A consumer proposal is a federally regulated debt settlement process available to insolvent individuals in Canada. Governed by the Bankruptcy and Insolvency Act, it is a legally binding agreement negotiated between a debtor and their unsecured creditors through a Licensed Insolvency Trustee. This alternative to bankruptcy allows Canadians to repay a portion of their debts over time, typically while retaining their assets. It provides immediate protection from creditors and offers a structured path to becoming debt-free.
Definition and Legal Framework
A consumer proposal is a formal, legally binding process under Canadian federal law that allows an insolvent individual to settle unsecured debts by repaying a reduced amount over time. It is specifically defined and regulated by the Bankruptcy and Insolvency Act. The process is administered exclusively by a Licensed Insolvency Trustee, who is federally licensed and regulated by the Office of the Superintendent of Bankruptcy. This framework ensures the process is conducted fairly and according to national standards. The proposal is an alternative to declaring personal bankruptcy and is designed to provide a more manageable path for debtors while offering creditors a better return than they might receive in a bankruptcy.
How a Consumer Proposal Works
The process begins with a consultation with a Licensed Insolvency Trustee, which is typically free and without obligation. The trustee assesses the individual's financial situation, including all assets, liabilities, and income. If a consumer proposal is deemed suitable, the trustee drafts a formal offer to the creditors. This offer proposes to repay a portion of the total unsecured debt, often between 30% and 80% of the amount owed, through monthly payments over a maximum period of five years. The proposal amount is largely based on the debtor's income and assets at the time of filing. Once filed, an immediate stay of proceedings takes effect, halting all collection calls, wage garnishments, and legal actions from unsecured creditors.
Creditors then have 45 days to vote on the proposal. For acceptance, creditors holding the majority of the total dollar value of the proven claims must vote in favour. If accepted by creditors and approved by the court, the agreement becomes legally binding on all unsecured creditors, even those who voted against it. The debtor makes the agreed monthly payments to the trustee's office for the duration of the proposal term. During this period, the debtor is also required to attend two mandatory financial counselling sessions focused on budgeting and financial goal setting. Upon completion of all payments, the trustee issues a certificate of completion, legally discharging the debtor from the debts included in the proposal.
Eligibility and Debt Limits
To qualify for a consumer proposal in Canada, an individual must be insolvent, meaning they cannot pay their debts as they become due. The total amount of their unsecured personal debts must not exceed $250,000, excluding any mortgage secured against their principal residence. If debts exceed this limit, a different process known as a Division I Proposal under the Bankruptcy and Insolvency Act must be filed. The proposal is specifically for individuals, including sole proprietors, and cannot be used by corporations. The debtor must also have a stable source of income that allows them to make the proposed monthly payments for the term of the agreement.
Certain types of debt can and cannot be included in a consumer proposal. The process is designed for unsecured debts, which are obligations not backed by collateral. Common examples of debts that can be included are credit card balances, personal loans, payday loans, unpaid income taxes, and unsecured lines of credit. Secured debts, such as a mortgage or a car loan, are not included in the proposal and must be paid separately. Other debts that generally cannot be included are child and spousal support payments, court-ordered fines or penalties, and debts arising from fraud. Student loans may be included only if the individual has ceased being a student for over seven years.
- Maximum unsecured debt limit: $250,000 (excluding mortgage).
- Debts that CAN be included: credit cards, personal loans, payday loans, income taxes, unsecured lines of credit.
- Debts that CANNOT be included: secured debts (mortgage, car loan), child/spousal support, court fines, student loans (if under 7 years).
- Required status: Insolvent individual (cannot pay debts as they come due).
Costs and Fees
The costs associated with a consumer proposal are federally regulated and prescribed by a tariff within the Bankruptcy and Insolvency Act. There are no large upfront fees for the debtor. The filing fee is approximately $750, with another $750 due if the proposal is accepted by creditors. The Licensed Insolvency Trustee also retains 20% of the future payments made under the arrangement as an administration fee. Critically, all these costs are paid from the funds collected through the consumer proposal payments. This means the debtor does not receive separate bills for these fees. They are deducted from the monthly payments before distributions are made to creditors. The regulated fee structure is designed to ensure transparency and prevent exploitation of debtors.
Impact on Credit and Assets
Filing a consumer proposal has a significant impact on an individual's credit rating. Upon filing, a notation is placed in the public records section of the credit report. The credit reporting agencies assign an R7 rating, which is the second-lowest rating on their scale, indicating the debt is being repaid through a third-party arrangement. This notation remains on the credit report for six years from the date of filing or for three years after the debtor is discharged from the proposal, whichever comes first. During this period, obtaining new credit, such as loans or credit cards, can be more difficult and may come with higher interest rates or require a co-signer.
One of the primary advantages of a consumer proposal over bankruptcy is the ability to retain assets. Typically, individuals can keep their home, car, RRSPs, and other possessions. This is conditional on the debtor continuing to make any required payments on secured debts, such as mortgage or car loan payments, outside of the proposal. The proposal only deals with unsecured debts. Most proposals include a windfall provision, requiring the debtor to report any significant financial gains received during the term, such as an inheritance or lottery win, which could affect the repayment terms.
Risks and Potential Downsides
While a consumer proposal offers a structured debt solution, it carries certain risks and downsides. The most direct risk is creditor rejection. If creditors holding the majority of the debt value reject the initial proposal within the 45-day voting period, the debtor is returned to their prior insolvent state. The trustee can then help draft a new proposal with improved terms, or the individual may need to consider bankruptcy. Another significant risk is default. If a debtor misses three payments (or falls three months behind), the proposal can be annulled. Annulment cancels the legal protection, allowing creditors to resume all collection activities for the original debt amounts.
