When Is a Consumer Proposal Worth It?
Consumer proposals can be a powerful alternative to bankruptcy, helping you make affordable monthly payments and stop collection calls. Still, it’s not right for everyone. Here’s how a consumer proposal works, who qualifies, and how to decide if it’s the right move for your financial situation.
What is a consumer proposal?
A consumer proposal is a legally binding agreement between you and your creditors to repay a portion of your debt — typically within five years. Creditors often agree to these arrangements because it’s better for them to receive some repayment on a set schedule rather than wait indefinitely for a full repayment that may never come.
Your monthly payments are fixed, usually lower than what you would otherwise pay, and don’t increase even if your income rises.
Because it is a legal process, a consumer proposal must be administered and mediated by a Licensed Insolvency Trustee (LIT), under the Bankruptcy and Insolvency Act of Canada.
While fees vary, expect to pay about $750 to file and another $750 to administer the proposal if it’s accepted by your creditors. The trustee you’re working with may also collect a service fee of around 20% of your payments.
As part of the process, you’ll also need to complete two mandatory financial counseling classes.
Filing a consumer proposal vs. filing for bankruptcy
With a consumer proposal, you do not have to surrender your assets or potentially make surplus income payments, as you would if you declared bankruptcy.
However, both processes share some similarities:
Public record. Each is a matter of public record and can negatively affect your credit. A consumer proposal typically stays on your credit file for no longer than three years from completion, while bankruptcy can stay for six to seven years.
Protection from creditors. Both provide a stay of proceedings, preventing creditors from calling, pursuing you in court, or garnishing your wages once you enter the process.
Eligible debts. Both can include unsecured loans, lines of credit, income tax debt owed to the Canada Revenue Agency (CRA), and credit card debt. They exclude secured debts (like a mortgage) and student loans less than seven years old.
A consumer proposal is often a last alternative before bankruptcy However, if you miss two or more payments of your consumer proposal, you may have to file for bankruptcy anyway.
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Consumer proposal vs. debt management plan
Another option for managing debt is a debt management plan (DMP), offered through a non-profit credit counselling agency. The counsellor works with your creditors to organize a repayment plan that fits your budget and schedule, often negotiating reduced or eliminated interest rates. You make one monthly payment to the agency, which then distributes it to your creditors.
While a DMP may sound similar to a consumer proposal in that you can consolidate your unsecured debt into one monthly payment, there are some key differences:
A DMP is voluntary — creditors can opt out and continue contacting you or garnishing wages.
You must repay all your original creditors in full under a DMP.
In contrast, a consumer proposal reduces the total amount you owe, and all calls and garnishments from creditors cease.
Who can file a consumer proposal?
A consumer proposal must be developed with a licensed bankruptcy and insolvency trustee, and it’s not an option for everyone.
To qualify, you must:
Live or operate a business in Canada.
Have debt of over $1,000.
Be insolvent, meaning you cannot make your debt payments, or your unsecured debt exceeds your assets.
Owe no more than $250,000 (excluding your mortgage).
You and a spouse — or any two individuals with substantially similar debts — can file a joint consumer proposal. You can also file a consumer proposal during a bankruptcy, but the date of the consumer proposal will be listed as the same as the bankruptcy, so you can’t add debts incurred afterward.
Even if you are eligible for a consumer proposal, it may not be your best option. Generally, it is best suited for people who:
Have the ability to make monthly payments.
Want to keep valuable assets they don’t want to lose during bankruptcy.
Earn enough that bankruptcy’s surplus income rules would make that route prohibitively more expensive.
So, when is it worth it?
A consumer proposal can be worth it if it helps you avoid bankruptcy, protect your assets and make manageable payments toward becoming debt-free. But if your income is unstable or your debt is relatively small, credit counselling or a repayment plan might be a better fit.
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Barry Choi
Shannon Terrell
Janine DeVault