What is a Consumer Proposal?

A consumer proposal is a legally binding agreement in Canada that allows individuals to settle unsecured debts by paying a reduced amount over time. Administered by a Licensed Insolvency Trustee (LIT), it offers an alternative to bankruptcy, helping debtors avoid losing assets and providing creditors with partial repayment.

How Does a Consumer Proposal Work in Canada?

Managing debt can be overwhelming, but Canadians have options to regain control of their finances. One such option is a consumer proposal. This alternative to bankruptcy provides a structured way to resolve debt issues while keeping assets like your home and car. In this article, we’ll explore the details of consumer proposals and how they might fit into your financial recovery plan.

A consumer proposal is a formal process governed by Canadian law, designed to help individuals consolidate and repay unsecured debts over a period of up to five years. It’s administered by a Licensed Insolvency Trustee (LIT), who acts as a mediator between you and your creditors. By agreeing to a consumer proposal, creditors receive a portion of what they’re owed, while debtors gain the benefit of reduced payments and asset protection.

How Does a Consumer Proposal Compare to Bankruptcy?

One of the most significant advantages of a consumer proposal is that you retain your assets, unlike in bankruptcy, where certain assets may be sold to repay creditors. Additionally, a consumer proposal allows you to consolidate unsecured debts into one manageable monthly payment, whereas bankruptcy typically involves the liquidation of non-exempt assets. Another key distinction lies in credit ratings: a consumer proposal results in an R7 rating, which is less damaging than the R9 rating associated with bankruptcy.

What Debts Can Be Included in a Consumer Proposal?

Consumer proposals are tailored to address unsecured debts such as credit card balances, personal loans, lines of credit, and certain tax obligations. However, they don’t cover secured debts like mortgages or car loans, nor do they apply to alimony, child support, court fines, or student loans less than seven years old. Understanding which debts qualify is crucial for determining whether a consumer proposal is the right choice for your financial situation.

How Does a Consumer Proposal Affect My Credit?

While a consumer proposal does affect your credit, its impact is generally less severe than bankruptcy. An R7 rating will appear on your credit report for three years after the completion of the proposal, signaling to creditors that you participated in a debt settlement program. This can limit your access to new credit temporarily, but it also marks a step toward financial recovery.

What Are the Pros and Cons of a Consumer Proposal?

Pros of a Consumer Proposal:

• Opting for a consumer proposal offers several advantages, including:

• Retention of assets like your home and vehicle

• Consolidation of multiple unsecured debts into one affordable payment

• Legal protection from creditor actions, such as wage garnishments

• Elimination of interest on included debts during the repayment period

Cons of a Consumer Proposal:

However, it’s important to be aware of potential disadvantages:

• The negative impact on your credit rating

• Ineligible debts, such as secured loans, remain unpaid

• The filing becomes a matter of public record

• Missed payments can lead to the annulment of the proposal

What Is the Process for Filing a Consumer Proposal?

The process for filing a consumer proposal is straightforward but requires careful planning:

Initial Consultation: Meet with a Licensed Insolvency Trustee to evaluate your financial situation and determine eligibility.

Proposal Creation: Draft a repayment plan tailored to your circumstances.

Creditor Review: Creditors have 45 days to accept or reject the proposal.

Payments Begin: Upon approval, begin making agreed-upon payments to the LIT.

Counselling Sessions: Attend two mandatory financial counselling sessions.

Completion: After all payments are made, receive a Certificate of Full Performance.

What Happens If I Miss Payments on My Consumer Proposal?

It’s vital to stay consistent with your payments. Missing three payments or failing to meet the proposal’s terms could result in its annulment, allowing creditors to resume collection actions for the full debt amount. If financial difficulties arise, reach out to your LIT to discuss potential solutions.

Can I Pay Off My Consumer Proposal Early?

One of the benefits of a consumer proposal is the ability to pay it off early without penalties. Early repayment not only reduces the financial burden more quickly but also helps expedite the removal of the R7 rating from your credit report, speeding up your financial recovery.

Am I Eligible for a Consumer Proposal?

Eligibility criteria include having total unsecured debts of less than $250,000 (excluding your mortgage), being insolvent, and demonstrating the ability to meet the repayment terms. Additionally, you must reside in Canada or own property within the country.

How Long Does a Consumer Proposal Last?

Typically, a consumer proposal lasts up to five years, depending on the repayment terms agreed upon. Payments are fixed and interest-free, offering a predictable pathway to debt resolution. If your financial situation improves, you can shorten this timeline by paying off the proposal early.

Is a Consumer Proposal Right for You?

Consumer proposals provide a viable alternative for Canadians struggling with unsecured debts. By retaining your assets and avoiding bankruptcy, this solution offers a structured, manageable way to regain financial stability. To determine if a consumer proposal aligns with your needs, consult a Licensed Insolvency Trustee for personalized advice.