If you’re struggling with debt, a consumer proposal might be the solution you need to regain control of your finances without resorting to bankruptcy. This legally binding process allows you to negotiate with your creditors to pay off a portion of your debt over time, while protecting your assets.

For homeowners, however, there’s another option to consider before filing for a consumer proposal: using the equity in your home to pay off your debts. This could be a better solution if you’re looking to preserve your credit and avoid the negative impacts of a consumer proposal. In this article, we’ll cover everything you need to know about filing for a consumer proposal in Ontario, while also exploring the alternative of using home equity to pay off debt.

What is a Consumer Proposal?

A consumer proposal is a formal, legal agreement between you and your creditors where you offer to pay back a portion of your total debt. Unlike bankruptcy, a consumer proposal allows you to keep your assets (such as your home and car) and avoid the financial and credit consequences of bankruptcy.

In Ontario, consumer proposals are governed by the Bankruptcy and Insolvency Act, and they must be administered by a Licensed Insolvency Trustee (LIT). If you owe between $1,000 and $250,000 (excluding your mortgage) and are unable to pay your debts in full, a consumer proposal could help you negotiate a settlement with your creditors and get back on track financially.

How Does a Consumer Proposal Work?

When you file a consumer proposal, you will work with an LIT to develop an offer to repay a portion of your debts. Typically, the amount you’ll pay is less than the full balance owed. Your creditors will vote on the proposal, and if the majority of them agree, it becomes a legally binding agreement.

Here’s a breakdown of the key steps:

Debt Reduction: Instead of paying the full amount owed, you’ll propose to pay a reduced amount, which may be agreed upon through negotiations.

Repayment Plan: The repayment plan typically lasts from 3 to 5 years and is based on your financial situation.

Asset Protection: Unlike bankruptcy, you can keep your home, car, and other assets as long as you adhere to the repayment terms.

No More Creditor Calls: Once your proposal is filed, creditors can no longer contact you or pursue legal actions like garnishing your wages.

How to File a Consumer Proposal in Ontario

Filing for a consumer proposal is a formal legal process that requires the help of a Licensed Insolvency Trustee (LIT). Here are the key steps involved:

Step 1: Evaluate Your Financial Situation

Before filing for a consumer proposal, it’s important to understand the full extent of your debt. This includes:

List of creditors: Make a complete list of all your creditors, including credit cards, loans, and any other outstanding debts.

Amount owed: Add up the total amount of debt you owe to each creditor.

Income and expenses: Review your monthly income and expenses to determine how much you can afford to offer in the proposal.

Step 2: Contact a Licensed Insolvency Trustee (LIT)

The next step is to find a Licensed Insolvency Trustee (LIT) in Ontario. An LIT is a government-authorized professional who is responsible for administering consumer proposals, bankruptcy filings, and other insolvency-related matters.

You’ll need to meet with the LIT to discuss your financial situation, explore your options, and determine whether a consumer proposal is the best solution. The LIT will help you:

Assess whether a consumer proposal is a viable option

Determine the amount you can offer to creditors

Draft the proposal and present it to your creditors

Step 3: File the Proposal with the LIT

Once you’ve agreed on the terms of your consumer proposal with your LIT, they will file the proposal with the Office of the Superintendent of Bankruptcy (OSB). This filing is what officially begins the consumer proposal process.

Proposal details: Your proposal will outline the amount you are willing to repay, how long the repayment period will last, and any other terms that apply.

Protection from creditors: Once the proposal is filed, creditors are legally prohibited from contacting you, and they must stop any legal actions, such as wage garnishments.

Step 4: The Proposal is Sent to Creditors

After filing the proposal, the LIT will send it to your creditors for their approval. Creditors have 45 days to vote on your proposal.

Creditor vote: In order for the proposal to be accepted, at least 50% of creditors (by dollar value) must approve it.

What happens if the proposal is rejected? If the majority of creditors reject the proposal, you may need to go back to the negotiating table, revise your proposal, or consider other options, like bankruptcy.

Step 5: Once Approved, Follow the Repayment Plan

If the majority of creditors agree to your proposal, it becomes legally binding. You’ll begin making monthly payments as outlined in the repayment plan, which typically lasts from 3 to 5 years. Once you complete the payments, your remaining debt is forgiven.

Step 6: Keep up with Payments

It’s crucial that you keep up with your monthly payments during the repayment period. If you fail to make the required payments, your creditors may apply to the court to have the proposal annulled, which could lead to bankruptcy.

Failure to comply: If you are unable to keep up with your payments, speak with your LIT immediately to discuss the situation and possible solutions.

Benefits of a Consumer Proposal

Filing a consumer proposal has several advantages:

Debt Reduction: You can often pay back only a portion of your total debt, with the remainder forgiven after the repayment period.

Asset Protection: Unlike bankruptcy, you can keep your home and other valuable assets.

