Consumer Proposal Guide

Decide if a consumer proposal is right for you.

A consumer proposal is a debt solution that allows you to get out of debt for less than the full amount you owe. It’s a legally binding agreement that you enter into with your creditors that’s arranged by a Licensed Insolvency Trustee. In the right circumstances, it can help you avoid bankruptcy, as well as save time and money as you work to become debt-free.

This page can help you understand consumer proposals and how they compare to other solutions. If you still have questions, call us at 1-888-294-3130. One of our trained credit counsellors will be happy to answer your questions and understand which debt relief option is best suited to your situation.

What is a consumer proposal and how does it work?

 

A consumer proposal is a formal agreement between you and your creditors that may allow you to get out of debt for a portion of what you owe. You agree to pay a certain amount of the debt back with installment payments over a set period. Your creditors agree to freeze interest charges and accept reduced monthly payments.

This is similar to debt settlement. However, this agreement is legally binding, because it’s arranged through a Licensed Insolvency Trustee, also known as a bankruptcy trustee.

In a consumer proposal, a Licensed Insolvency Trustee calculates what percentage of your debt you can repay

The basics

Minimum debt amount required: $1,000

Maximum debt amount allowed: $250,000 or $500,000 if you’re married

Interest charges: All interest charges are frozen

Payments: Typically lowers monthly payments

Maximum time to complete: 60 months

Cost: $1,500 filing fee plus 20% of your future payments

Are your assets protected? Yes

Does this negatively affect your credit? Yes

How consumer proposals work

Couple meets with a Licensed Insolvency Trustee

  1. First, you contact a Licensed Insolvency Trustee (LIT).
  2. They will schedule an assessment, where you will meet with them to discuss your finances and debt.
  3. Initially, they’ll total up your debt to make sure you fall within the limits. There’s a minimum requirement of $1,000 and a maximum requirement of $250,000 for individuals or $500,000 for a joint proposal with married couples. The total debt calculation does not include your mortgage.
  4. They will also ask you questions about your financial situation that you must answer honestly and completely. They will need a complete list of:
    1. Assets (property with monetary value)
    2. Liabilities (debts)
    3. Household expenses and income
  5. Then they will review other debt-relief alternatives with you, including debt consolidation, credit counselling and bankruptcy.
  6. Once it’s decided that a consumer proposal is your best option, you pay the $1,500 setup fee and the trustee will begin to craft the proposal.
  7. They will work with you to determine how much you can reasonably afford to pay towards your debt each month.
  8. Then they will draft a proposal that gets sent to your creditors asking for a principal reduction; your creditors will have 45 days to respond.
  9. You will be required to sign an Assessment Certificate that verifies everything you’ve discussed and agreed to.
  10. Once your creditors agree to the proposal, the Licensed Insolvency Trustee files the proposal will the Office of the Superintendent of Bankruptcy (OSB).
  11. Your payments will begin the date specified. You will pay fixed installment payments to the LIT and they will distribute the fund to your creditors as agreed. You will also be required to attend two financial counselling sessions.[1]

What happens if you miss any payments?

If you miss three payments or any one payment is more than three months past-due, your consumer will be annulled. This means your creditors can start collection actions again. It can be difficult, though not impossible, to revive a proposal once this happens.

If you have any trouble making the payments assigned, you may be able to amend the agreement. However, you are generally expected to meet the payment schedule the trustee sets.

What kind of debts can I include?

In general, you can include most types of unsecured debts, such as:

  • General-purpose credit cards
  • Store credit cards
  • Gas cards
  • Unsecured personal loans
  • Unsecured lines of credit (LOCs)
  • Income taxes
  • Payday loans

You cannot include secured debts, such as a mortgage or auto loan, as well as court-ordered debts, such as child support and alimony. You also generally cannot include student loans, although they may be included upon meeting certain conditions.

