If you are buried under credit card balances, collection calls, or a wage garnishment notice, the words “insolvency” and “consumer proposal” probably feel scary and confusing — and you may even be using them as if they mean the same thing. They don’t. Insolvency is the financial state you are in when you can no longer pay your bills as they come due. A consumer proposal is one of the formal legal solutions available to people who are insolvent in Canada.
This guide breaks down what insolvency actually means, how a consumer proposal fits into the bigger picture, how it compares with bankruptcy and informal alternatives, and how to figure out which path might fit your situation. The goal is not to push you into anything. It is to help you understand the real options Canadians use every year so you can make a calm, informed decision.
What “insolvency” really means
In Canada, insolvency is a financial state, not a legal filing. You are technically insolvent if you owe at least $1,000 and either (a) you can’t pay your debts as they come due, or (b) the value of your debts is greater than the value of your assets. This definition comes from Canada’s federal Bankruptcy and Insolvency Act, which is the law that governs both consumer proposals and bankruptcies.
The Office of the Superintendent of Bankruptcy, the federal regulator that oversees these processes, explains that “insolvency” is the umbrella, and there are a few formal ways to resolve it: a consumer proposal, a Division I proposal (for larger debts), or bankruptcy. There are also informal options like a debt management plan through a non-profit credit counsellor or a debt consolidation loan, which we cover in more detail in our guide to debt relief options in Canada.
Being insolvent doesn’t automatically mean you have to file anything. It just means you have legal paths available if you decide to use them. Many Canadians live in a kind of grey zone — barely making minimum payments — for months or years before they explore a formal solution.
What a consumer proposal is
A consumer proposal is one of the two formal insolvency procedures available to individual Canadians (the other being personal bankruptcy). According to the Office of the Superintendent of Bankruptcy, it is a legally binding offer you make — through a Licensed Insolvency Trustee (LIT) — to your unsecured creditors, asking them to accept partial repayment of what you owe over a set period of up to five years.
To qualify, your total unsecured debts must fall between $1,000 and $250,000, not counting a mortgage on your principal residence. Once filed, the proposal creates an automatic stay of proceedings: collection calls, lawsuits, and most wage garnishments are required to stop. Interest also stops accruing on the debts inside the proposal. If your creditors holding a majority of the debt vote to accept it, the proposal becomes binding on every unsecured creditor, even ones who voted no.
For more detail on how this stacks up against the other formal option, see our companion guide on bankruptcy vs consumer proposal in Canada.
Pros of a consumer proposal
Keep your assets
You don’t surrender your home, car, RRSPs, or savings. As long as you keep up with secured debts (like your mortgage and car loan), they stay separate from the proposal.
Pay back only a portion
Most proposals settle for somewhere around 30–50 cents on the dollar of unsecured debt, depending on what you can afford and what creditors will accept.
Interest stops
From the moment the proposal is filed, interest on included debts is frozen. You pay down principal, not a moving target.
Legal protection
An automatic stay of proceedings stops collection calls, lawsuits, and most wage garnishments while the proposal is in place.
One predictable payment
You make a single monthly payment to your LIT. Unlike bankruptcy, the payment doesn’t go up if your income increases.
Less severe than bankruptcy
A proposal results in an R7 credit rating versus the R9 rating from bankruptcy, and it falls off your credit report sooner.
Cons of a consumer proposal
It still hurts your credit
An R7 rating typically stays on your report for three years after you finish, or six years from the filing date — whichever comes first.
Creditors must agree
If creditors holding most of the debt reject the proposal, it fails. You’d then need to amend it, choose another option, or consider bankruptcy.
You have to qualify
You need a steady income to support the payments. If you can’t realistically afford even a reduced amount, a proposal probably isn’t the right fit.
Some debts aren’t included
Secured debts (mortgage, car loan), most student loans under 7 years old, child or spousal support, and court-ordered fines are not erased by a proposal.
It’s a long commitment
Proposals can run up to five years. Missing three monthly payments (or having a longer gap on a non-monthly schedule) can cause it to be deemed annulled.
Only an LIT can file it
You can’t do a consumer proposal yourself. It must be administered by a federally Licensed Insolvency Trustee, which means working with a regulated professional.
Who should consider a consumer proposal
- You owe between $1,000 and $250,000 in unsecured debt (credit cards, lines of credit, payday loans, personal loans, tax debt).
- You have steady income and could reasonably afford a reduced monthly payment.
- You want to keep your home, vehicle, RRSPs, or other assets.
- You’ve fallen behind, are facing collection calls, or are worried about a wage garnishment.
