Consumer Proposal Explained: A Canadian Debt Solution

A consumer proposal is a formal, legally binding agreement between you and your unsecured creditors, administered by a Licensed Insolvency Trustee in Canada, to repay a portion of your debt over time—typically 60% or less of what you owe—while stopping interest and collection actions. This debt solution is designed for individuals who cannot afford their monthly payments but want to avoid bankruptcy. In a consumer proposal, you make a single monthly payment to the trustee, who distributes it among your creditors, and the proposal must be approved by a majority of your creditors and the court. General guidance suggests this option works well for debts between $1,000 and $250,000 (excluding a mortgage or other secured debts).

How a Consumer Proposal Differs from Debt Consolidation

Debt consolidation typically involves taking out a new loan—often with a lower interest rate or APR—to pay off multiple debts, leaving you with one monthly payment. This option requires a good credit score to qualify for favourable terms. In contrast, a consumer proposal does not require a loan; instead, it negotiates a payoff amount lower than the total debt. Creditors agree to accept less than what is owed, and the proposal stops all interest accumulation. For example, if you owe $30,000, a consumer proposal might settle for $12,000 spread over 60 months. Debt consolidation, meanwhile, would require you to repay the full $30,000 plus interest, though at a possibly reduced rate. A consumer proposal can be a better fit if your credit score is already low or if monthly payment amounts are unmanageable even with a consolidation loan.

Impact on Your Credit Score and Future Borrowing

Filing a consumer proposal will affect your credit score—it is reported as an R7 rating on your credit report with Equifax and TransUnion Canada. This rating stays on your report for three years after you complete the proposal (or six years from filing if you do not complete it). During that time, obtaining new credit, a mortgage, or a HELOC will be more challenging, though not impossible. Many lenders will consider you once the proposal is fully paid, especially if you rebuild your credit through small, secured credit cards or a low-limit loan. General guidance: your credit score may drop 100-200 points initially, but recovery begins once the proposal is completed and you demonstrate consistent payment behaviour.

Steps to File a Consumer Proposal

• Meet with a Licensed Insolvency Trustee (LIT) for a confidential, no-obligation review of your debts and income.
• The trustee prepares a proposal offering a percentage of your total unsecured debt (e.g., 30% to 60%) payable over a period up to five years.
• Creditors vote on the proposal; if a majority (by dollar value) accepts, it becomes binding on all unsecured creditors.
• You make one monthly payment to the trustee, who manages distribution and handles all creditor communication.
• After you complete all payments, you receive a certificate of full performance, and the remaining debt is legally discharged.

Key Considerations and Comparison Table

Below is a simple comparison between a consumer proposal and debt consolidation to help illustrate key differences. General guidance: consult a Licensed Insolvency Trustee for personalized advice.

Is a Consumer Proposal Right for You?

A consumer proposal is generally most suitable if you have a steady income to make monthly payments, owe at least $1,000 in unsecured debt, and cannot realistically pay the full amount within five years. It is not available for secured debts like a mortgage or car loan, nor for certain obligations such as child support or court fines. Because this is general educational content, speaking with a Licensed Insolvency Trustee—who is provincially regulated by the Office of the Superintendent of Bankruptcy Canada—will give you a clear picture of your options. The trustee will also review whether alternatives like a debt management plan or personal bankruptcy are preferable in your specific situation.