A further consideration is the public nature of the filing. Consumer proposals become part of a public record maintained by the federal government, though this is not broadly advertised. There is also a risk of dealing with unlicensed debt relief companies that may charge excessive fees only to refer clients to a Licensed Insolvency Trustee, effectively resulting in double charging. It is illegal for a company to manage a consumer proposal if they do not employ a licensed insolvency trustee. Consumers should always verify that they are working directly with a Licensed Insolvency Trustee regulated by the federal government.
Historical Context and Canadian Statistics
The modern concept of debt restructuring, including consumer proposals, evolved from historical bankruptcy laws focused on liquidation and punishment. The first English statute dealing with bankruptcy was the Statute of Bankrupts of 1542. Modern insolvency law, including Canada's Bankruptcy and Insolvency Act, has shifted focus towards rehabilitating debtors and allowing for the continuation of financial life. In Canada, consumer proposals were introduced as a formal alternative to bankruptcy, providing a more flexible tool for debt settlement. The system is administered by the Office of the Superintendent of Bankruptcy, which oversees the licensed trustees.
Consumer proposals have become a widely used debt relief tool in Canada. In 2011, trustees filed 127,774 insolvent estates, with consumer estates comprising the vast majority at 122,999. Of these consumer filings, 45,006 were consumer proposals, while 77,993 were bankruptcies. This represented a reduction of 8.9% in consumer insolvencies from the previous year. The data shows consumer proposals accounting for a significant portion of personal debt resolutions, highlighting their role in the Canadian financial landscape.
Comparison with Bankruptcy
A consumer proposal and personal bankruptcy are both governed by the same federal law but differ significantly in process and outcome. A key distinction is asset retention. In a consumer proposal, individuals typically keep all their assets, whereas in bankruptcy, non-exempt assets may be liquidated by the trustee. The impact on credit also differs slightly. Both result in a serious negative notation, but a consumer proposal is generally viewed as a less severe mark than a bankruptcy by some lenders. The duration of the process is another difference.
The cost structure also varies. In a bankruptcy, the trustee's fees and costs are paid from the liquidation of the bankrupt's assets or from required surplus income payments. In a consumer proposal, fees are a regulated percentage of the payments made. From the creditor's perspective, a consumer proposal often offers a higher return on the debt owed compared to bankruptcy, which is why creditors may be more inclined to accept it. Both processes provide an immediate stay of proceedings, stopping creditor actions, and both require financial counselling.
Frequently asked questions
How much does a consumer proposal cost?
Costs are federally regulated. There is an initial filing fee of about $750, and another $750 due if the proposal is accepted. The Licensed Insolvency Trustee also retains 20% of your future payments as an administration fee. Importantly, all these costs are paid from the funds you submit as part of your proposal payments, so you do not pay large amounts upfront.
Who can file a consumer proposal for me?
Only a Licensed Insolvency Trustee (LIT) can file a consumer proposal. LITs are federally licensed and regulated professionals. It is illegal for any other company or individual to administer a consumer proposal. Be cautious of debt relief companies that charge fees only to refer you to a trustee, as this can result in being double-charged.
What is a consumer proposal in Canada?
A consumer proposal is a federally regulated and legally binding process available to insolvent Canadian individuals. It is a negotiated settlement between a debtor and their creditors, administered by a Licensed Insolvency Trustee. The debtor agrees to repay a portion of their unsecured debts over a maximum of five years, with the funds distributed to creditors. This process is governed by the Bankruptcy and Insolvency Act and serves as a formal alternative to declaring personal bankruptcy. The creditors have 45 days to accept or reject the proposal, and if accepted, it prevents further collection action.
Can I keep my house and car with a consumer proposal?
Yes, you can generally keep your assets, including your house and car, when filing a consumer proposal. A consumer proposal deals specifically with unsecured debts, not secured debts tied to assets. To retain secured assets like a house or car, you must continue making the regular mortgage or loan payments separately from the proposal agreement. If an asset like a house or car is above a certain value, a third party could buy the interest from the estate to allow the debtor to keep it, otherwise the trustee could seize and sell it, but this is more common in bankruptcy proceedings.
What is the maximum debt limit for a consumer proposal in Canada?
A consumer proposal can only be made by a debtor with debts to a maximum of $250,000, not including the mortgage on their principal residence. If a person's total debts exceed this amount, they must file a Division 1 proposal under the Bankruptcy and Insolvency Act. This limit applies specifically to unsecured debts. The process is federally regulated and provides a legal framework for insolvent individuals to negotiate with creditors.
How long does a consumer proposal last in Canada?
A typical consumer proposal involves a debtor making monthly payments for a maximum of five years. The funds from these payments are distributed to their creditors. This five year period is the standard maximum length for the repayment plan under the government regulated process. The legally binding agreement is designed to allow for debt settlement over a manageable timeframe.
Sources and further reading
- Consumer proposal (Wikipedia) en.wikipedia.org
- Consumer Proposal mnpdebt.ca
- What is a Consumer Proposal in Canada? rbcroyalbank.com
- What Is a Consumer Proposal in Canada? | CCS nomoredebts.org
- Filing a consumer proposal in Canada, BDO Debt Solutions debtsolutions.bdo.ca
- Consumer Proposals in Canada, Affordable Debt Solutions farber.ca
This article explains how things work and is not financial, tax or legal advice. Rules, limits and rates change, so check the current figures with the Canada Revenue Agency, your province or your financial institution before you act.