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How does a consumer proposal work?

A consumer proposal is an alternative to bankruptcy that allows you to essentially consolidate your unsecured debt and pay all or some of it back in monthly payments, and/or in lump sums, interest-free amounts over a five-year period. A consumer proposal is a formal arrangement that can only be facilitated by a Licensed Insolvency Trustee (LIT). Your trustee will work with you to make an offer to your creditors to either modify your payments or repay only a percentage of what you owe.

In a consumer proposal, you may pay back 100% of the debt you owe, but typically, creditors will agree to a proposal that provides them with a percentage of what you owe because it allows them to get more back than they would in a bankruptcy

In order for the proposal to be successful, your LIT will work with you to figure out how much you can afford and how much your creditors might be willing to accept, based on your financial circumstances. Your creditors will then vote whether or not to accept your proposal. In most proposals, the amount you have to pay is made in monthly payments to your LIT over an agreed-upon period of time that is no longer than five years. However, you can make a lump-sum payment or a combination of a lump-sum payment and monthly payments.

How do I file a consumer proposal? 

You cannot file a consumer proposal by yourself. You must file with a LIT and you can book a free, no-obligation consultation in order to determine if a consumer proposal is the right debt solution for you

Watch the video to learn about the process of filing a consumer proposal, from meeting a LIT for the first time, to submitting a proposal to your creditors, all the way to meeting the terms of your consumer proposal and being discharged. 

Video transcript: Meet Mary. Mary took a job right out of college, but recently, she has had to take a lot of time off to care for her sick husband Paul. With reduced income and their debts mounting, they are now considering bankruptcy

  1. Their first step was to visit a Licensed Insolvency Trustee, a professional who is licensed by the Office of the Superintendent of Bankruptcy Canada. To their surprise, the trustee told them that bankruptcy may not be necessary. The trustee says that Mary and Paul could prepare what is called a consumer proposal. This is an offer to creditors to pay back a percentage of what they owe over a period of up to five years. There are advantages to filing a consumer proposal, the trustee tells them. For example, they get to keep their possessions and the proposal binds all creditors to the agreement. 
  2. To get things underway, the trustee explains that Mary and Paul must provide a complete list of what they own and what they owe. Using that information, the trustee will put a proposal together based on their ability to pay. The proposal will then be filed with the Office of the Superintendent of Bankruptcy Canada, the Federal organization that regulates Licensed Insolvency Trustees. Once it is filed, Mary and Paul will stop making payments directly to their unsecured creditors. The trustee also explains that if creditors are garnishing her wages or suing them, those actions will stop, too. 
  3. Once the appropriate papers are filed with the Office of the Superintendent of Bankruptcy Canada, the trustee will then submit the proposal to the couple’s creditors. The creditors will then have 45 days to accept or reject the offer. 
  4. If creditors appear unsatisfied with the proposal, the trustee may also negotiate amendments such as higher payments to creditors, but if the proposal is rejected, Mary and Paul are told they’ll have to look at other options to solve their financial problems. This may include declaring bankruptcy. 
  5. If the proposal is accepted, Mary and Paul will then be responsible for making periodic payments to the trustee, who will use that money to pay the creditors. 
  6. Further, they will be required to adhere to any other conditions in the proposal. They will also have to attend two counselling sessions to help them get back on their feet financially. 
  7. If they meet the conditions, they will be legally released from the debts that were included in the proposal. Mary asks about their credit rating. Yes, it will be affected, she is told. But once the terms of the proposal are met, they will be able to start rebuilding their credit and their financial future.

Who decides how much I’ll pay under a consumer proposal?

A consumer proposal starts with you filing a proposal to your creditors, and your creditors vote whether to accept or reject your offer. They are motivated to participate in the process if they will receive more in a consumer proposal than if you filed for bankruptcy. 

Your creditors have 45 days to review your proposal and they have the ability to accept or reject the offer. If creditors are not satisfied, you can modify the proposal and submit it again. However, if your proposal is rejected, you must look at other debt help options, which might include declaring bankruptcy. 

What debts can be included in a consumer proposal?

Your unsecured debts are included in a consumer proposal. Unsecured debt (unlike a mortgage that is secured by a house or a car loan secured by a car) can be included in a consumer proposal. Types of unsecured debts include (but are not limited to):

Normally, secured creditors are not affected by a consumer proposal. In most instances, you will continue to make payments to the secured creditors as per your usual arrangements.

However, in your consumer proposal, you may choose to surrender and return your secured assets, such as a vehicle or house, to the lender and stop making payments for these assets. In these circumstances, depending on provincial laws, the sale of assets held by the secured creditor will be included in your consumer proposal. This means you will not be responsible for any further payments to the secured creditors.

Will I lose my house or my car under a consumer proposal? 

