Understanding What a Consumer Proposal Is in Canada: A Clear, Updated Guide for 2025

Debt can feel overwhelming, but you have options. If you’re trying to understand what a consumer proposal is in Canada and whether it can help, this guide explains the process in plain language—how it works, who qualifies, what debts are covered, how it affects your credit and assets, plus practical tips to strengthen your proposal.

Understanding What a Consumer Proposal Is

A consumer proposal is a legally binding agreement under Canada’s Bankruptcy and Insolvency Act (BIA) that lets you repay a portion of your unsecured debt over time, often at a significant reduction. It must be filed through a Licensed Insolvency Trustee (LIT). When the proposal is accepted, collection actions stop and interest on included debts is frozen.

Consumer proposals are designed for individuals whose debt has become unmanageable but who want to avoid bankruptcy. They allow you to consolidate and settle unsecured debts (like credit cards and lines of credit) into one affordable monthly payment, typically over up to five years.

How a Consumer Proposal Works

Eligibility

To qualify, you must owe more than you can reasonably repay and have total debt of $250,000 or less (excluding your mortgage on your principal residence). Joint consumer proposals are available for spouses or partners whose debts are substantially similar.

A Licensed Insolvency Trustee reviews your finances—income, expenses, assets, and debt obligations—to confirm you’re a suitable candidate and to estimate what creditors are likely to accept.

Debts Covered (and Not Covered)

Consumer proposals typically include most unsecured debts:

• Credit cards, lines of credit, personal loans
• Bank overdrafts and overdue utility bills
• Certain tax debts owed to the Canada Revenue Agency (CRA)

They do not usually include secured debts (like car loans or mortgages) unless you choose to surrender the collateral. Student loans can be included, but federal/provincial student loan balances are only discharged if seven years have passed since you ended your studies. During the proposal, collection actions are stayed for included debts; you must maintain payments on any secured debts you want to keep.

Filing Steps

• Initial consultation: Meet with an LIT to review your finances and discuss options.
• Draft the proposal: Your trustee structures a payment plan based on what you can afford, typically over 36–60 months.
• File and notify: The proposal is filed with the Office of the Superintendent of Bankruptcy and sent to creditors.
• Automatic protection begins: A stay of proceedings stops wage garnishments and most collection activity on included debts.

For more on the legal protection provided, see an explanation of the stay of proceedings.

Approval and Voting

Creditors have 45 days to respond. If creditors representing more than 50% (by dollar value) of the voting claims accept, your proposal is approved and binding on all included creditors. If no meeting is requested within 45 days, the proposal is typically deemed accepted. Your trustee manages the voting process and informs you of the outcome.

Your Obligations

• Make the agreed payments on time.
• Attend two mandatory financial counselling sessions.
• Inform your trustee about significant changes (income, assets, or expenses).

Missing payments can lead to annulment of the proposal, which reinstates creditors’ collection rights.

Benefits and Drawbacks

Key Benefits

• Debt reduction: You often repay less than the full balance, based on your ability to pay.
• Interest stops: All interest on included debts is frozen from the filing date.
• Legal protection: The stay of proceedings halts most collection actions and wage garnishments on included debts.
• Asset retention: Proposals generally allow you to keep your assets if you maintain any secured payments.
• Credit impact is lighter than bankruptcy: A proposal typically results in an R7 rating, while bankruptcy is R9.

Potential Drawbacks

• Credit score impact: A proposal appears on your credit report during the term and for a period after completion.
• Budget discipline required: Payments must be made consistently for several years.
• Public record: Insolvency filings are part of the public record, though not widely publicised.
• Rejection risks: If creditors believe the offer is too low compared to bankruptcy recovery, they may reject or counter.

For a deeper comparison of options, explore our Bankruptcy vs Consumer Proposal guide.

Credit and Assets: What Changes

How a Proposal Affects Your Credit

Your credit rating will reflect an R7 for accounts included in a consumer proposal. In general, credit bureaus note proposals for up to three years after completion or six years after filing, whichever comes first. Timely payments, secured credit-builder products, and keeping your utilization low can help rebuild credit during and after your proposal. The Financial Consumer Agency of Canada offers guidance on improving credit habits and understanding credit reports.

