What is a Consumer Proposal?

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Why File For a Consumer Proposal?

If you’re drowning in financial difficulties and don’t know how to get out, but you don’t want to declare bankruptcy, a consumer proposal might be right for you. 

With a consumer proposal, your debts are negotiated through the Licensed Insolvency Trustee – in other words, you have a mediator working in your corner to get you the best deal possible, while being fair to your creditors. 

With a consumer proposal, you’ll be able to lower your debt payments and pay on a fixed schedule. Your payment amount will never go up. Also, you’ll likely be able to keep your secured assets (home and car), which you might have lost in a bankruptcy. 

Not everyone should file a consumer proposal—for some people, bankruptcy is the best route – but if you are in the right situation you owe it to yourself to take advantage of this fully legal and responsible solution. 

The main advantages of a consumer proposal

If you are in a serious financial situation where your debts feel overwhelming, you will appreciate the benefits of filing a consumer proposal. 

Many consumer proposal candidates have high credit card debt, in particular.

Remember, the purpose of a consumer proposal is to give an honest but unfortunate debtor a fresh financial start. Similar to a bankruptcy, a consumer proposal is a solution – not a punishment. 

Unlike in a bankruptcy, in a consumer proposal your assets do not “vest” with the Licensed Insolvency Trustee.

In a consumer proposal:

• You usually get to keep your assets (your Licensed Insolvency Trustee can give you more details)
• You avoid the issue of “surplus income” (in consumer proposals the payments are fixed, regardless of the debtor’s future income – unlike in personal bankruptcies where the more you earn the more you pay)
• Your consumer proposal payments are lower than you were paying on your combined debts
• You receive protection from your creditors
• You attend two financial counselling sessions as a requirement of your consumer proposal – this will help you with budgeting, both during and after your proposal
• You will avoid bankruptcy, and the consumer proposal process is easier than bankruptcy
• When you have successfully completed your consumer proposal, you will be debt free (unsecured debts)

The main disadvantages of a consumer proposal

Most of the disadvantages of filing a consumer proposal are common to all debt relief options.

• It can feel embarrassing to take this step to deal with your debts (but rest assured, it is a positive step and your Licensed Insolvency Trustee knows how you feel)
• Your credit score will be temporarily affected by a consumer proposal (more on this below)
• To successfully complete your consumer proposal, you will need to watch your budget and make your payments on time; for some, this means spending less, but for others, the single monthly payment may ease their budget

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What Happens When You File a Consumer Proposal?

When you file a consumer proposal:

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A Consumer Proposal Can Be Beneficial in the Following Ways:

• Typically, you maintain control of all of your assets, including your home, vehicle and furniture
• Lower monthly payments
• You only need to repay a portion of your debt
• Interest on your debts stops – even on credit card debt – while your proposal is in effect
• Once your proposal has been accepted, your payments will never increase; you will owe nothing more than what has been agreed to in the proposal
• Early in the process, you can negotiate with your creditors, via your Licensed insolvency Trustee
• Your creditors are legally bound to the proposal terms, if accepted – they cannot revive the debt in the future and request more money

The negative effect on your credit score is generally not as severe as in a bankruptcy

How a Consumer Proposal Affects Your Credit Report

As mentioned above, filing a consumer proposal has a detrimental effect on your credit rating. However, keep in mind that if you have been struggling with your debts for months, and if you have exceeded your credit limit or missed payments on your debts, your credit score will already be negatively affected. Thus, when it comes to your credit report, you may not currently have all that much to lose!

A more pressing concern is how the consumer proposal will affect your credit rating once you have completed the process. 

Filing a consumer proposal will affect your credit bureau report in two ways: 

1. A negative notation of R7 or R9 will be placed against each individual debt included in the consumer proposal 
2. A notation will be added to your credit report that you filed a consumer proposal, with the date

The negative notation (sometimes called derogatory information) placed against each account usually takes the form of an R7 or R9 rating. R7 is sometimes used for proposals and debt settlements; R9 is the worst rating, and is used for proposals, debt settlements, collections or bankruptcies. 

