If you’re searching for debt relief in Canada, you may have come across the term “consumer proposal”. What exactly is a consumer proposal, though, and how can it help you?
In this “Consumer Proposal FAQs” blog, we’ll answer the 20 most frequently asked questions about this Canadian debt relief option and whether or not it’s right for you.
#1 What Is a Consumer Proposal?
A consumer proposal is a legal process in Canada that offers debt relief and protection from creditors. After entering into a consumer proposal, the interest payments on your unsecured debt will stop, calls and letters from your creditors will stop, and up to 80% of your unsecured debt can be forgiven. The rest of your debt will be restructured into one easy-to-make monthly payment.
#2 How Does a Consumer Proposal Work?
First, you will meet with a Licensed Insolvency Trustee (LIT) to review your situation. If you determine a consumer proposal is your best option, your LIT will file the appropriate paperwork and help you negotiate with your creditors.
Once your consumer proposal is accepted, you will make the agreed-upon monthly payments to your LIT for up to 60 months. After successfully making these payments, and attending two mandatory counselling sessions, your consumer proposal will be complete.
#3 What Debts Are Included In a Consumer Proposal?
Any debt that is unsecured must be disclosed and will be included in your consumer proposal. This includes:
- Credit Card Debt
- Unsecured Lines of Credit
- Personal Loans
- Payday Loans
- Most Tax Debt
- Student Loans (over seven years old)
It should be noted that your consumer proposal will include all of your unsecured debt. You can’t pick and choose which unsecured debt you want to be included.
#4 What Debts Are Excluded In a Consumer Proposal?
Debts secured by assets are excluded from being settled in a consumer proposal. This includes:
- Second Mortgages
- Secured Lines of Credit
- Car Loans
- Life Insurance Loans
If a secured asset has become a financial burden, and you owe more on it than it’s worth, you can surrender that asset and include the money owed in a consumer proposal.
In addition, alimony, child support, legal fines and penalties, and school loans under seven years old are not dischargeable in a consumer proposal.
#5 Will a Consumer Proposal Ruin My Credit?
Not necessarily. A consumer proposal will negatively affect your credit rating in the short term. In the long term, though, a consumer proposal could help you to improve your credit. After successfully making all of your consumer proposal payments, your credit rating should improve substantially over what it was before the consumer proposal.
#6 How Long Does a Consumer Proposal Stay On a Credit Report?
A consumer proposal will stay on your credit report for three years after you make your last consumer proposal payment or six years after the consumer proposal goes into effect (whichever comes first). Once the consumer proposal is discharged, you will have a fresh start financially and a chance to improve your credit rating.
#7 How Much Does a Consumer Proposal Cost Per Month?
This is dependent on many factors, including:
- your income
- the amount of unsecured debt you owe
- how much debt is forgiven
- how your remaining debt is renegotiated
- the length of your consumer proposal
Regardless of the above factors, the monthly payments for a consumer proposal will generally be considerably less than you paid before. A Licensed Insolvency Trustee can help you understand what creditors may be willing for a monthly payment based on your situation.
#8 Will My Consumer Proposal Payments Change Over Time?
No. Once your consumer proposal is accepted, your payments will remain the same over the term of the consumer proposal. Normally a consumer proposal will take between 36-60 months worth of payments. If your financial situation improves, you can pay the remaining months off in one lump payment without penalties.
In the event your situation changes for the worse, an opportunity to amend a consumer proposal does exist.
#9 How To Qualify For a Consumer Proposal?
To qualify for a consumer proposal, you must meet the following requirements:
- You are an individual and not a corporation.
- You live in, do business in, or own property in Canada.
- You are unable to repay your debt.
- You owe at least $1,000 in unsecured debt.
- You have the income to make your consumer proposal payments.
If you owe more than $250,000 in total debt, excluding the mortgage(s) on your primary residence, you would need to file a Division 1 Proposal instead.
#10 Do All Consumer Proposals Get Accepted?
No. Not All consumer proposals get accepted. There are some instances where one might be rejected, such as:
- Your proposal is too low.
- You can’t make your monthly consumer proposal payment.
- You’re suspected of financial fraud.
- You can pay your original debt but won’t.
If your consumer proposal is rejected due to your creditors wanting more money, you can, via your Licensed Insolvency Trustee, renegotiate your consumer proposal.