- You’d rather avoid bankruptcy if there’s a workable alternative.
- You can’t realistically dig out with a debt consolidation loan or credit counselling DMP alone.
Who should NOT use a consumer proposal
- Your debts are mostly secured (mortgage, car loan) — a proposal won’t touch those.
- Your unsecured debt is under a few thousand dollars and you could clear it with a tighter budget or a small debt consolidation loan.
- You have no reliable source of income and can’t sustain regular payments for years.
- Your unsecured debt is over $250,000 — you’d need to look at a Division I proposal or bankruptcy instead.
- Your debt is mostly student loans less than 7 years from your graduation date or court-ordered support — these usually survive a proposal.
- You have significant non-exempt assets and are open to bankruptcy as a faster reset.
A realistic financial example
Imagine “Priya,” a 38-year-old in Toronto with a steady office job. Over the past few years she’s accumulated $42,000 in unsecured debt: credit cards, a line of credit, and a personal loan. She’s been making minimum payments for two years and her balance has barely moved. After consulting an LIT, she explores a consumer proposal.
This is a hypothetical example, not a quote — every situation is different and the percentage offered depends on your income, assets, and what creditors will accept. But it gives you a feel for the difference between minimum-payment treadmill versus a structured plan with a defined end date.
How the process actually works, step by step
- Free consultation with a Licensed Insolvency Trustee. You sit down (in person or virtually) with an LIT, share a full picture of your income, assets, and debts, and discuss every realistic option — not just a proposal. The OSB maintains a public list where you can find a Licensed Insolvency Trustee.
- Decide on the right path. If a proposal looks like a fit, your LIT helps you sketch out a realistic monthly payment based on your budget and the percentage of debt creditors are likely to accept.
- The proposal is drafted and filed. The LIT prepares the formal documents and files them with the Office of the Superintendent of Bankruptcy. From this moment, the automatic stay kicks in: collection calls, lawsuits, and wage garnishments must stop.
- Creditors review and vote. Creditors have 45 days to accept, reject, or request a meeting. If creditors holding a majority of the dollar value of debt accept (or simply don’t object), the proposal is approved.
- You start making payments. You pay the LIT once a month (or on whatever schedule was set) and they distribute the funds to your creditors. Interest does not accrue on the included debts.
- You attend two financial counselling sessions. These are required by law and are designed to help you build healthier money habits and avoid ending up here again.
- You complete the proposal. Once you’ve made every payment and met every condition, you receive a Certificate of Full Performance and are legally released from the included debts. Your credit can begin to recover from this point.
Ready to see if you qualify?
FAQ
Is a consumer proposal the same thing as declaring insolvency?
Not exactly. Insolvency is the financial condition of being unable to pay your debts when they’re due. A consumer proposal is one specific legal way to deal with insolvency, alongside bankruptcy and informal options. You can be insolvent without filing anything formal — but if you decide to file, a consumer proposal is one of the federally regulated paths under the Bankruptcy and Insolvency Act.
Will a consumer proposal stop my wage garnishment?
In most cases, yes. Once the proposal is filed with the Office of the Superintendent of Bankruptcy, an automatic stay of proceedings takes effect. That stay stops most collection actions, including wage garnishments from unsecured creditors. There are a few exceptions — for example, family support orders generally continue — but for credit card and personal-loan garnishments, filing the proposal will normally bring them to a halt.
How much does a consumer proposal cost?
The fees a Licensed Insolvency Trustee can charge are set and capped by federal regulation, and they are paid out of the monthly payments you make into the proposal — not as separate out-of-pocket bills. In other words, your proposal payment includes both the amount going to creditors and the LIT’s regulated fee. Most LITs offer a free initial consultation, so you can get a clear breakdown of what your specific proposal would cost before you commit to anything.
Can I keep my house and car in a consumer proposal?
Yes, in almost every case. A consumer proposal only restructures your unsecured debts. As long as you continue paying your mortgage and car loan as normal, those secured debts and the assets behind them are not affected by the proposal. This is one of the biggest reasons people choose a proposal over bankruptcy when they own a home or have significant equity in a vehicle they need to keep.
How long does a consumer proposal stay on my credit report?
An R7 rating from a consumer proposal generally stays on your credit report for three years after you complete all your payments, or six years from the date you originally filed — whichever comes first. By comparison, a first-time bankruptcy typically stays on your report for six to seven years after discharge. That’s a meaningful difference if rebuilding your credit is a priority. Many people also see real credit recovery stories within a year or two of finishing their proposal, especially when they pair it with secured-credit-card rebuilding habits.
