The ultimate guide to consumer proposals
If you are looking for debt relief solutions, a consumer proposal could be the answer. You are not alone. Filing for a consumer proposal can help you reduce your debt.
Did you know that tens of thousands of Canadians file for a consumer proposal each year? These account for around two-thirds of consumer insolvency cases. They are twice as common as bankruptcies.
The differences between a consumer proposal and bankruptcy are not always easy to understand. Take control of your financial future now. This comprehensive guide explains how consumer proposals work, eligibility, how they impact your credit score and other options for getting out of debt.
What is a consumer proposal?
A consumer proposal is an arrangement for your to settle your debt, but by paying back less than you owe. You must file your proposal through a Licensed Insolvency Trustee (LIT). They will help you reach an agreement with the lenders you owe money to. Before making any commitment, it is important to know how a consumer proposal works. That means understanding the fundamentals.
A consumer proposal can be a better option than bankruptcy for debts you are unable to pay. You can lower your debt, sometimes by as much as 80 percent. More importantly, you can keep your assets while getting your debt to a manageable level. It is a powerful consumer tool that is legally binding. It allows you to freeze interest on your debt and halt any actions collectors have against you.
How much debt you need to be in to be eligible to file a consumer proposal depends on your province. Although, you typically need to have a minimum of $1,000 in debt. Under Canadian law, debt over $250,000 is not eligible for a consumer proposal (Bankruptcy is more appropriate in those cases). A consumer proposal is only available for restructuring unsecured debts, including:
- Credit cards
- Lines of Credit (LOCs)
- Store credit cards or credit lines
- Unsecured personal loans
- Collection files
If you have secured debt, such as a car loan, mortgage, or HELOC, they cannot be included in your consumer proposal. The debt reduction afforded by a consumer proposal can, however, help you retake control of your finances, make regular payments and keep these assets.
Not all consumer proposals are accepted because your creditors must approve and agree to the proposal. If you have more than one debt, your creditors will enter a vote on whether to approve the consumer proposal or not.
How do I file for a consumer proposal?
Filing a consumer proposal involves connecting with a Licensed Insolvency Trustee, or LIT, to discuss your options. If you agree a consumer proposal is the best next step, your Trustee will negotiate an agreement with your creditors on your behalf. Below is the process to qualify for a consumer proposal:
You need to notarize documents to be able to move through the process of agreeing to a consumer proposal. Each of the following documents is part of your proposal:
- Statement of Affairs: A financial statement and sworn declaration showing the estimated value of your assets and total debts.
- Statement of Income and Expenses: Highlights the income and expenses for your household, including surplus income after debt repayments.
- Consumer Proposal: Your formal proposal to repay a portion of your debt, including your proposed repayment plan.
- Assessment Certificate: A declaration your Trustee has provided you all necessary information and advice about your rights and alternative options.
- Creditor Report: Your Trustee will send a separate report to your creditors highlighting why they recommend a consumer proposal.
What happens after a consumer proposal is accepted?
- You retain your assets as long as you continue to make payments to your creditors
- You make repayments periodically or in a lump sum (depending on your agreement)
- You are legally bound to the conditions of the consumer proposal
- You must attend two financial counselling sessions
What happens if a consumer proposal is not accepted?
- You can make changes and make another proposal
- You can explore alternatives for paying off your debt.
- You can declare bankruptcy.
Pros and cons of a consumer proposal
Like all major financial options, there are disadvantages to a consumer proposal, but there are also obvious advantages to a consumer proposal. The following lists can help you understand the benefits of a consumer proposal, while also weighing the negatives. That way, you can make the best decision for your financial situation and goal to become debt-free.
Consumer proposal pros:
- You can clear your debt for less than the original amount borrowed.
- Consolidate multiple debt into a single repayment agreement.
- Protect yourself from having your earning garnished, being sent collection and lawsuits.
- Avoid bankruptcy, which has more severe consequences on your credit file.
- Protect your assets (home, car, possessions) from collection or being sold off during bankruptcy.
- Fixed repayments that do not change even if your financial situation improves.
Consumer proposal cons:
- Your proposal stays on your credit report for years.
- Consumer proposals are more expensive than other debt relief methods.
- Your credit rating will be negatively impacted.
- A consumer proposal is legally binding
What if I miss payments on my consumer proposal?
A consumer proposal agreement is similar to any other type of debt. That means if you do not pay you will suffer financial consequences. However, there are unique aspects to missing repayments on a consumer proposal that are worth knowing about.
Firstly, it is possible to defer repayments for two monthly payment cycles. This gives you a window to start making payments again if you run into financial issues. If you fall behind on three monthly payments your proposal will be annulled. This means the creditor cancels the agreement and all benefits of the proposal disappear.
Missing payments on a consumer proposal risks having your debts reinstated to their previous amounts and losing creditor protection for your assets and against legal proceedings.
How much does a consumer proposal cost?