What Happens to Your Assets

Most people keep their essential assets during a consumer proposal. You must continue paying secured loans (like your car loan or mortgage) to keep those assets. If you cannot afford a secured payment, surrendering the collateral is an option; any remaining shortfall after sale can be treated as unsecured and included in the proposal.

To learn more, read what happens to your assets in a consumer proposal.

Costs and Payments

How Costs Work

You don’t pay the Trustee’s fees out of pocket. The LIT’s fees are standardized under the BIA and deducted from your monthly proposal payments. There are no separate application fees or hidden charges—everything is built into your agreed repayment amount.

Payment Structure and Interest

Payment terms depend on your budget and what creditors will accept. Monthly payments are fixed; if your income rises, you can choose to accelerate payments and finish early. All interest on included debts stops once you file. For context on rates and affordability trade-offs, see our guide to consumer proposal interest rates.

Real-World Example

Consider Jordan, who owes $45,000 in unsecured debts across five credit cards and a personal line of credit. After budget review, the LIT proposes repaying $18,000 over 60 months—$300 per month—with interest frozen. Creditors accept, wage garnishment stops, and Jordan keeps the car by continuing the secured auto loan. After completing the proposal, the record drops off the credit file within the typical timeframe, and Jordan’s score begins to recover with on-time payments and low utilization.

Comparing Alternatives

When Debt Consolidation Works Best

A consolidation loan can simplify payments and potentially lower interest if your credit score and income are strong enough to qualify. It doesn’t reduce the principal, though, and missed payments can hurt your credit. Learn more in our in-depth guide to debt consolidation in Canada.

Bankruptcy vs Proposal: A Snapshot

Bankruptcy may be appropriate if your income is too low to fund a proposal or if your debt level is beyond the $250,000 consumer proposal cap. Bankruptcy can be faster but has a heavier impact on credit and may affect certain assets. Review the differences in our Bankruptcy vs Consumer Proposal guide.

Tax Debts and Student Loans

Including CRA Tax Debts

Tax debts can be included in a consumer proposal, and CRA is bound by the accepted terms. Filing promptly can stop most collection actions on included tax balances. For authoritative information about tax obligations and enforcement, visit the Canada Revenue Agency.

Student Loans: The Seven-Year Rule

Government student loans are only discharged if seven years have passed since you ceased being a student. If you’re within seven years, they can be included for payment and collection relief during the proposal, but the balance won’t be forgiven at completion. In hardship cases, a court may consider discharge at five years, but this is not guaranteed and requires legal advice.

Tips to Prepare a Strong Proposal

Strengthen Your Proposal

• Build a realistic budget: Include essential expenses and a small emergency buffer so payments remain sustainable.
• Offer comparable value: Creditors compare your offer to what they’d receive in bankruptcy. Your LIT will help quantify this.
• Consider seasonal income: If your income fluctuates, discuss stepped or variable payment structures with your trustee.

Avoid Common Reasons for Rejection

• Underestimating income: Be transparent; creditors assess affordability.
• Excluding major creditors: Omissions can derail acceptance.
• Ignoring economic context: If inflation is impacting your budget, document it. See how broader conditions affect proposals in our inflation guide.

For broader consumer guidance on choosing the right solution, the Financial Consumer Agency of Canada provides unbiased resources on managing debt and evaluating insolvency options.

Market Trends and Outlook

Household debt burdens and living costs shape how many Canadians turn to consumer proposals. While precise figures shift year to year, the broader trend of elevated consumer debt has been well documented. For current economic context and data, visit Statistics Canada, which publishes ongoing analyses of household debt ratios, insolvency filings, and credit market trends.

Conclusion

A consumer proposal can be a practical, dignified way to regain financial control—reducing your unsecured debt, stopping interest, and protecting you from most collection actions. Understanding eligibility, the filing process, and the trade-offs can help you choose wisely among alternatives like consolidation or bankruptcy. With realistic budgeting, transparent documentation, and guidance from a Licensed Insolvency Trustee, many Canadians complete proposals successfully and rebuild their financial health over time.