When you file a consumer proposal, all your assets are protected from your unsecured creditors. If you own a home or a car you will need to make payments on your mortgage or car loan in order to keep them, as these debts are not settled in a consumer proposal.

Consumer proposals commonly offer unsecured creditors settlement of debts by way of monthly payments, not by way of surrendering assets. This means that individuals normally keep all their assets when they file a consumer proposal.

Will debt collectors stop calling me if I file a consumer proposal?

By law, collection actions against you must cease once your consumer proposal has been filed. A consumer proposal provides a Stay of Proceedings, which means that by law your creditors can no longer contact you for payment. All collection action against you must cease once official consumer proposal documents are filed. Consumer proposals trigger a freeze on your debts and stop interest charges, collection calls and letters, wage seizures, and bank freezes.  

If you have a mortgage or vehicle loan that you are opting to continue with, you must continue to make the required monthly payments and you will continue to be the contact person with your creditors about these.

Some types of debt (like those for child and/or spousal support) may not be extinguished by filing a consumer proposal, and the Stay of Proceedings will not apply.

How does a consumer proposal work if I have joint debts?

If you have joint debts then it may be appropriate to file a joint consumer proposal as the non-filing partner will still be liable for the joint debts. 

If your spouse is not jointly responsible for your debts, then your spouse is not affected by you filing a consumer proposal, and your consumer proposal will not affect your spouse’s credit report

Can I still get credit if I’m under a consumer proposal?

Most lenders will not give you credit if your consumer proposal has not been completed. However, you may be able to get a prepaid or secured credit card

When you file your consumer proposal, you must give your credit cards to your trustee so they can be cancelled.

After your consumer proposal ends, lenders can decide whether or not to give you credit. You can send your “certificate of full performance”, which is given to you after your proposal is finished, to credit reporting agencies to update your credit report.

How do I file a consumer proposal if I owe money to the CRA? 

A consumer proposal is a negotiated settlement between you and your unsecured creditors, which includes the Canada Revenue Agency (CRA). If you are unable to negotiate a payment plan with the CRA, another option to consider is a consumer proposal. 

Unsecured tax debts, including income tax, GST/HST, and payroll remittances, are included in a consumer proposal and the CRA is bound by the terms of an accepted consumer proposal.

Filing a Consumer Proposal will also stop further interest from accumulating and halt bank account freezes and wage seizures that CRA may have in place. With the CRA, in addition to the typical conditions included in a consumer proposal, the CRA requires that:

  • Your offer to them is greater than the return they would otherwise receive from you in a bankruptcy
  • You have presented a “viable” proposal, meaning you can prove to the CRA that you will have the ability to successfully make the proposed payments based on your financial circumstances
  • You are current on all tax filings, in order to ensure that the offer being presented includes all amounts of outstanding income tax debt
  • You remain compliant on all future tax fillings and instalment payments, which will be included as a clause of your proposal

Another benefit to filing a consumer proposal is that your trustee communicates directly with the CRA on your behalf. 

If the consumer proposal is accepted by the majority of your creditors, CRA interest and collection activity will stop, and you will be bound by the newly agreed terms.

Can I file more than one consumer proposal?

You need to be discharged from a consumer proposal before you can file another one. You can add amendments to an active consumer proposal. If you file a consumer proposal and it is annulled because you cannot make regular payments, for example, you cannot submit a new proposal seeking relief on the same debts without court approval. 

How do I get out of a consumer proposal?

To get out of a consumer proposal, you are responsible for making payments to your trustee for the lump-sum or monthly payments detailed in your agreement. Additionally, you must attend two financial counselling sessions.

At any time during the proposal, you are permitted to pay off the outstanding balance owing under the proposal and complete the process early; you can also increase your monthly payments and make extra payments along the way if you wish to shorten the time to complete the process. Doing any of these will result in you completing your proposal earlier than planned, and you will get your certificate of full completion earlier too. This has the advantage of getting the clock ticking on the three-year timeline that a proposal stays on your credit rating.

If your situation changes and you can’t manage your consumer proposal payments, it may be possible for your trustee to amend the consumer proposal. Your creditors would be advised of your intention to change your consumer proposal terms and they must agree to accept the amended consumer proposal.

However, your consumer proposal could be annulled if you fall behind on your payments. Depending on your payment plan, your consumer proposal could be “deemed to be annulled” if: 

  • If you are on a monthly payment plan and you miss three payments
  • If your lump-sum payment is more than three months overdue

If your consumer proposal is annulled, your debts are reinstated, and you lose your creditor protection.  

In rare cases, someone who has filed a consumer proposal abandons the consumer proposal altogether due to a change in circumstances. While a consumer proposal is an alternative to personal bankruptcy, it does not take away the option to file a bankruptcy if the circumstances warrant it.

Learn more about consumer proposals

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