Downsides of Filing a Consumer Proposal in Canada: Risks, Costs, and Smarter Alternatives

Consumer proposals help many Canadians cut unsecured debt and avoid bankruptcy. But like any legal debt solution, they come with real trade-offs. If you’re weighing your options, it’s critical to understand the downsides of filing a consumer proposal before you sign. This guide breaks down the most common risks—credit score impact, acceptance uncertainty, budgeting strain, and more—along with practical tips to reduce them.

What is a consumer proposal? A quick refresh

A consumer proposal is a legally binding agreement under Canada’s Bankruptcy and Insolvency Act to repay a portion of your unsecured debts over a set period (up to five years). A Licensed Insolvency Trustee (LIT) files the proposal, negotiates with your creditors, and administers payments.

Proposals can be effective when debt is unmanageable but you want to avoid bankruptcy. That said, they’re not a free pass. Understanding the potential downsides will help you decide if it’s the right tool for your situation—or if another strategy might fit better.

For a side-by-side comparison of insolvency options, see our complete 2025 guide to bankruptcy vs. consumer proposals in Canada.

The real downsides of filing a consumer proposal

Below are the key drawbacks Canadian borrowers most often encounter—explained in plain language with examples and mitigation ideas.

Downside 1: Credit score and credit report impact

Filing a consumer proposal will significantly impact your credit in the short term. The proposal appears on your credit report during the term and for a period after completion, which can make it harder to qualify for new credit, favourable loan rates, or some types of housing.

• What this looks like in real life: You might be offered higher interest rates, be asked for larger deposits (e.g., for utilities), or be declined for certain credit products while the notation remains on your file.
• Why this happens: Lenders view insolvency filings as higher risk. The record signals that you needed formal help to repay debts.

To learn more about the timing and rebuilding process, read our detailed guide on how consumer proposals affect your credit score and future opportunities and consult guidance from the Financial Consumer Agency of Canada.

Downside 2: Public record and privacy considerations

Consumer proposals are public records in Canada. They’re included in the federal insolvency database and reported to credit bureaus. While your neighbours won’t get a notification, anyone who checks the public registry (for example, some lenders, landlords, or employers for certain roles) can see the filing.

• Potential effect: Applications that rely on credit checks or financial background screens may be affected.
• Mitigation tip: Prepare context. If asked, be ready to explain what led to the filing and how your budget and habits have improved.

The Financial Consumer Agency of Canada provides consumer education on how insolvency information appears and how to manage your financial profile during and after a proposal.

Downside 3: Acceptance risk—and what happens if creditors say no

Submitting a proposal doesn’t guarantee acceptance. Creditors vote, and they can request modifications (e.g., higher total repayment or a shorter term) or reject the offer. If there isn’t sufficient support, your proposal can fail—potentially pushing you to revise your offer or consider other options.

• Example: If your offer pays less than creditors expect to receive in a bankruptcy scenario (after accounting for realizable assets and income considerations), they may insist on changes before agreeing.
• If it’s rejected: You can revise and resubmit through your LIT, or you might need to explore alternatives like a debt management program, consolidation, or bankruptcy.

See common pitfalls and how to improve your chances in our guide on reasons consumer proposals get rejected—and how to help ensure acceptance.

Downside 4: Not all debts are included—and assets still matter

Consumer proposals cover most unsecured debts (like credit cards, lines of credit, personal loans). However, they do not include secured debts (such as mortgages and car loans) where an asset guarantees repayment. You must keep those payments current to retain the asset.

Secured debts are excluded

• You’ll continue to pay your mortgage or car loan as usual. If you fall behind, the lender may still enforce their security.
• If your secured payment is unaffordable, talk to your LIT about whether a sale or refinance makes sense before filing.

Assets, windfalls, and income changes

• You typically keep your assets in a proposal, but their value can influence what creditors will accept in your offer.
• Windfalls after filing: While proposals don’t automatically increase with higher income (unlike bankruptcy surplus income rules), a major change could make it wise to amend and pay off faster. Your LIT can explain your options.

For a deeper look at how assets factor into negotiations and outcomes, read What happens to your assets in a consumer proposal?

Downside 5: Payment commitments and cash-flow strain

Proposals can run as long as five years. Even with lower total debt and frozen interest, the monthly payment must fit your budget—every single month.

• Missed payments risk annulment: Falling behind can cause the proposal to be annulled, restoring the full debt (minus any amounts already paid) and resuming collections.
• Cash-flow tightness: Households with variable income (seasonal work, commissions) may find fixed monthly payments challenging without a solid emergency fund.

Mitigation tips

• Build a small emergency buffer before filing (even a few hundred dollars helps).
• Ask your LIT about a realistic payment schedule with some wiggle room.
• Consider aligning payments with your pay cycle.