Legal Protection: Once the proposal is filed, creditors must stop all collection actions, and wage garnishments are halted.

No Interest: During the repayment period, interest on your debt stops, so your payments go directly toward reducing the principal.

Consumer Proposal Alternative for Homeowners

While filing a consumer proposal can be a helpful way to deal with debt, homeowners in Ontario should consider using the equity in their homes as an alternative solution. If you have significant home equity, you may be able to consolidate your debt through a home equity loan or Home Equity Line of Credit (HELOC), which often come with lower interest rates than credit cards or personal loans.

Here’s why using home equity might be a better option for homeowners:

Lower Interest Rates: Home equity loans and HELOCs typically offer lower interest rates compared to other types of unsecured debt, such as credit cards or personal loans. For instance, a typical credit card interest rate could be 18%, whereas a home equity loan might be around 5-7%. This reduction in interest means that you’ll pay less over time, making your debt easier to manage and reducing the overall cost.

Let’s say you have $15,000 in credit card debt with an interest rate of 18%. If you make only the minimum payments, it could take you 10+ years to pay it off and cost you over $30,000 in interest. But if you consolidate that debt into a home equity loan with a 5% interest rate, your monthly payments would be significantly lower, and you’d pay off the debt much faster, saving you a considerable amount in interest.

Avoiding the Consequences of Consumer Proposals or Bankruptcy: If you choose to file for a consumer proposal or bankruptcy, it can have long-term effects on your credit score and financial future. A consumer proposal remains on your credit report for 3 years after you’ve completed the repayment terms, while a bankruptcy stays on your report for 6-7 years. These records can make it difficult to access credit in the future and may affect your ability to buy a home or get a loan.

By opting to use your home equity to pay off your debt, you avoid the legal and financial consequences of a consumer proposal or bankruptcy. While you will still need to make monthly payments to pay off your home equity loan or HELOC, you won’t face the stigma and financial impact of filing for insolvency.

Preserve Your Assets: One of the most significant advantages of using home equity to pay off debt is that you get to keep your assets. In a consumer proposal, you can typically keep your home, but you’ll still be required to make monthly payments to your creditors. However, if your proposal is rejected or if you go bankrupt, your assets—including your home—could be at risk.

With a home equity loan or HELOC, you maintain ownership of your home while consolidating your debt, avoiding the risk of losing your property.

Flexible Repayment Options: A HELOC, in particular, offers flexibility in how you repay your debt. You can pay off as much or as little as you want (as long as you meet the minimum monthly payment). This gives you greater control over your finances, and it may help you avoid the rigid repayment schedule of a consumer proposal or bankruptcy. However, it’s important to note that using a HELOC responsibly requires good financial discipline, as the available credit is revolving, and it’s easy to fall back into debt if not managed carefully.

How to Use Home Equity to Pay Off Debt

Before using your home equity to pay off your debt, it’s important to follow these steps:

Assess Your Home’s Value: First, determine the current market value of your home. This can be done through an appraisal or by consulting with a real estate agent. Knowing how much equity you have will help you understand how much you can borrow.

Consult with a Trusted Mortgage Broker: Speak to your mortgage broker to explore your options for accessing your home equity. They will review your financial situation, including your debt, income, and credit history, to help you determine the best solution.

Choose Between a Home Equity Loan or HELOC: Depending on your preferences and financial situation, you can choose between a home equity loan or a HELOC. A home equity loan provides a lump sum with fixed payments, while a HELOC offers more flexibility with a variable interest rate.

Consolidate Your Debts: Once you have access to the funds, use them to pay off high-interest debt, such as credit card balances, personal loans, or other outstanding bills. This will immediately reduce the amount of interest you’re paying, and you’ll only need to focus on repaying the loan or HELOC.

Create a Budget: After consolidating your debt, create a budget to ensure you stay on track with your repayment plan. Pay your monthly mortgage and loan payments on time to avoid late fees and to protect your credit score.

Monitor Your Progress: Regularly review your debt and financial situation to ensure that you’re not accumulating new debt. Stay within your credit limits and avoid relying on credit cards or additional borrowing while you pay off your loan or HELOC.

Filing a Consumer Proposal in Ontario and the Alternative for Homeowners

A consumer proposal can be a helpful solution for individuals in Ontario who are struggling with debt, but it’s not the only option. Homeowners should seriously consider using the equity in their homes as an alternative to manage their debts and preserve their credit. By consolidating your debts through a home equity loan or HELOC, you may be able to pay off your debt faster and avoid the negative financial consequences of a consumer proposal or bankruptcy.

If you're unsure which option is best for you, it's highly recommended that you consult with a Licensed Insolvency Trustee (LIT) or a financial advisor to fully understand the benefits and risks associated with each choice. By getting professional advice, you’ll be better equipped to make the best decision for your financial future.