Weighing the pros and cons

Comparing the pros and cons of consumer proposals

 

Pros

  • You get out of debt for less than you owe. It some cases, you may only pay back 20-30% of a balance.
  • You’ll be debt-free in 5 years or less. Since a proposal can only have a maximum term of 60 payments, you have a definitive date when you’ll be debt-free.
  • Fixed payments are easier on your budget. You’ll pay exactly the same amount each month as outlined in your agreement. So, you can set a budget that works.
  • All collection calls stop. Once the consumer proposal is in place, all collector and creditor calls will cease. That’s less financial stress to bear!
  • You won’t lose your assets. Filing for bankruptcy means you could lose your home, cars and other assets. Those are protected with a proposal

Cons

  • You will not be in control of the settlement negotiation. The Licensed Insolvency Trustee will determine what you can reasonably afford to pay. You’re expected to meet that requirement.
  • The fees for setting up and having the LIT administer your proposal are high. The initial setup fee is $1,500 and the LIT takes 20% of the future payments administering your proposal and payments.
  • The proposal becomes a permanent part of the public record. This record can affect your ability to qualify for future loans and lines of credit. They are also accessible to anyone who requests the information.

How does this compare to other solutions, like credit counselling?

Credit counselling is not a solution in and of itself. At its core, it’s a free service that helps you identify the right solution to get out of debt. In fact, a credit counsellor may recommend a consumer proposal if it’s the best option for debt relief in a particular situation.

It’s often a good idea to contact a trained credit counsellor first before you contact a Licensed Insolvency Trustee. The counsellor can help you understand your full range of options first. This may help you avoid the exhaustive financial disclosure of your finances to a trustee.

Then, if the credit counsellor recommends contacting a Licensed Insolvency Trustee, you can start that process with more confidence that it’s the right choice.

Consumer proposals vs debt management programs

The real comparison is between a consumer proposal and a debt management plan, which is the program you can enroll in through a credit counselling agency. Here is how these two options compare:

Debt management programConsumer proposal
Amount of principal paidPaid in fullOnly pays back a percentage of the principal
Interest chargesEliminated or reducedFrozen
PaymentsTypically lowers monthly paymentsOften lowers the payments by a larger percentage
CostLow setup and administration fee, rolled into the monthly payment$1,500 to file plus 20% of all payments
Maximum term of repayment60 payments60 payments
Affect on your creditNoted on your credit report for 2 years from the date you complete the programNoted for 3 years from the date of final discharge
Are your assets protected?YesYes
Permanent public record?NoYes

Consumer proposals versus debt settlement

These two options provide roughly the same benefit – you may be able to get out of debt for a portion of what you owe. However, a debt settlement program is run through a private company instead of being formalized by a Licensed Insolvency Trustee.

In theory, this would give you greater control over the negotiations with your creditors. The company you hire would negotiate on your behalf, rather than finding the maximum amount you can afford to pay like a LIT.

However, debt settlement companies have been highly regulated in Canada following the Great Recession. In many cases, creditors will not accept settlement offers outside of a formal consumer proposal. This type of debt relief is rare, and you also need to be concerned with any company offering this service. Be cautious of unrealistic promises and companies that charge high upfront fees.

Consumer proposals versus bankruptcy

Court rules on bankruptcyConsumer proposals are often an important last resort before you file for bankruptcy. Filing for bankruptcy can put assets, such as your home and cars, at risk. Those assets could be liquated to satisfy the debts that you owe.

Outside of the asset protection offered by a proposal, these solutions have many similarities. They both are administered by a Licensed Insolvency Trustee. Both solutions will affect your credit for many years beyond the date of the final discharge. Both of these options will also become part of a permanent public record.

When you start working with a Licensed Insolvency Trustee, you will be required to submit a full financial disclosure. This will allow the trustee to view every aspect of your finances, including your assets, debts and budget. The trustee will recommend filing for bankruptcy or a consumer proposal based on this evaluation.

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