Debt Relief Experts
A consumer proposal offers Canadians struggling with debt a legal way to reduce their debt payments and avoid bankruptcy. By working with a Licensed Insolvency Trustee, you can negotiate with creditors to pay back a portion of your debt while protecting yourself from collection calls and legal actions.
However, not everyone can file a consumer proposal, and a trustee does not recommend this debt relief solution to everyone struggling with debt. Let’s look at how to qualify for a consumer proposal in Canada and when it makes sense financially.
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Are You Eligible to File a Consumer Proposal?
The Bankruptcy And Insolvency Act outlines the legal eligibility requirements to file a consumer proposal in Canada:
- You must be an individual and reside, carry on business, or have property in Canada
- You must be insolvent, meaning you cannot pay your debts as they come due, or your assets are worth less than your unsecured debts.
- You must owe more than $1,000 and less than $250,000, not including the mortgage debt on your principal residence.
Part of the debt assessment process conducted during your consultation with a Licensed Insolvency Trustee will be reviewing your budget and financial situation to determine whether you meet some practical requirements.
Based on my experience, if you:
- have assets that you might lose if you were to file for personal bankruptcy
- have a high income that might trigger a surplus income penalty in a bankruptcy
- have enough income that you can afford some monthly payments to your creditors
- do not qualify for a debt consolidation loan to restructure your debts
then a consumer proposal may be right for you.
A consumer proposal provides needed debt relief. It allows you to pay back your creditors less than what you owe, at an agreed-upon amount that you can afford, with no interest, within five years.
What Types of Debts Are Included in a Consumer Proposal?
A consumer proposal allows you to consolidate and settle unsecured debts. Debts eligible for discharge in a consumer proposal include
- credit card debts,
- unsecured loans or lines of credit,
- payday loans,
- income tax debt and government debts,
- collection accounts and unpaid bill payments
- government student loans are eligible if you have been out of school for seven years.
Secured debts, like your mortgage or car loan, cannot be included in your proposal if you wish to keep your house or car. However, reducing unsecured debts by filing a consumer proposal can make keeping up with your mortgage and car payments much easier. If you surrender your vehicle or house before or as part of the proposal process, any balance owed after the sale of the asset will be forgiven through your proposal.
As with all insolvency proceedings, some debts cannot be discharged, including alimony and child support payments, court fines or penalties or debts due to fraud. These debts don’t make you ineligible to file a proposal, but they remain after the completion of your proposal.
How Much Debt Do You Need to File a Consumer Proposal?
To qualify for a consumer proposal, your total unsecured debts must be less than $250,000.00, excluding the mortgage on your principal residence.
Practically, most Licensed Insolvency Trustees recommend considering a consumer proposal when you have at least $10,000 in unsecured debt. This makes sense when you consider that a consumer proposal is a legal debt settlement process. Debts below that amount are better dealt with through bankruptcy or credit counselling.
The amount you’ll need to repay through your proposal depends on various factors, including your total debt amount, your income and ability to pay, your assets and what creditors are likely to accept.
Most proposals offer to repay between 20-50% of your total debt through manageable monthly payments over a maximum of 5 years.
Considering a consumer proposal?
Are There Income Requirements for a Consumer Proposal?
You must have a stable source of income to file a consumer proposal. This shows creditors you can maintain your proposed monthly payments. Qualifying income can come from any source, including regular or self-employment earnings, pension payments, benefits payments etc.
There’s no minimum income requirement, but you need sufficient income to make monthly proposal payments while covering your regular living expenses. Your Licensed Insolvency Trustee will help determine a realistic payment plan based on your budget.
How Do Creditors Affect Your Consumer Proposal?
Your consumer proposal must be accepted by creditors to become legally binding. For approval, creditors representing at least 50% of your debt value must vote to accept your proposal.
Creditors have 45 days to vote on your proposal. During this time:
- A Licensed Insolvency Trustee presents your offer to creditors
- Creditors can accept, reject, or request changes
- If accepted, all unsecured creditors are bound by the terms
- If rejected, your trustee can help you revise the offer or explore other options
Which is Better? A Consumer Proposal or Bankruptcy
If you don’t qualify for a consumer proposal, or if it’s not the best solution for your situation, your Licensed Insolvency Trustee will review all available debt relief options with you. These may include debt consolidation, credit counselling, or bankruptcy. Each option has different eligibility requirements and benefits, and your trustee will help you understand which solution best fits your financial circumstances.
A consumer proposal often provides advantages over bankruptcy:
- Keep your assets, including your home equity
- More flexible repayment terms
- Less impact on your credit rating (R7 versus R9 for bankruptcy)
- Avoid bankruptcy duties and restrictions
A consumer proposal is generally the better option if you have high home equity, can afford a lump sum proposal settlement or may be subject to surplus income.
However, bankruptcy might be more appropriate if you:
- Have little or no income to make proposal payments
- Have few assets to protect
- Want a shorter debt resolution process
Special Considerations & FAQs
Can you file a consumer proposal if you own a home?
Yes, you can keep your house as long as you maintain your mortgage payments.
Your home equity may affect the amount you need to offer creditors in your proposal. If you own a home with some equity and file for bankruptcy, you would have to pay the trustee the equity in your home to avoid the trustee selling your home for the benefit of your creditors. Most people do not want to do this. Assuming you do not want to lose your home, you can file a consumer proposal instead, paying that equity over a maximum of five years.
Can you file a proposal if you’re bankrupt?
Yes, you can file a consumer proposal to annul your bankruptcy if you haven’t been discharged. This might be beneficial if your financial situation has improved, such as if you expect a significant increase in income or windfall.
Can you file a second consumer proposal?
Yes, but only if you’ve completed payments on your first proposal, or the proposal has been formally withdrawn or you have received court approval.
Filing a consumer proposal over a second bankruptcy is often a better option due to the punitive cost and credit rating impact of filing bankruptcy a second time. A second bankruptcy will remain on your credit report for 17 years from the date of filing, while a consumer proposal is removed six years from filing.
Your trustee will help determine if this option is suitable.
Can you file a joint proposal with your spouse?
Yes, couples can file a joint consumer proposal if their debts are joint and substantially the same. The combined unsecured debts must not exceed $500,000.
What documents do you need to file?
The consumer proposal process begins with a free debt assessment by a Licensed Insolvency Trustee. To file your proposal with the federal government, you will need to provide:
- Proof of income and expenses
- List of your assets and their value
- Details of all debts and creditors
- Recent tax returns
- Personal identification
Dealing with debt can feel overwhelming, but you don’t have to face it alone. At Hoyes Michalos, our Licensed Insolvency Trustees can help you understand options to become debt free and determine if a consumer proposal is right for you. Contact us today for a free, confidential consultation to discuss your debt relief options and start your journey toward financial freedom.
