Consumer Proposal: A Definitive Guide For Canadians

How Does a Consumer Proposal Compare to Other Debt Solutions?

When it comes to wrestling with debt, think of it as standing at a crossroads. There are multiple paths you can take, each with its own upsides and downsides. Below, we break down how a Consumer Proposal measures up against other popular debt relief options like debt consolidation, bankruptcy, and credit counselling.

Debt Solution	Impact on Credit Score	Asset Protection	Repayment Term	Eligibility Requirements
Consumer Proposal	Moderate	High	Up to 5 years	Insolvent but not bankrupt; debts below $250,000 (excluding mortgage)
Debt Consolidation	Varies	Low	2-5 years	Good credit score; adequate income
Bankruptcy	Severe	Low	9-21 months	No minimum debt; must be insolvent
Credit Counselling	Mild	None	Up to 5 years	No debt restrictions

Types of Debt that Qualify for Consumer Proposals

When considering a Consumer Proposal as a solution for debt relief, it’s essential to know which types of debt can be included. Not all debts are eligible, and understanding these distinctions is crucial for effective financial planning. Below is a detailed look at the various kinds of debt that qualify.

CERB Repayment

The government requested that all CERB double payments, CERB overpayments, and payments made to ineligible CERB recipients be returned by December 31st, 2020. If you are unable to make arrangements for your CERB repayment, filing for bankruptcy or a consumer proposal may be the best option for your financial future.

Credit Card Debt

One of the most common types of debt included in Consumer Proposals is credit card debt. Whether it’s from one or multiple cards, this unsecured debt is eligible for negotiation under the terms of a Consumer Proposal.

Personal Loans

Unsecured personal loans from banks or other financial institutions are also eligible. Like credit card debt, these are unsecured, meaning they don’t involve collateral, making them a suitable candidate for a Consumer Proposal.

Payday Loans

Payday loans are notorious for their high interest rates, and they can be included in a Consumer Proposal. This move can often alleviate the hefty interest burdens these loans carry.

Tax Debts

Consumer Proposals can include debts owed to the Canada Revenue Agency (CRA) for income taxes, GST/HST, and even payroll taxes. This can be a significant relief for many individuals, as tax debts often come with substantial penalties and interest.

Medical Bills

Unexpected medical expenses can throw your financial planning off balance. Medical bills that are not covered by insurance can also be included in a Consumer Proposal.

Utility Bills

If you’ve fallen behind on utility payments, these can be added to your Consumer Proposal. This includes electricity, gas, and even some telecom bills.

Store Cards

Store credit cards or lines of credit from retail businesses are also unsecured and can be included in a Consumer Proposal. This can be particularly helpful if you’ve racked up considerable debt from high-interest store cards.

Student Loans

In some instances, student loans can be included in a Consumer Proposal, but there are conditions. Generally, the loan must be at least seven years old from the date of your last study period for it to be eligible.

Legal Judgments

If you have legal judgments against you related to unpaid debts, these can be included in a Consumer Proposal. This does not extend to criminal fines or penalties.

Business Debts

For sole proprietors or partners in a small business, business debts can sometimes be included in a personal Consumer Proposal if you are personally liable for the debts.

Types of Debt That Generally Do NOT Qualify

Understanding what types of debt qualify can give you a clearer picture of how effective this debt relief option might be for your specific financial situation. Always consult a Licensed Insolvency Trustee to assess your unique circumstances and provide tailored advice.

Secured Loans

Mortgages, car loans, and any other debts that are secured against an asset usually cannot be included.

Child Support and Alimony

These obligations are not dischargeable under a Consumer Proposal.

Criminal Fines

Fines and penalties assessed due to criminal activity are not eligible for a Consumer Proposal.

Steps to File a Consumer Proposal

Consult a Licensed Insolvency Trustee (LIT): The first step involves meeting a LIT who will assess your financial situation to determine if a Consumer Proposal is your best option.
Prepare the Proposal: Your LIT will then draft a proposal, specifying how much you can reasonably afford to pay back to your creditors.
Creditor Approval: Creditors receive the proposal and vote on it. If the majority (in terms of debt owed) agree, the proposal becomes binding on all creditors.
Repayment: Once the proposal is accepted, you make monthly payments to the LIT, who then distributes these payments among your creditors.
Completion: After all payments are completed as agreed, your remaining debt is officially discharged, offering you a clean slate to rebuild your financial life.

FAQ

Common questions about Consumer Proposals

Is a Consumer Proposal Right for Me?

If you have a stable income but are overwhelmed by unsecured debt, a Consumer Proposal could be a suitable option. It offers an alternative to bankruptcy, allowing you to protect your assets while negotiating more manageable repayment terms with your creditors.

How Long Does a Consumer Proposal Stay on My Credit Report?

A Consumer Proposal will remain on your credit report for three years after you've completed all the payments. During this period, it may be more challenging to get approved for new credit or loans, so it's essential to focus on rebuilding your credit score once the proposal is completed.

Can I Pay Off My Consumer Proposal Early?

Yes, most Consumer Proposals can be paid off early without incurring any penalties. Doing so can also hasten your credit recovery process, as the proposal will be removed from your credit report three years from the completion date.

What Types of Debt Can Be Included in a Consumer Proposal?

Consumer Proposals primarily address unsecured debts like credit card balances, personal loans, and medical bills. They generally cannot be used for secured debts like mortgages or car loans, nor for student loans that are less than seven years old.

What Happens if I Miss a Payment?

Missing a payment can have serious repercussions. If you miss three payments or if one payment is overdue for more than 30 days, your Consumer Proposal could be annulled, which means you'll lose the protections it offers, and creditors could resume collection activities.

Will All Creditors Agree to the Proposal?

Not necessarily. Creditors vote on your proposal, and it becomes binding if creditors representing a simple majority of your debt agree to it. However, it's not uncommon for some creditors to reject the proposal even if the majority accepts it.

Can I Keep My Credit Cards?

Generally, you will have to surrender all your credit cards when filing a Consumer Proposal. You may be able to apply for a secured credit card during the proposal period, which can help you start rebuilding your credit.

What is the Role of a Licensed Insolvency Trustee (LIT)?

The LIT acts as a mediator between you and your creditors. They evaluate your financial situation, help draft the Consumer Proposal, and disburse your payments to creditors. They also ensure that both parties comply with the terms of the proposal.

Can I Negotiate the Terms After Acceptance?

The terms of a Consumer Proposal are generally fixed once creditors have accepted it. However, under specific circumstances like a significant change in your financial situation, you may apply to amend the proposal, but this would require a new round of voting among creditors.

How Does a Consumer Proposal Affect My Spouse or Partner?

Your Consumer Proposal is specific to your debts and does not directly affect your spouse or partner unless they are co-signers on some of your accounts. In such cases, they would be responsible for the debt if the creditor decides not to accept the terms of the Consumer Proposal for that particular debt.