Let’s start with a consumer proposal definition: A consumer proposal is a formal binding offer made to your creditors to settle your debt for less than the full amount owing. An alternative to bankruptcy, it is a legal process filed under the Bankruptcy & Insolvency Act through a Licensed Insolvency Trustee. At the completion of the proposal all unsecured debts included in the proposal are forgiven.
To help you decide if a consumer proposal is the right option for you, we’ve provided some answers to the most frequently asked questions we receive about consumer proposals in Canada.
What are the common benefits of filing a consumer proposal?
A consumer proposal is a viable alternative to declaring bankruptcy in Canada. Choosing the right solution depends on your specific situation. The main benefits of a consumer proposal in Ontario include:
- you keep your assets
- you make one lower monthly payment
- it’s a government program
- it provides creditor protection and court approval
- there are early payment options
- you avoid bankruptcy
What are the key differences between a consumer proposal and bankruptcy?
- You do not surrender assets in a consumer proposal, including tax refunds.
- Monthly payments are usually lower in a bankruptcy.
- A proposal requires the pre-approval of your creditors through a voting process. Bankruptcy is automatic although your creditors can oppose your discharge.
- Payments in a consumer proposal are negotiated up front. Bankruptcy payments are defined by legislation and can increase if your income increases.
- You can pay off a consumer proposal early. Bankruptcy has a pre-defined length determined by legislation.
- A consumer proposal has fewer required duties than bankruptcy. For example there is no requirement to report your income and expenses monthly in a consumer proposal.
Read more for a full comparison between bankruptcy and a consumer proposal
What does a consumer proposal cost?
You must offer more than what your creditors would expect to receive in total in a bankruptcy scenario to satisfy your creditors. When determining how much to pay, the trustee will look at:
- What you own and what you earn to determine how much would be available to your creditors in a bankruptcy.
- Your budget to determine that you can afford the payments.
There are no extra or up-front fees. Your LIT or consumer proposal administrator is paid out of the amount you agree to pay your creditors. The cost for filing a consumer proposal is covered by your agreed upon proposal payments and are not a separate charge.
What is the acceptance rate in a consumer proposal?
There are three rules of thumb for a successful consumer proposal:
- You must offer more than creditors would receive in a bankruptcy.
- It must meet the minimum expectations of your creditors.
- Your payments must be affordable.
At Hoyes, Michalos we have a 99% acceptance rate.
When will my consumer proposal be approved?
Once your proposal documents are signed they will be electronically filed with the government and your creditor protection starts. At that time, you stop making payments to your creditors.
- A consumer proposal is approved if a majority of creditors (based on the dollar value of proven claims) vote yes after which it is approved by the Court.
- A meeting is required if at least 25% of your unsecured creditors ask for one (based on the dollar value of proven claims).
- Creditors have 45 days to vote or request a meeting.
- Failing to vote is considered a yes vote.
It is possible to negotiate to try to obtain agreement.
Can I leave a creditor out of my proposal?
No. You cannot pick and choose which debts to include. A consumer proposal eliminates unsecured debts including credit cards, lines of credit, payday loans and tax debts.
Consumer proposals do not affect secured creditors. You cannot modify the terms of secured debt in a consumer proposal.
There are some debts that cannot be settled by a consumer proposal including student loans less than 7 years old, support and alimony obligations, court fines and penalties.
Read more in our article: Must a consumer proposal include all my creditors?
How long does a consumer proposal last?
Payments in a consumer proposal can be spread over a maximum of 60 months. If you can afford more each month, you can shorten your proposal term or offer a lump sum payment. Consumer proposal payments are interest free no matter how long the term of your proposal, up to a maximum of five years.
Can I pay off my proposal early?
Yes. While your total payments are fixed once your creditors accept the proposal, you can pay off your proposal early and begin the recovery process sooner.
Can tax debts be settled by a consumer proposal?
Yes. Unsecured tax debts are included in a proposal and CRA is bound by the terms of an accepted proposal. See our tax debt forgiveness article.
Will a consumer proposal stop a wage garnishment and collection calls?
Yes. A consumer proposal is a legal proceeding under the Bankruptcy and Insolvency Act that provides a stay of proceedings that immediately stops all creditor actions including most wage garnishments and calls from creditors and collection agencies. Once you sign your proposal documents, they will be electronically filed with the government and you immediately gain protection from your creditors.
Do I have duties during my proposal?
The duties required in a consumer proposal are much less than those in a bankruptcy. During your proposal, you must:
- Make all required payments
- Attend two credit counselling sessions.
- Unlike bankruptcy you do not need to report your income and expenses and you do not lose any assets, including any tax refunds owing to you.
What happens if I miss my proposal payments?
You can defer up to two payments but if you fall three payments in arrears your proposal will be ‘deemed to be annulled’, your debts are reinstated and you lose your creditor protection.
How long does a consumer proposal stay on my credit report?
The Office of the Superintendent of Bankruptcy reports all consumer proposals and bankruptcy filings monthly to the different credit bureaus. If you file a consumer proposal a notice will appear, including the date you filed, that indicates that you entered a repayment arrangement with your creditors. This notice remains on your report for 3 years after your proposal is completed.
Read more: How a consumer proposal affects your credit
Do I qualify for a consumer proposal?
Any individual who owes less than $250,000 (excluding a mortgage on a personal residence) can file a consumer proposal to settle their debts. A consumer proposal is a viable alternative if you have significant surplus income or assets you want to keep.