No matter if you are in Ontario or Vancouver, British Columbia or Saskatchewan, the price for a consumer proposal will be the same at $1,770 + 5% of the payment to your creditors. Below we break down the total cost of a consumer proposal before factoring in monthly payment:
|2 counselling sessions||$170 ($85 each)|
|Proposal administration fees||$1,500|
|Levy||5% deducted from payments to creditors|
All consumer proposals are regulated by the federal Bankruptcy and Insolvency General rules. This is a full federal regulation, so it is complex, which is why working with a Licensed Insolvency Trustee is essential.
One important part of the regulatory document is that all consumer proposals must cost the same amount. It does not matter which Trustee or company you work with; the cost will be the same. This is valuable information because it helps you to avoid LITs that are over-charging. It also means you won’t find a better deal or price by shopping around.
That does not mean shopping around is pointless, we still compare Trustees online to find the best provider for you. Work with someone you are comfortable with. You can reach a consumer proposal expert at the top of this page.
Where do I file for a consumer proposal?
All consumer proposals in Canada must pass through a Licensed Insolvency Trustee (LIT). There are other debt solutions available from other firms, but a LIT is the only debt professional able to file a consumer proposal. This happens through a license with the Canadian government that allows the LIT to file a proposal for customers.
How can I reduce my debt with a consumer proposal?
One of the benefits of a consumer proposal agreement is you reduce the amount of your overall debt into a consolidated single payment. This is appealing to customers and a frequent question we get is by how much is it possible to reduce debt with a consumer proposal?
Unfortunately, the is no single answer to this question. Consumer proposals are unique to each person because they depend on the debt of the individual. You can realistically reduce your debt by between 20% to 80%, with a number around 50% being the average.
To find how much of your debt you can reduce, your LIT will look into specific details of your circumstances, including:
- Total debt: Your proposal should seek to pay a reasonable amount of your debts off.
- Bankruptcy comparison: The LIT will look into the value of repayments debt creditors will seek if you declare bankruptcy.
- Income: Your ability to make repayments is important, and the LIT will consider your overall household income and spending.
How does a consumer proposal affect your credit?
While a consumer proposal agreement will affect your credit score, it has less impact than a bankruptcy. Sure, you are going to find it harder to obtain credit, but there is more chance with a consumer proposal. TransUnion and Equifax – Canada’s two major credit bureaus – state it takes three years for a consumer proposal report to leave your credit report after the last payment.
A consumer proposal's three years on your credit is a lot less than a bankruptcy's, which stays for six or seven years depending on the province
Is a consumer proposal with it?
Like any major financial solution, whether a consumer report is right for you depends on your specific circumstances. This can be a better option than bankruptcy because it is a less dramatic option. Although, if your debt totals more than $250,000 or is secured, you won’t qualify for a consumer proposal.
Working with a LIT is the best way to see if a consumer report is the best fit to help you become debt-free. Speak with an expert today.
Can I file for a consumer proposal by myself?
No, unfortunately, you can’t file a consumer proposal yourself. In Canada, you must work with a Licensed Insolvency Trustee (LIT) in order to file. These federally licensed and regulated professionals offer advice to customers in debt. Working with a LIT allows you to make the best decisions about what to do when you have financial difficulties.
Why do I need a LIT?
If you want to file a consumer proposal, you must use a LIT and cannot do it yourself. Licensed Insolvency Trustees are the only professionals in Canada with the authority to administer legal insolvency to help customers overcome debt. This includes consumer proposals and bankruptcy, making them the best – and only – option for legally clearing your debt.
Consumer proposal vs bankruptcy
Bankruptcy and consumer proposals serve the same purpose, allowing you to clear your debt. However, they differ in how they achieve that goal:
- Bankruptcy payments are typically lower, but you have to give up assets to repay portions of your debt.
- A bankruptcy is automatic and does not require approval from creditors.
- Consumer proposal payments are fixed, while bankruptcy payments can increase and decrease depending on legislation.
- Bankruptcy repayment windows are locked between 9 and 21 months, while you can pay your consumer proposal off when you want.
- While consumer reports are limited to $250,000 of unsecured debt, a bankruptcy has no debt restrictions.
Curious to learn more? See our complete guide to bankruptcy.
Consumer proposal vs debt consolidation
On the surface, a consumer proposal and debt consolidation serve the same function. However, there are differences to be aware of:
|Debt consolidation||Consumer proposal|
|Debt consolidation is a solution to reorganize your existing debt and make it easier to manage||Consumer proposal does the same while renegotiating the owed debt to a lower amount.|
|Debt consolidation will not cause more harm to your credit score than your existing debt.||A consumer proposal is damaging to your credit rating. It remains for three years after the final payment, making it harder to obtain loans or other credit during this time.|
Speak with a debt insolvency expert:
Debt happens and people deserve the opportunity to resolve their financial issues with a fresh start. A consumer proposal is one solution that could put you on a path to becoming debt-free. Depending on your specific circumstances, it can help you reduce your debt and take control of your financial future.
Connect with an expert to get judgement-free advice for a Licensed Insolvency Trustee and explore the best solutions for your financial situation. That’s why we provide a judgement-free platform that allows you to find the best Licensed Insolvency Trustees (LITs) to work with.