT you’re working with, so you should be able to breathe easy.
4. Unsecured debt is covered, but not secured
Unsecured debt, such as bank loans and credit cards, is included in both a consumer proposal and bankruptcy. However, secured debt, such as mortgages and vehicle loans, cannot be included in either of these debt relief options.
In both cases, the hope is that the actions resulting from handling your unsecured debt will lessen your financial stress and set you on a path where making payments on mortgages, cars, etc., is more manageable.
4 differences and unique consumer proposal characteristics
What follows are a few points about the important differences between a consumer proposal and declaring bankruptcy.
1. They stay on your credit report for different lengths of time
If you file a consumer proposal, this information will be available on your credit report for up to 5 or 6 years. Or, if you finish paying your debts a bit early, this will be removed from your credit report 3 years after you make your final payment and all obligations are fulfilled.
However, information about bankruptcy is only removed from your credit report 6 years after you’ve been discharged – 7 years in some cases.
2. Reporting monthly income is required for one, not the other
Once you file for bankruptcy, you’re required to show proof of your earnings each month, as well as any child support, tax credits, or other income you may receive.
But with a consumer proposal, this reporting isn’t required.
3. There’s a limit to how much debt a consumer proposal will cover – not so with bankruptcy
You will only qualify for a consumer proposal if your debt load is less than $250,000 (for a single individual) or $500,000 (for couples filing jointly).
Bankruptcy, on the other hand, doesn’t have maximum limits. However, the minimum amount of debt that a bankruptcy claim will take on is $1,000.
4. One requires higher payments based on your income, but the other doesn’t
It’s a misconception that when you file for bankruptcy in Canada, all of your income is required to go toward your debt. The truth is that you don’t have to make any payments at all unless you make more than the set income limits.
However, if you make more than a set limit in a month, you’ll be required to pay half of the extra income to your LIT.
Here are the surplus income limits:
| Family size | Income limit |
|---|---|
| 1 | $2,355 |
| 2 | $2,931 |
| 3 | $3,604 |
| 4 | $4,375 |
| 5 | $4,962 |
| 6 | $5,597 |
| 7 | $6,231 |
Income levels do not affect repayment details for anyone who files a consumer proposal. Once your monthly payments are set for this, they stay the same throughout the length of your proposal.
The 7 steps for filing a consumer proposal
The process required to file a consumer proposal isn’t complicated, but there are several steps to take. And taking these steps will ensure that you know that you’re making the right decision for yourself, your family, and your finances.
Here is the list of steps, each of which we’ll explain in more detail:
- Meet with the LIT
- Consider alternatives
- Prepare and sign documents
- File the proposal
- Creditors respond
- Credit counselling
- Certificate is granted
1. Meet with a licensed professional to discuss your situation
Meeting with an LIT to discuss the ins and outs of debt management can be a lifesaver all on its own. They’ll be able to consider the specifics of your individual situation, review all of the possible options with you, and guide you to a solution that satisfies you and your creditors.
You’ll want to research the LITs available in your area, and a simple Google search will show you a list of names to consider. Take the time to visit a few trusted websites to check credentials, experience, and reviews from previous clients before you reach out to make an appointment.
2. Take time to consider all of the alternatives
After meeting with the LIT, take time to consider all the options they presented to you – a consumer proposal isn’t something you want to rush into as it will affect your life for several years afterward.
It’s important that you take time to research and consider every alternative before making the final decision and informing the LIT. We’ll go over some alternatives to filing a consumer proposal in the next section.
3. Prepare the proposal and sign documents with your trustee
Once the decision to go ahead with the proposal has been made, you and your LIT will have to prepare the documentation. Together, you’ll review your personal finances, figure out what you can afford to pay your creditors, decide on the term length, and put it all on paper.
Once the documents are prepared and signed, it’s time to file.
4. Officially file the proposal
Your LIT is the one to actually file and register the documents. And once the consumer proposal is filed with the government, creditors are no longer able to pursue or harass you for repayment.
5. Wait for the creditors accept the proposal
Creditors have 45 days to review and consider your proposal, and only 50% of them actually have to vote to accept in order for it to be made official. After this, the agreement is legally binding and applies to all creditors, whether they voted in favour or not.
There’s always a chance the proposal will be rejected, though, but this doesn’t happen often since a consumer proposal provides them with more money than if you declared bankruptcy.
They could also ask for a meeting with you and the LIT to further discuss the details.
6. Attend credit counselling sessions
Unlike bankruptcy, a consumer proposal only requires 2 things of you once it’s been approved – that you make your payments on time and that you attend 2 credit counselling sessions.
The counselling sessions will offer information on how to rebuild your credit and better manage your finances in the future.
7. Receive a Certificate of Full Performance
A Certificate of Full Performance will be presented to you once you’ve made the final payment as outlined in the consumer proposal. At this point, you’ll have paid off your debts and are free to make a fresh start.
Your creditors will report to the credit bureaus, TransUnion and Equifax, that the balance of your debt has been paid, and you’ll be free to begin rebuilding credit.
There are alternatives to submitting a consumer proposal
Of course, before submitting a consumer proposal, you should consider every alternative in detail so you can be sure you’re making an informed decision.