Downside 6: Costs, fees, and “hidden” expenses to watch

LIT fees are regulated and come out of your proposal payments, but you should still understand the total cost you’re committing to. There may also be indirect costs:

• Higher deposits for utilities or cell phone plans while rebuilding credit.
• Potential insurance or financing costs if your credit rating affects pricing or approvals in some contexts.
• Banking changes: You may need to switch banks or products if your current lender is one of your creditors.

The Financial Consumer Agency of Canada offers clear guidance on how proposals work, including how fees are regulated and disclosed.

Downside 7: Employment, housing, and insurance impacts

Most jobs won’t check the insolvency database. That said, some roles—especially those involving financial responsibility, bonding, or security clearance—may review credit or public records.

Renting and utilities

• Landlords often check credit. A proposal on your report can mean more questions, lower approval odds, or larger deposits.
• Utility providers may ask for a deposit or limit access to certain plans while your credit recovers.

Professional licensing and bonding

• Certain professions or contracts that require bonding may scrutinize insolvency filings. Prepare documentation that demonstrates stability: budgets, pay stubs, and references.

Downside 8: Taxes and government debts

Tax debts can often be included in a proposal, but the details are nuanced. The Canada Revenue Agency has specific rights and processes, including possible set-offs of refunds in certain circumstances. Student loan treatment can also depend on timing rules set by legislation.

• Mitigation tip: Before filing, ask your LIT to clarify how government debts will be treated and whether any offsets may apply to refunds or benefits.

For consumer education on credit reporting rules and government debt considerations, see the Financial Consumer Agency of Canada.

Downside 9: Co-signed and joint debts—what to know

A consumer proposal protects you, not your co-borrowers or guarantors. If you file on a joint credit line or a co-signed loan, the other party remains fully liable for the balance.

• Example: You file a proposal that includes a joint line of credit. Collections against you stop, but the bank can still pursue your co-borrower for the full amount.
• Mitigation tip: Discuss a joint strategy with your LIT. In some cases, a joint consumer proposal or other coordinated plan makes more sense.

Downside 10: How long it stays on record—and why timelines matter

The proposal shows on your credit report during the repayment term and for a period after completion (timing varies by credit bureau). If you plan to apply for a mortgage renewal or new financing in the next few years, this timeline matters.

• Mitigation tip: Ask your LIT about realistic timelines for completion and removal, and confirm with credit bureaus. Plan major credit applications after the notation has dropped, if possible.

Practical ways to reduce these downsides

Even if a consumer proposal is right for you, smart planning can limit the negatives:

• Test-drive a budget first: Track your spending for 30–60 days to ensure the proposed monthly payment is sustainable. Build a small emergency fund before filing.
• Choose the shortest feasible term: A shorter plan means the notation may drop off sooner after completion.
• Stabilize your income: If your income is highly variable, time your filing for a period of greater predictability or consider biweekly payments.
• Protect co-borrowers: If you share debts, coordinate strategies so no one is left exposed.
• Plan for future goals: If you’ll need a car or mortgage renewal during the term, talk to a mortgage professional early about requirements and timing.
• Improve acceptance odds: Make sure your offer reflects what creditors could reasonably expect in a bankruptcy. Our guide to common reasons proposals get rejected can help.

Is a consumer proposal still worth it?

It depends on your debt type, income stability, assets, and goals. In many cases, a proposal offers a realistic path out of debt and avoids the harsher asset-related consequences of bankruptcy. In others, it may be too rigid or costly relative to alternatives—especially if your income is volatile or most of your debt is secured.

For a broader comparison, review our bankruptcy vs. consumer proposal guide. You can also consider less invasive options below.

Alternatives to consider before you file

• Debt management program (DMP): A non-insolvency program that consolidates unsecured debts into one monthly payment, often with reduced interest. Learn how a DMP works in our step-by-step debt management programs guide.
• Debt consolidation loan: If your credit and income still allow, a single lower-rate loan can simplify payments and reduce interest. Understand the benefits and risks of debt consolidation in Canada.
• Bankruptcy: A last-resort option when repayment is not feasible. It can be faster but has different consequences for assets and reporting. Compare options in our consumer proposal vs. bankruptcy expert guide.

For context on how household debt trends are evolving, explore current data from Statistics Canada.

Final thoughts

A consumer proposal can be a powerful tool—but it’s not consequence-free. Expect a temporary yet meaningful credit impact, public record visibility, acceptance risk, and the pressure of a fixed monthly payment for up to five years. Weigh those trade-offs against your financial reality, assets, and goals. With the right preparation—budget testing, co-borrower planning, and a realistic offer—you can reduce the downsides and choose the path that genuinely sets you up for long-term stability.