Understanding the Impact of a Consumer Proposal on Your Line of Credit in Canada

Introduction

Lines of credit are flexible, convenient, and—when used wisely—can be a helpful tool for managing cash flow. But if debt grows faster than income, that same flexibility can create stress. For many Canadians, a consumer proposal is a practical way to reset finances without declaring bankruptcy. Understanding the impact on your line of credit is crucial so you can plan confidently and avoid surprises.

This guide explains what happens to your line of credit when you file a consumer proposal, the short- and long-term effects on your credit profile, and how to protect your financial future. We’ll also cover secured versus unsecured lines of credit, common bank actions, and realistic strategies to rebuild credit.

Consumer proposal basics

A consumer proposal is a legally binding agreement to repay a portion of your unsecured debts over a set period (up to five years) through a Licensed Insolvency Trustee (LIT). It includes protections such as a stay of proceedings, which stops most collection actions while your proposal is active.

Consumer proposals are governed under federal law and administered by LITs. According to Canada.ca, proposals offer an alternative to bankruptcy, allowing debtors to keep assets while committing to a structured repayment plan.

If you’re weighing your options, review how proposals compare to bankruptcy in our detailed analysis: Bankruptcy vs Consumer Proposal: Complete Canadian Guide (2025).

How a consumer proposal affects lines of credit

Most lines of credit are unsecured—meaning they’re not backed by collateral—and are treated like other unsecured debts in a consumer proposal. Here’s what to expect.

Immediate account actions: freeze or closure

When your LIT files your consumer proposal, creditors are notified. Most banks respond by:

• Freezing or closing your unsecured line of credit to prevent further borrowing
• Stopping collections and interest on included debts from the filing date (subject to proposal terms)
• Transferring your account to a recovery or insolvency department for administration

It’s common to lose access to linked features (e.g., overdraft protection) if they are part of, or tied to, the line of credit included in the proposal.

Credit rating and reporting (R7) timeline

Filing a consumer proposal typically results in an R7 rating on accounts included in the proposal, signaling a repayment arrangement to future lenders. The rating affects credit access during and shortly after the proposal. The exact reporting period can vary by credit bureau and province, and may last for a period after completion.

For guidance on how proposals and payment history appear on your credit report—and what lenders see—review resources from the Financial Consumer Agency of Canada (FCAC).

Interest, fees, and payment terms

Most unsecured debts included in a consumer proposal stop accruing interest from the filing date. Instead, you make fixed proposal payments to your LIT, who distributes funds to creditors according to the agreed terms. If you’re comparing how interest and repayment work inside a proposal versus other solutions, see Consumer Proposal Interest Rates: Expert Guide to Debt Solutions.

Secured vs. unsecured lines of credit

Not all lines of credit are treated the same:

• Unsecured line of credit (LOC): Typically included in a proposal and frozen/closed by the lender.
• Secured line of credit (e.g., HELOC): Backed by collateral (like your home). Secured debts aren’t usually included in a consumer proposal, and the lender can maintain normal terms. You must keep payments current to avoid default. For clarity on assets and secured obligations, review what happens to your assets in a consumer proposal.

Tip: If you rely on your HELOC for home repairs or emergencies, discuss the implications with your LIT before filing. Your proposal should be structured so you can stay current on secured obligations while meeting proposal payments.

Joint and authorized user accounts

Joint lines of credit create shared liability. If only one borrower files a consumer proposal, the co-borrower generally remains responsible for the full balance. Authorized users are typically not liable, but access may be blocked once the account is closed or frozen.

Before filing, confirm the account structure with your bank and your LIT to avoid unexpected responsibility for a spouse or family member.

Overdrafts and linked accounts

Overdrafts tied to chequing accounts are often treated as unsecured credit. If included in your proposal, banks may remove overdraft privileges and request repayment of any negative balance through the proposal.

Always plan for banking continuity. Consider opening a new chequing account at a different institution (before filing) to ensure uninterrupted access to essential banking services.

