What You Need to Know About the Consumer Proposal in Canada

If you spend time on social media, you’ve probably come across ads promoting a Canadian government “Debt Relief Program” or the “Consumer Proposal”. These ads claim you can slash your unsecured debt by 70% to 80% with zero interest—sounds too good to be true, right? I get it; I would be skeptical if I were you.

But here’s the good news: The Consumer Proposal is completely legit! However, like anything that sounds amazing, it does have its own set of drawbacks. Otherwise, it would be too good to be true.

Let’s dive in and discover what a Consumer Proposal means!

What is a Consumer Proposal?

A Consumer Proposal is a formal agreement with your creditors, allowing you to pay back a portion of what you owe in exchange for full forgiveness of your debts. It’s federally regulated under Canada’s Bankruptcy and Insolvency Act and must be filed through a Licensed Insolvency Trustee.

For those struggling to keep up with monthly payments, a Consumer Proposal offers a way to reduce debt without the consequences of bankruptcy.

How to be eligible for this program?

To file a Consumer Proposal in Canada, you need to:

• Be able to pay a portion of your debts
• Be insolvent (your debts are greater than your assets, or you can’t keep up with payments)
• Owe no more than $250,000 in unsecured debt (excluding a mortgage and other secured debt)
• Be a resident of Canada or have Canadian property

Citizenship isn’t required, so even those on work permits can apply

What Debts Can Be Included?

A Consumer Proposal covers unsecured debts like:

• Credit card debt
• Unsecured lines of credit
• Personal loans
• Payday loans
• Overdrafts
• CRA debt (e.g. taxes, EI overpayments, CERB overpayments)
• Debt in collection
• Outstanding bills
• Student loans (if they’re more than seven years from your last day in school)

What Debts Cannot Be Included?

Secured debts such as: 

• Mortgages 
• Car loans
• Car lease agreements
• Home equity lines of credit (HELOC)
• Student loans (less than seven years from your last day in school)

Your secured debt may not be eligible, however, eliminating your unsecured debt can make managing secured loans easier. 

How Much Does a Consumer Proposal Cost?

A Consumer Proposal means you pay back less than what you owe—it’s a type of debt settlement. Your repayment terms are negotiated based on what you can afford and what creditors are willing to accept.

Your finances will be assessed to determine a reasonable offer. The final amount depends on your income and assets. Many proposals see settlements around 30 cents on the dollar, though this can vary.

Payments are interest-free and can be stretched over five years, allowing you to manage your budget while potentially reducing your debt by up to 70%.

Pros and Cons of Consumer Proposals

A Consumer Proposal is the only debt settlement method backed by the Canadian government, making it a safer choice than informal agreements.

Pros:

• Reduce your debt by up to 70%
• Be debt-free within 3-5 years
• Keep your assets and protect them from your creditors
• Simplify your finances with one monthly payment
• Freeze interest and stop collection calls
• Stop legal actions and lawsuits
• Stop wage garnishments
• Legally bind all creditors if the majority agrees
• Avoid bankruptcy while still getting significant relief

Cons:

• It will temporarily impact your credit score
• Some creditors may not accept your proposal, although approval rates are high
• Missing three payments will void the agreement, bringing back your original debt
• Some debts like child support and alimony cannot be included

Impact on Your Credit

A Consumer Proposal will affect your credit rating, but the impact is temporary. Credit bureaus (Equifax and Transunion) will remove the Proposal from your report three (3) years after you complete it or six (6) years after you file, whichever comes first. Many find their credit score improves soon after completing the program, as it offers a fresh start.

How Does a Consumer Proposal Work?

Here’s a quick overview of the process:

Debt Assessment: Your financial situation will be evaluated to see if a Consumer Proposal suits your needs.

Offer Creation: A payment plan will be recommended that works for both you and your creditors.

Filing: Once you’ve agreed on a payment amount, your proposal will be filed with the government and your creditors will be notified.

Stay of Proceedings: Creditors can’t take any legal action against you once the Proposal is filed.

Approval: Creditors have 45 days to review the proposal. If most agree, it’s approved. We have 98% success rate.

Payment and Duties: You’ll make regular payments and attend two financial counseling sessions.

Debt Discharge: After completing your payments, you receive a Certificate of Full Performance, indicating your debts are cleared.

Why Choose a Consumer Proposal Over Bankruptcy?

A Consumer Proposal can be a better option than Bankruptcy because it allows you to:

• Retain assets, like equity in your home
• Avoid surplus income payments, which increase bankruptcy costs for higher earners
• Repay only what you can afford
• It’s open and flexible which means you can pay more than your minimum which potentially leads to paying off the agreement early
• It’s often easier to get back on your feet financially with a Consumer Proposal since you’re not facing the severe restrictions that come with Bankruptcy

The Bottom Line

A Consumer Proposal can be a great option for individuals looking to manage their debt without the consequences of bankruptcy; while keeping assets and simplifying monthly payments. However, it’s essential to be mindful of the long-term commitment (maximum of 5 years), credit impact, and, most importantly, your spending habits. While a Consumer Proposal provides a clear path to debt relief, it doesn’t solve underlying money habits or budgeting issues that may have contributed to your financial challenges.

If overspending or lack of money management skills led to your debt, these behaviors can still impact your finances even after the Proposal is complete. To stay financially healthy, it’s important to work on sustainable budgeting and responsible spending practices alongside your Consumer Proposal. Without addressing these habits, you could find yourself back in debt down the road.

A Consumer Proposal can be a great step toward financial recovery, but building better budgeting and financial habits after completing it is key to staying debt-free.