Understanding Consumer Proposals for Small Business Owners in Canada

Running a small business in Canada often means wearing many hats—and shouldering personal financial risk. If cash flow has tightened and unsecured debts are piling up, understanding consumer proposals can give you a clear, regulated path to stabilize your finances without shuttering your operations. This guide explains what a consumer proposal is, how it works for small business owners and entrepreneurs, who qualifies, and how it compares to other debt relief options in Canada.

What is a consumer proposal for small business owners?

A consumer proposal is a legally binding agreement under the Bankruptcy and Insolvency Act (BIA) between an individual and their creditors. It’s filed through a Licensed Insolvency Trustee (LIT) and typically allows you to repay only a portion of what you owe over a set period (up to 60 months), while stopping collection actions and interest on included debts.

For small business owners, the key nuance is that a consumer proposal is filed by a person—not a corporation. That means it can be very effective if you operate as a sole proprietor or if you personally guaranteed business debt. If your business is incorporated and most of the debt sits with the corporation (without your personal guarantee), a different restructuring route (such as a Division I proposal) may be more suitable.

For the official framework, see the Government of Canada’s guidance on insolvency and consumer proposals.

When a consumer proposal makes sense

• You’re a sole proprietor whose business debts are legally your personal debts.
• You’re incorporated but personally guaranteed business credit cards, lines of credit, merchant cash advances, leases, or vendor accounts.
• You need immediate protection from collections to keep the business operating.
• Cash flow supports a predictable monthly payment, but not full repayment plus interest.

Debts you can and cannot include

In most cases, you can include unsecured personal debts (even if business-related), such as:

• Business credit cards and unsecured lines of credit in your name
• Overdrafts, personal loans used for business
• Trade accounts and vendor balances you personally guaranteed
• Personal income tax debt (subject to CRA rules)

Debts you generally cannot include:

• Secured loans tied to collateral (e.g., vehicle loans or equipment loans)—unless you surrender the asset
• Specific court fines, child or spousal support
• Most student loans if you left school less than seven years ago

Some government-related business debts can be complex (for example, director liability for unremitted source deductions). Your LIT will clarify what falls inside or outside a proposal based on your structure and liabilities.

How a consumer proposal works in Canada

The consumer proposal process is structured, transparent, and regulated. Once filed, a legal stay of proceedings stops collections, lawsuits, and most wage garnishments while creditors review your offer.

Learn how the stay protects you in practice in our guide to the stay of proceedings.

Step-by-step timeline

1. Meet a Licensed Insolvency Trustee (LIT): The LIT assesses your income, assets, debts, and business structure, and advises on options.
2. Draft the proposal: You and the LIT propose an affordable monthly (or lump-sum) amount based on your budget and creditor recovery expectations.
3. File the proposal: The LIT files with the Office of the Superintendent of Bankruptcy; the stay of proceedings begins.
4. Creditor vote (within 45 days): Creditors accept or reject. If the majority (by dollar value) vote in favour, the proposal binds all unsecured creditors in the class.
5. Make payments and complete counselling: You make fixed payments (up to 60 months) and attend two financial counselling sessions.
6. Certificate of Full Performance: When completed, you’re legally released from included debts.

Benefits and trade-offs for small business owners

Key advantages

• Lower total debt repayment: You may pay only a portion of the original balances.
• Interest and most penalties stop: Payments are fixed and predictable.
• Legal protection: Collections and most legal actions stop during the process.
• Keep essential assets: Many small business owners keep the tools they need to operate; learn more in what happens to your assets in a consumer proposal.
• Operate while you repay: You can typically continue trading, serving clients, and generating revenue.

Potential trade-offs

• Credit impact: A consumer proposal appears on your credit report for a period after completion and can affect new borrowing in the short term.
• Budget discipline required: Missed payments can risk annulment.
• Public record: Proposals are recorded in a public insolvency database.
• Creditor approval: The proposal must be acceptable to creditors; the LIT will structure it to improve the likelihood of acceptance.