Step-by-step: what happens after filing

Here’s a practical timeline of what to expect once your consumer proposal is filed:

1. Filing and creditor notification: Your LIT submits the proposal, and creditors are notified. The stay of proceedings begins, pausing most collection activities.
2. Account changes: Unsecured LOCs included in the proposal are usually frozen or closed. You lose borrowing access, and interest generally stops accruing.
3. Creditor review period: Creditors vote to accept or reject the proposal (most are accepted). If accepted, your repayment schedule is confirmed.
4. Payment phase: You make regular payments to your LIT. Keep all secured debts (like HELOCs) current to avoid default.
5. Completion and discharge: After making all payments, you receive a certificate of full performance. Over time, credit access improves as positive history accumulates.

If you’re exploring broader relief options or want to compare paths, our overview of solutions can help: Understanding Canadian Debt Relief: Your Guide to Financial Freedom.

Rebuilding credit after a consumer proposal

Completing a proposal is the start of a fresh financial chapter. Focus on building consistent, low-risk credit behaviour:

• Use a secured card: A secured credit card helps re-establish payment history. Keep utilization under 30% and pay on time.
• Automate payments: Set up automatic payments to avoid missed due dates—one missed or late payment can slow your progress.
• Stabilize banking: Maintain a positive balance and avoid overdrafts. Your banking behaviour can influence future credit decisions.
• Monitor your credit: Periodically review your credit reports to ensure accuracy. FCAC provides helpful guidance on how credit reports and scores work.

Example: Before filing, Jay had a $20,000 unsecured LOC at 12% interest and was making interest-only payments. In the proposal, the LOC was included and frozen. Jay completed the proposal with fixed monthly payments, then used a secured card with a $500 limit, paying the balance in full monthly. After 12 months of on-time payments and low utilization, Jay’s score improved, and he qualified for a modest unsecured card with a lower limit.

Alternatives and when a consumer proposal makes sense

A consumer proposal is best when unsecured debt is unmanageable at current interest rates and you need legal protection from collections. But it’s not the only option:

• Debt consolidation loan: If you have stable income and fair credit, consolidating into a lower-rate loan can reduce interest and simplify payments without affecting your credit as severely. Learn more: Debt Consolidation in Canada: Benefits, Risks, and a Step-by-Step Plan.
• Budget and cash-flow restructuring: Tightening spending, renegotiating bills, and adjusting priorities can create room to repay debt faster.
• Credit counselling: A debt management program can sometimes lower interest through creditor agreements, though it’s not a court-ordered process.

When high interest, persistent collection pressure, or multiple unsecured accounts are creating unsustainable stress, a consumer proposal can bring immediate relief and a predictable path to becoming debt-free.

Common mistakes to avoid

• Relying on your LOC after filing: Once included, your LOC will be frozen or closed. Have a plan to manage cash flow without it.
• Overlooking secured obligations: Secured accounts like HELOCs are separate. Keep payments current to protect your collateral.
• Not separating banking: Opening a new chequing account before filing helps prevent disruptions if your current bank freezes accounts.
• Ignoring credit report accuracy: Review reports after completion and dispute errors. Accurate reporting helps you rebuild faster.
• Choosing a solution without comparing options: If you’re unsure, compare choices—our Canadian debt relief overview and bankruptcy vs proposal guide can help you decide.

Conclusion

Filing a consumer proposal will almost always freeze or close an unsecured line of credit, add an R7 rating to affected accounts, and limit borrowing power temporarily. Those trade-offs are balanced by immediate relief from collections, predictable payments, and a clear path to becoming debt-free. If you manage secured obligations carefully and follow a disciplined plan to rebuild your credit, your access to mainstream credit will improve over time.

For data on debt trends, explore Statistics Canada. To understand how lenders and bureaus assess credit, consult the Financial Consumer Agency of Canada. And for a deeper dive into how proposal interest works in practice, review our guide to interest in consumer proposals.