Again, meeting with a licensed insolvency trustee to discuss your options is an important step in this process.
| Alternative | Pros | Cons |
|---|---|---|
| Credit counselling agency | * Usually free * Doesn’t show on a credit report | * Can require a lot of work |
| Debt consolidation loan | * Combines everything into one lump sum payment * Possibly a lower interest rate than your current debts | * Can be difficult to obtain, depending on your credit score * May not be enough to cover all debts |
| Budgeting | * Doesn’t show on a credit report * You maintain control of your own finances | * Requires dedication, restraint, and hard work * Doesn’t work for all situations |
| Bankruptcy | * All debts (unsecured) are taken care of * Provides a fresh start | * Stays on a credit report for up to 7 years * Requires income reporting and possible surplus payments |
Consult a credit counselling agency
Credit counselling agencies are mostly non-profit organizations that exist solely to help Canadians take charge of their personal finances. They offer a range of services, including:
- one-on-one counselling,
- group classes and courses,
- seminars on a range of financial topics, and
- personalized debt management plans.
There’s more information regarding “Getting help from a credit counsellor” here.
Consider a debt consolidation loan
A debt consolidation loan can be a convenient alternative to a consumer proposal. It requires approaching a bank or other lender and asking for a loan that will pay off all your creditors. You’re then able to make just one regular loan payment instead of organizing several different payments for your various bills, etc. – and it might be at a reduced interest rate too.
It’s possible that you won’t be approved for a debt consolidation loan, though. If you’ve already missed certain payments that have subsequently been reported to the credit bureaus, it can affect your eligibility for loans like this.
But it can’t hurt to look into the option.
You can always tighten the bootstraps with DIY budgeting
It’s possible that your biggest issue is just that you’re not good at juggling all the bills and payments you have on your plate. In cases like this, creating a detailed budget can make all the difference.
A budget will allow you to see your spending laid out in such a way that you can more easily recognize the problem areas. Plus the right budget software will provide advance notifications when certain payments are nearing their due date so you’ll be less likely to forget and incur late fees.
There are plenty of budgeting software options available for little to no cost and offer a surprising list of helpful features. Here are a few examples of these features:
- syncs your bank accounts and credit cards,
- allows customized spending categories,
- has top-notch security features,
- can export data to external files and spreadsheets,
- provides regular reports on the budget, and
- works on multiple device types.
For some people, creating and sticking to a budget really can be the simple alternative to filing a consumer proposal.
Bankruptcy may not be as awful as you think
Yes, bankruptcy should be thought of as a last resort. But it isn’t the death sentence that many people feel it is.
Simply put, bankruptcy is a legal process that discharges you from most of your debt. But despite what you may have heard, bankruptcy doesn’t mean you’ll lose your house or car, usually, since those are forms of secured debt. And you can’t lose your job over it either.
It does take a few years before the sting of bankruptcy is removed from your credit report, though – 6 or 7 years, usually. But this is very close to how long a consumer proposal stays on your report too.
While it isn’t recommended that you choose to declare bankruptcy if you qualify for a consumer proposal instead, you should still discuss the option with your advisor or LIT.
Consumer proposals – what are your thoughts?
All in all, if you’ve been struggling with overwhelming debt, a consumer proposal can provide the resolution and peace of mind that you’ve been looking for. There are a lot of details to consider before committing to this debt resolution plan, but the benefits can be worth it.
What about you? Have you filed a consumer proposal in the past? If so, what was the experience like for you?
We love hearing our readers’ stories and opinions, so please feel free to share your thoughts in the comment section below.
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FAQ
What is a consumer proposal?
A consumer proposal is an agreement between you and your creditors that details how you’ll repay them a percentage of the total you owe. It’s a legally binding document that allows you to maintain control of your assets even while paying your creditors.
Does a consumer proposal affect credit?
Yes, filing a consumer proposal will affect your credit. It will be added to your credit report and, therefore, it will come up any time a lender views your report. Both credit bureaus have different policies on how long it stays on your file, though. You can read about these here.
What is the difference between a consumer proposal and bankruptcy?
One of the biggest differences between these is that you are subject to a surplus income limit after you’ve declared bankruptcy. If you reach or surpass this limit, you’ll have to pay half of this extra income to your LIT. You can read more about this and other differences between these concepts here.
Is there a consumer proposal calculator I can use?
Yes, you’ll find consumer proposal calculators online if you search for them. Speaking with an LIT or a credit counsellor may be a better option, though. These professionals can look at your finances and determine whether a consumer proposal is the right answer for your circumstances.
What happens if a consumer proposal is rejected?
Just because a consumer proposal is rejected by creditors doesn’t mean the process is over. A simple change of terms may be required, and the creditors themselves will usually propose the change or changes themselves. But even if they don’t, you still have the option of submitting a revised proposal.
What are the options for a consumer proposal in Toronto?
There are plenty of LITs available for consultation in Toronto, and you can find them with a quick Google search. After reviewing the individual’s credentials and experience, you can meet them for a free consultation and then decide whether to proceed with the process. The steps for filing a consumer proposal in Toronto will be the same as they are across Canada.
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