Does it matter whether your credit bureau report shows R7s as opposed to R9s? In practical terms, it does not – all are bad ratings that would discourage lenders from offering you credit.

However, there is good news! 

These negative notations, as well as the notation that you have filed a consumer proposal, will be removed from your credit report either six years after you sign your proposal, or three years after you complete your proposal terms – whichever is earlier. This applies to reports from both of Canada’s credit reporting agencies: Equifax and TransUnion.

Can I Rebuild My Credit Rating After A Consumer Proposal?

Yes! You can begin to rebuild your credit rating as soon as your consumer proposal is completed (or, in some cases, even sooner – ask your Licensed Insolvency Trustee).

Rebuilding credit after completing a consumer proposal is a gradual but uncomplicated process. Initially, it’s crucial to understand that a consumer proposal typically results in an R7 credit rating, which affects your credit report for three years post-completion. The first step towards rebuilding your credit is to obtain and review your credit report for any inaccuracies, ensuring it accurately reflects your current financial status. If you identify any errors, you are responsible for filing a dispute with the credit bureaus to ensure the discrepancies are corrected.

The journey to credit restoration involves several key steps. Begin by creating a detailed budget to manage your finances effectively and prevent falling back into debt. You should be ensuring that you are contributing to an emergency fund every month so that you do not lean on credit for emergencies in future. 

A practical tool in this phase is a secured credit card. By using this card responsibly and paying off balances in full and on time, you demonstrate to creditors your ability to manage credit. As more time passes with you showing good payment history, you will see gradually improvements to your credit score. Once you have stabilized your financial situation through responsible credit use and contributing to savings, it can be useful to diversify your credit with a mix of credit types, like installment loans and revolving credit, which can positively impact your score. Regular monitoring of your credit score and report is essential to track your progress and address any issues promptly.

Restoring your credit post-consumer proposal is a process that demands patience, discipline, and consistent financial responsibility, but it is not complicated. Over time, these efforts contribute significantly to improving your credit standing, paving the way for a healthier financial future.

Alternatives to Consumer Proposal

If you are facing overwhelming debt and have decided to take action, you’ll want to know what debt relief solutions are available to you. 

Attending a no-obligation, free, confidential meeting with a Licensed Insolvency Trustee is a great next step, as Trustees are trained to analyze your situation and offer the most beneficial courses of action. Here are some alternatives to consumer proposal you may hear about.

Credit counselling

Various organizations, including both for-profit and non-profit agencies, offer credit counselling and “consumer proposal services”. 

Some of these agencies are simply businesses that will profit from referring you to a Licensed Insolvency Trustee. This is something to watch for, since you can easily contact and meet with a Trustee independently, and your first meeting is free.

Better credit counselling agencies, especially non-profit ones, do offer constructive and knowledgeable advice and help with budgeting, and will help you develop a debt management plan. If your debts are not too severe, what you learn from a good credit counsellor could be enough to turn your situation around – and even help you become debt free.

Debt consolidation loans

Among the debt relief options is the debt consolidation loan. 

If you have numerous debt payments and it is difficult to juggle and organize them, you can ask your bank about a debt consolidation loan. With this type of loan, you use the funds advanced to pay off all your credit accounts. With that done, you will have one monthly payment for the loan itself.

Although these loans work well if used responsibly and paid off on time, many debtors are disappointed to learn that their bank will not approve them for a loan to consolidate their debts. If your finances are stretched to the limit, or if your credit bureau report notes any missed payments, you may not qualify.

Debt Settlement

Debt settlement is a process where you negotiate with creditors to pay a reduced amount of your debts, potentially less than the full owed amount. However, not all creditors may agree to settle, and it’s important to be aware that this process can have a significant impact on your credit score.