Real-world examples and scenarios

Example 1: Sole proprietor with seasonal revenue
Sofia runs a landscaping business as a sole proprietor. She owes $78,000 across a personal LOC (used for equipment), business credit cards, and overdue vendor balances. Winter cash flow is weak and interest charges are mounting. Her LIT proposes $350 per month for 60 months ($21,000 total), which creditors accept given her budget and projected off-season income. Collections stop, she retains her tools, and she rebuilds cash reserves during peak months.

Example 2: Incorporated owner with personal guarantees
Ethan’s incorporated café owes $140,000 across a business card and an equipment lease he personally guaranteed. Foot traffic fell, but the café is still viable. Ethan’s personal proposal offers $500 per month for 60 months ($30,000 total) funded from his salary. Creditors vote to accept, recover more than in a bankruptcy scenario, and the café continues trading.

These are illustrative figures only. The actual offer depends on your budget, assets, and creditor expectations in your province.

Consumer proposal vs. other debt relief options

To choose well, compare the consumer proposal against alternatives commonly considered by entrepreneurs:

• Bankruptcy: May be appropriate if income is limited or there are few assets to protect; read our complete 2025 guide to bankruptcy vs. consumer proposal.
• Debt consolidation loan: Can simplify payments but requires qualification and may not reduce the principal. Explore the real pros and cons in debt consolidation in Canada.
• Debt management program (DMP): A non-insolvency option that may reduce interest but not principal. Payment feasibility depends on cash flow stability.
• Business restructuring: If most liabilities are corporate, see effective strategies for business debt relief for entrepreneurs (e.g., refinancing, cost restructuring, or a Division I proposal).

How to build a strong proposal

Creditors want a fair, realistic offer that exceeds what they’d expect in a bankruptcy. A strong file typically includes:

• Clear cash-flow analysis: Provide seasonality details and a forward-looking budget (12-month minimum). Show how the business will meet payments and remain viable.
• Accurate filings: Keep tax returns and GST/HST filings up to date so liabilities are properly quantified.
• Evidence of necessary assets: List tools or equipment essential to operations and their market value.
• Rational payment amount: Propose a payment schedule that fits your budget and offers fair recovery to creditors.
• Avoid preference payments: Don’t favour one creditor in the weeks prior to filing; this can complicate matters.
• Plan for variability: If your revenue fluctuates, consider a slightly lower monthly amount with the option for occasional top-up payments in peak months.

For context on how creditor voting works and what influences outcomes, see the acceptance rate insights for consumer proposals.

Costs, timelines, and acceptance likelihood

Costs: You don’t pay the LIT separately; fees are set by regulation and come out of your proposal payments. This makes costs predictable and transparent for small business owners with tight budgets.

Timelines: Filing to creditor decision typically takes up to 45 days. Most proposals run 36–60 months, though lump-sum proposals (e.g., using a family contribution or asset sale) can end much sooner.

Acceptance: Proposals must be better for creditors than a bankruptcy outcome. Many are accepted when structured well and supported by strong financials. For high-level context on insolvency trends, visit Statistics Canada. For the overall process and legal framework, refer to Government of Canada resources.

Life during and after a consumer proposal

During the proposal: You’ll make fixed payments, continue operating your business, and attend two financial counselling sessions. You can adjust your budget to reflect seasonal revenue, but it’s critical to make payments on time to avoid annulment.

After completion: You receive a Certificate of Full Performance and are released from included debts. You can then focus on rebuilding your credit and strengthening cash flow. Responsible trade terms with suppliers, a separate tax savings account, and improved pricing or cost controls all help sustainability.

Want a deeper dive into how proposals change what you pay and why interest effectively stops? Review our expert guide to consumer proposal interest.

Conclusion

Consumer proposals can be a practical, regulated way for Canadian small business owners to deal with personal business debt while keeping the doors open. If you’re a sole proprietor—or an incorporated owner with personal guarantees—and cash flow supports a stable monthly payment, a proposal can reduce your balances, stop collections, and provide a consistent runway to rebuild. Understand your structure, document your budget honestly, and work with a Licensed Insolvency Trustee to tailor a credible offer. Weigh the trade-offs against alternatives, and choose the path that best protects your business’s long-term viability and your personal financial health.