Consumer Proposal: An Alternative to Bankruptcy

What is a consumer proposal?

A consumer proposal is an alternative to bankruptcy for Canadians. A consumer proposal is a formal agreement between you and your creditors about how you will repay your debts. It is one of the solutions available to you if you are struggling with paying back what you owe your creditors. 

Consumer proposals are available if you owe less than $75,000 to your creditors (not including the mortgage on your principal residence).

To create a consumer proposal, you work with an administrator (a person designated by the federal government’s Superintendent of Bankruptcy to be responsible for the administration of a consumer proposal under the federal Bankruptcy and Insolvency Act). You and the administrator will put together an offer to pay your creditors a percentage of what you owe them over a specific period of time, or to extend the time you have to pay off your debt, or some combination of both. You then pay the administrator, who uses that money to pay off each of your creditors.

A consumer proposal might be the right choice for you if you owe less than $75,000 to your creditors and you would like to avoid bankruptcy. The consumer proposal process is relatively simple and is only available to individuals, not businesses. A consumer proposal typically lasts between two and five years.

Which debts can I settle through a consumer proposal?

Consumer proposals typically only deal with unsecured debt (i.e., credit card debt or personal loans that aren’t backed by assets or collateral). If you default on payments for secured loans, however, your secured creditors may file a claim to be voluntarily included in your consumer proposal. These secured creditors are bound by the proposal in the same way your unsecured creditors are. (The more likely scenario, though, is that your secured creditors will seize your asset(s) backing the loan -- i.e. foreclose on your home or repossess your car or other belongings). 

You may elect to surrender secured assets in a consumer proposal. Your assets will be seized, but you won’t be responsible for any more payments to the secured creditor. Plus, if your assets are worth less than what you owe (i.e., if your home’s value is less than your mortgage), the difference is converted into unsecured debt and covered under your consumer proposal.

Benefits of a consumer proposal

The main benefit of a consumer proposal is that, unlike a bankruptcy, you get to retain control of your assets, instead of surrendering them to a trustee in bankruptcy for sale.

In addition, what you pay your creditors through a consumer proposal may be less than what you owe them. (However, a consumer proposal must ensure that you pay your creditors more than you would pay them if you declared bankruptcy.)

Costs of a consumer proposal

The proposal administrator is paid an amount that is set by the Superintendent of Bankruptcy and set out in the Bankruptcy and Insolvency Act, and this payment is taken from your monthly payments.

For example, if you are paying $350 per month for 48 months, that is all you pay -- there are no additional fees or costs. In a typical consumer proposal, the administrator receives a base fee of $1,500, and receives 20% of all funds distributed to the creditors (after the proposal is accepted).

The government retains a 5% tax or levy on all proposal payments. In total, creditors receive somewhat less than 75% of the total payments in a proposal; the administrator gets 20% plus a base fee, and the federal government gets 5%.

How do I file a consumer proposal?

• The first step in preparing a proposal is to meet with an administrator (typically a trustee in bankruptcy) who can work with you to determine whether a proposal is the right course of action for you.
• If the decision is made to go ahead with a proposal, the proposal documents are prepared and filed with the Official Receiver (an employee in the federal government’s Office of the Superintendent of Bankruptcy who accepts the documents filed in proposals and bankruptcies).
• Your creditors then have 45 days to either accept or reject the proposal. If they do not object within that period, your proposal is deemed to have been accepted by them.
• However, if creditors representing at least 25% of the money you owe object to your proposal, a meeting of your creditors will be held – and you must attend. At that meeting, your creditors will vote on whether to accept your proposal or not.
• If creditors representing at least 51% of the money you owe vote to accept the proposal, all your creditors must accept it as well.
• If your proposal is not accepted, you can make changes to your proposal and resubmit it to your creditors for consideration, consider other options for resolving your financial difficulties, or move on to bankruptcy.
• If your proposal is accepted, you will need to make payments as set out in the proposal to the administrator. They will then distribute funds to your creditors.

If you default on the arrangements in the proposal, you are not automatically sent into bankruptcy, but all your creditors are free to take action against you.

What happens with my creditors if I file a consumer proposal?

If your proposal is accepted, your creditors are legally prevented from taking any further action against you so long as you make your scheduled payments to the administrator.

Once your proposal is accepted, you stop making payments directly to your creditors. Any garnishments of your salary will stop, and lawsuits against you by creditors will also come to an end. In addition, none of your creditors or your landlord can terminate an agreement they have with you simply because you filed a proposal.

What happens to my credit history if I file a consumer proposal?

Your credit history is affected for a much shorter time period with a consumer proposal than with a bankruptcy. The record of your consumer proposal will remain on your credit history for 3 years after you have finished making payments under the proposal. (This compares to the 6 or 7 years, depending on the credit reporting agency, that a bankruptcy will remain on your credit history.)

In addition, debts handled through a consumer proposal are rated as R7, not R9. The R7 rating is less damaging to your credit history than an R9 rating.

Division I proposals

The federal Bankruptcy and Insolvency Act also provides for what are known as "Division I Proposals." These are more complicated than consumer proposals, and are available to businesses as well as individuals. (These are called "Division I" proposals because the process for this form of proposal is set out in Division I of the Act.)

The main difference between a consumer proposal and a Division I proposal is that Division I proposals have no upper limits on indebtedness – you can use a Division I proposal to avoid bankruptcy even if you owe more than $75,000.

For more information, read the official newsletter of the Superintendent of Bankruptcy.