During the negotiation phase, it’s possible for interest and penalties to continue accumulating on your debts, and it’s worth noting that the forgiven portion of the debt could be considered taxable income. Therefore, it’s advisable to seek guidance from a financial advisor or a Licensed Insolvency Trustee before deciding to pursue debt settlement. Their expertise can help you fully understand the
implications and whether this option aligns with your financial situation.

Debt Management Programs

Debt Management Programs (DMPs) streamline debt repayment by consolidating multiple payments into one manageable monthly installment. Credit counselors negotiate with creditors for potentially lower interest rates. However, DMPs only address unsecured private debts, and as such cannot deal with government debts like taxes or student loans. They also do not typically reduce the principal amount owed but lump together the total of eligible unsecured debts and give 3-5 years to pay it off at a reduced interest rate. Participation typically negatively impacts your credit rating, and there is no legal protection from your creditors. It is important to weigh out your options with a licensed professional before committing to any option.

Wait-and-see

Although it sounds like “doing nothing,” wait-and-see can be useful if any of your debts are approaching the end of your provincial statute of limitations on debt collection. 

Once a debt is older than the applicable statute defines, you are no longer legally required to pay it. This is what “statutes of limitations” legally define, in reference to debts.

As these statutes vary between provinces and can be difficult to interpret, making a free first appointment with a Licensed Insolvency Trustee is a good idea. The Trustee can let you know if this approach might work for you.

Bankruptcy

If none of the other debt relief options is suitable, and if you are considering filing a consumer proposal but are not certain that you will succeed in making up to five years of regular payments, bankruptcy might be a better option for your financial situation. Although you may lose more assets, bankruptcy is usually shorter than a consumer proposal. It can be a viable way of getting a new financial start. When you are released from your bankruptcy, you will be debt free. As with the other alternatives, a Licensed Insolvency Trustee is your best source of information.

How to File a Consumer Proposal in Canada

A consumer proposal is a legal process under the Bankruptcy and Insolvency Act that must be administered by a Licensed Insolvency Trustee (LIT). Accordingly, to answer the question, “where to get a consumer proposal?”, your first step is to set up a meeting with someone from an LIT’s office.

An LIT can help you negotiate a fair settlement with your creditors via a consumer proposal, with manageable fixed monthly payments for up to five years or a lump-sum payment. A proposal is approved when the creditors who own the majority of your debt have agreed to the terms of your proposal and the courts approve it. Once accepted, the proposal is binding on all parties. As long as you then fulfill the terms of your proposal, you will be released from the unsecured debts you owed.

Why Would your Creditors Accept a Consumer Proposal?

Your creditors don’t want you to go bankrupt. Creditors typically receive very little from a bankrupt customer. The creditors have no choice in the bankruptcy process – they only get their share, as determined by the courts, of the assets the creditor gives up in the bankruptcy. This is where a consumer proposal comes in.

A consumer proposal will typically allow creditors to recover more of the money you owe them than they would if you were to declare bankruptcy. This is largely because instead of giving up your assets and possibly paying surplus income payments for nine or 21 months, as you would do in a bankruptcy, you pay into a consumer proposal for up to five years. Thus, a consumer proposal allows you to work to resolve your debts as honorably as possible, and pay your creditors more (or in rare cases, all) of what you originally owed them.

Note that there are special rules around student loans, and debts to the federal government (CRA). If you have a student loan or tax arrears, a Licensed Insolvency Trustee can advise you.

Success Rates of Consumer Proposals: What to Expect

Consumer proposals have been shown to be an effective tool in debt management. In general, the majority of proposals are accepted either right away, or after some negotiations with the creditors. Key to the acceptance of a consumer proposal is demonstrating to the creditors that the client has the ability to manage finances effectively, in addition to ensuring that the offer is financially advantageous for the creditors in comparison to what they may receive in a bankruptcy context.
Statistics also indicate a high completion rate for consumer proposals. The success factors lie largely in the hands of the client, and include realistic budgeting, consistent income, and guidance through financial counselling from a Licensed Insolvency Trustee. While challenges exist, with commitment and the right strategies, a consumer proposal can be a positive step towards financial stability.