It should be noted that while creditors can outright reject consumer proposals, it is uncommon. Creditors are generally willing to negotiate with you to come to acceptable terms.
#11 Can I File a Consumer Proposal with My Spouse?
Yes, you can enter into a joint consumer proposal with a spouse. To ensure that the proposal is accepted, there should be joint debt as well as individual debt. This is a more complicated process, and it’s best to contact your Licensed Insolvency Trustee to see if this is your best option.
#12 How To File a Consumer Proposal?
The first step to filing a consumer proposal is to find a Licensed Insolvency Trustee (LIT). They are the only people who can initiate the process. Once you and your LIT have determined the debt you owe and what you can repay, they’ll file all the necessary paperwork and contact your creditors on your behalf.
#13 Will a Consumer Proposal Force Me To Sell Everything?
No. A consumer proposal offers both debt relief and asset protection. Unlike bankruptcy, a consumer proposal doesn’t require you to sell any of your assets to satisfy your creditors.
#14 Will I Lose My Tax Refunds Or Benefits After Filing a Consumer Proposal?
No. Tax refunds and any government benefits you receive, including Canada Child Benefits and/or Working Income Tax Benefits, are protected during a consumer proposal. There are certain exceptions, so a consultation with a Licensed Insolvency Trustee is recommended.
#15 Can a Consumer Proposal Affect Employment?
In most cases, no. Filing a consumer proposal should not affect your employment in any way. One exception would be if you are a licensed and/or bonded professional. In this case, your licensing or bonding agency may require notification of your consumer proposal. If you are in this situation, it’s best to disclose this to your Licensed Insolvency Trustee.
#16 What’s the Difference Between a Consumer Proposal and Bankruptcy?
Both bankruptcy and consumer proposals are insolvency proceedings. They differ in a few ways, such as:
- Asset Protection – A consumer proposal allows you to keep all your assets.
- Length – Consumer proposals can last up to 60 months, while bankruptcy could be discharged in as little as 9 months.
- Credit Reporting – A consumer proposal will be off your credit report much sooner.
- Monthly Payments – Typically, monthly payments are lower with a consumer proposal.
Talk with your Licensed Insolvency Trustee to determine if a consumer proposal or bankruptcy is best for you.
#17 How Many Times Can You Do a Consumer Proposal In Canada?
There is no limit to the number of consumer proposals you can file during your life. The only requirement is that you not have more than one consumer proposal in effect at the same time.
#18 How Soon After a Consumer Proposal Can I Get a Mortgage?
The standard answer to this question is that it normally takes two years after your consumer proposal is discharged before a lender will approve a mortgage loan. There are other factors, though, that can shorten this time frame. This includes lowering the loan-to-value ratio on the home you’re purchasing by making a larger-than-normal down payment.
#19 Is a Consumer Proposal Worth It?
If you’re unable to make your monthly payments as they become due, then yes, a consumer proposal is worth it. It will eliminate interest payments, forgive most of your debt, and protect your assets. Consumer proposals may offer you the best opportunity to get on your feet again financially and to stop the constant anxiety of being in debt.
#20 What are the Consumer Proposal Pros And Cons?
There are many advantages to a consumer proposal, as well as a few disadvantages. Let’s take a quick look at some of these.
|Consumer Proposal Pros||Consumer Proposal Cons|
|Asset Protection||Short-Term Impact on Credit Report|
|Termination of Interest Payments||Not all Debt is Included|
|One Low Monthly Payment||Could be Rejected by Creditors|
|Little to No Upfront Costs||Could Last up to 60 Months|
|Debt Forgiveness||Will be Public Knowledge|
|Less Stigma than Bankruptcy||Penalty for Default|
|Monthly Payment will not Increase|
|Wages can’t be Garnished|
|No Collection Calls or Letters|
|Applies to Some Government Debt|
|Less Anxiety Every Month|
|A Financial Fresh Start|
While there are certainly some disadvantages to a consumer proposal, the advantages far outweigh them.
Did These Consumer Proposal FAQs Help?
Entering into a consumer proposal is a difficult decision. Our goal with this list of consumer proposal FAQs is to give you all of the information you need to make this decision less stressful. If there are any additional questions you may have, or if you’re ready to begin the process, please feel free to reach out to us.