Average Duration of Consumer Proposals and Their Impact

The average duration of a consumer proposal in Canada is typically five years, though it can be paid as quickly as the client wants and is able to. During this period, individuals agree to pay a portion of their debts, consolidated into one more manageable monthly payment, facilitated by a Licensed Insolvency Trustee. The impact of a consumer proposal is twofold: it provides immediate financial relief by consolidating debts into manageable payments and stops any legal action and interest accumulation, but it also affects the individual’s credit rating.

A consumer proposal usually results in an R7 credit rating, which indicates that the individual is making regular payments through a special arrangement to settle debts. This rating remains on the credit report for three years after the completion of the proposal, whether that be at the end of 5 years or sooner. Despite this impact on credit scores, consumer proposals offer a viable path for individuals to regain financial stability, as they restructure debts in a more manageable way without declaring bankruptcy. 

This balance of immediate financial relief and long-term credit impact makes consumer proposals a popular choice for Canadians seeking to get a fresh start financially without filing a bankruptcy. 

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What Are the Qualifications to File a Consumer Proposal?

Among debt relief options, a consumer proposal may be a viable solution for you if:

• You have debts exceeding $5,000, but not more than $250,000 (excluding secured debt such as your mortgage).
• You can afford to make a payment each month.
  You cannot repay all of your creditors in full with interest.
• You can’t get a debt consolidation loan because your debts are too high.
  You would like to be debt free but cannot pay your current debts.
• You don’t want to declare bankruptcy, because:
  • You would be subject to surplus income payments; and / or
  • You don’t want to lose control of your assets.

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Consumer Proposal FAQs

How much does a Consumer Proposal cost?

In most cases, the proposal administrator will be paid from the proceeds of the consumer proposal, rolled into your regular monthly payments. The administrator’s fees are set by the Office of the Superintendent of Bankruptcy.

What are the qualifications to file a Consumer Proposal?

• You are insolvent (your debts are greater than the value of your assets or you are unable to make payments as those payments are due)
• You have total unsecured debts of less than $250,000 (excluding the mortgage on your principal residence and other secured debts such as vehicle loans)
• You have no prior consumer proposal proceedings still open

How does a Consumer Proposal affect my mortgage?

A consumer proposal does not affect secured debt, such as a mortgage. You will continue to make your monthly payment. Your secured creditors will be informed of your proposal, but if there have been no problems with your mortgage payments most banks or mortgage companies simply renew your mortgage normally when the time comes. 

You will still need to make your regular mortgage payments if you make a consumer proposal.

Are there special rules around student loan payments, and debts owed to Canada Revenue Agency?
Yes. A Licensed Insolvency Trustee is highly qualified to advise you in these areas.

Is a Consumer Proposal the Right Option for Me?

Compared to other debt relief solutions, a consumer proposal could be a viable option if you are earning income but still struggling to get out of debt. A consumer proposal can help you get out of debt and start fresh.

A consumer proposal administrator can help you by meeting with you and working out a payment plan, and then presenting that plan to your creditors. If your creditors and the court accept your proposal, it becomes a legally binding settlement of your unsecured debts.

Where To Get A Consumer Proposal? Meet with a Licensed Insolvency Trustee

Contact us to arrange a no-charge, no-obligation, confidential consultation with a Licensed Insolvency Trustee to review your financial situation and all of your options. Rest assured that the Trustee knows this is a stressful process – you will be in good hands.

Whether you live in Ontario, Alberta, or another part of Canada, find the solutions you need today! Find a local Trustee you can trust. Bankruptcy Canada can connect you with Trustees from coast to coast in Canada including Toronto and Ottawa. Talk to one today.