Consumer Proposal Canada: Licensed Trustees in Bankruptcy

What is a Consumer Proposal in Canada?

A consumer proposal gives you a legal way to settle debts for less than you owe. The Bankruptcy and Insolvency Act governs this debt solution, and the Office of the Superintendent of Bankruptcy (OSB) oversees proposals filed across Canada.

A consumer proposal is a formal, legally binding process administered by a Licensed Insolvency Trustee (LIT). It can offer creditors a percentage of what is owed, more time to pay, or both. The term cannot exceed five years.

Overview of the Consumer Proposal Process

Your path from financial stress to stability follows a clear order. You gather financial statements and honest details about income, expenses, and debts. You then meet with a Licensed Insolvency Trustee, who assesses whether a proposal fits better than bankruptcy, consolidation, or another option.

The LIT drafts a proposal based on what you can actually afford and submits it to creditors. Filing starts a stay of proceedings on most unsecured collection action. If accepted, you make one agreed payment through the LIT for up to five years and complete two mandatory financial-counselling sessions.

Creditors have 45 days to respond. If no creditor meeting is required in that time, the proposal is deemed accepted. A meeting can be directed by the Official Receiver or requested by creditors representing at least 25 percent of proven claims by value. At a meeting, acceptance needs an ordinary resolution by dollar value — effectively more than 50 percent of voting proven claims.

Legal Framework and Government Regulation

The federal Bankruptcy and Insolvency Act is the legal backbone of consumer proposals. Only a federally licensed LIT can administer one; the OSB oversees the process.

The statutory debt ceiling is $250,000 in total debts, excluding debts secured by your principal residence. This is broader than “unsecured debts only”: a car loan or other debt not secured by the principal residence can count toward the ceiling. An LIT verifies your exact eligibility.

The stay generally stops unsecured collection action and wage garnishment once the proposal is filed. It does not normally stop secured creditors from enforcing a mortgage or vehicle security, and support obligations have special rules. Trustee fees are regulated and paid from the proposal funds, rather than billed as separate surprise charges.

Benefits of Filing a Consumer Proposal

A consumer proposal can simplify multiple debts into one payment and may settle the included debts for less than the full balances. The percentage varies widely based on income, assets, creditors, and what they would recover in a bankruptcy; “up to 80 percent” is not a guarantee.

Filing generally stops interest on debts dealt with by the proposal and stops most unsecured collection action. You typically retain assets while keeping secured payments current. This makes a proposal a common alternative for people who can sustain a fixed payment but want to avoid bankruptcy.

Stop Interest and Collection Action

Filing a consumer proposal triggers a stay of proceedings for most unsecured claims. Collection calls, lawsuits, and wage garnishments related to those claims generally stop once the proposal is filed.

The limits matter. Secured creditors retain their security rights unless a court orders otherwise, so a mortgage or vehicle payment still needs to be maintained if you want to keep that asset. Child or spousal support enforcement is not covered by the same stay. An LIT can explain how the rules apply to each debt in your own list.

Eligibility for a Consumer Proposal

A consumer proposal is intended for an individual who is insolvent and whose aggregate debts do not exceed $250,000, excluding debts secured by the person’s principal residence. You must be a Canadian resident or have property in Canada, give the LIT full financial disclosure, and be able to perform the agreed terms.

The process can work for salaried, self-employed, retired, or benefit-income households if the budget supports a payment. If the ceiling is exceeded, a Division I proposal may be an alternative, but it follows different rules and can lead to bankruptcy if rejected.

How to File a Consumer Proposal

Step 1: Consult a Licensed Insolvency Trustee. Bring recent pay stubs, bank statements, debt statements, tax information, and an asset list. Initial consultations are generally free.

Step 2: Assess the complete financial picture. The LIT totals debts, identifies secured and unsecured claims, reviews assets and household costs, and compares a proposal with bankruptcy and other options.

Step 3: Draft and negotiate the proposal. The LIT creates an offer intended to provide creditors more than bankruptcy would, then files it and handles communications. You must include all applicable unsecured creditors; you cannot simply choose preferred creditors.

Step 4: Complete the terms. If the proposal is accepted or deemed accepted and approved or deemed approved by the court, make payments through the LIT and attend two counselling sessions. When you complete the terms, the LIT issues a certificate of full performance.

Role of Licensed Insolvency Trustees

A Licensed Insolvency Trustee assesses your income, expenses, assets, and debts; prepares and files the proposal; communicates with creditors; receives payments; distributes money to creditors; provides the two required counselling sessions; and issues the completion certificate.

Only an LIT or an administrator appointed or designated by the Superintendent can file a consumer proposal. Debt consultants, counsellors, or lawyers may offer other services, but they cannot administer this federal insolvency process unless they are also licensed as an LIT.

Consumer Proposal vs. Bankruptcy

Both options operate under federal insolvency law and through an LIT, but they work differently. A proposal normally fixes a repayment amount for up to five years and allows you to retain assets while meeting secured obligations. Bankruptcy has different duties, potential surplus-income payments, and provincial exemption rules that determine which assets can be kept.

A rejected consumer proposal does not automatically make you bankrupt. You may amend it, choose another option, or consider bankruptcy. Missing the equivalent of three monthly payments, however, can cause deemed annulment, bringing collection rights back unless the proposal is revived or another legal solution is used.

Credit Impact and Asset Retention

A consumer proposal is a serious credit event. Credit reports commonly show an R7 rating while the proposal is active. Credit-report retention practices differ by bureau and province, so ask the LIT and check both Equifax and TransUnion after completion rather than relying on a single national timeline.

You normally keep assets under a proposal, provided you maintain secured payments. Home equity, vehicle equity, RRSP treatment, and windfalls can change what creditors expect in the proposal, so disclose everything. A proposal is not a guarantee that every asset-related issue disappears; it is a negotiated legal solution based on your actual circumstances.

Debts Included and Excluded

Common unsecured debts include credit cards, unsecured lines of credit, personal loans, payday loans, collections accounts, and tax debts. Secured debts such as mortgages and car loans normally continue outside the proposal if you want to keep the asset.

Certain debts receive special treatment under section 178 of the Bankruptcy and Insolvency Act. Examples include support obligations, court fines, fraud-related debts, and student loans when you file while still a student or within seven years of ceasing to be a student. Do not assume a debt is discharged without having the LIT review it.

Missed Payments and Completion

A consumer proposal requires a realistic payment plan. If payments are monthly or more frequent, default equal to three payments causes deemed annulment. If payments are less frequent than monthly, the proposal is deemed annulled when a payment is more than three months overdue.

After annulment, creditors can generally resume collection for their claims less amounts already distributed. Speak with your LIT before you fall behind: some proposals may be amended, revived, or addressed through another legal route. If you complete all conditions, you receive a certificate of full performance that legally releases you from included debts.

Conclusion

A consumer proposal can provide a structured path out of unmanageable debt without automatically requiring bankruptcy. It is federally regulated, administered only by Licensed Insolvency Trustees, and designed around a payment you can realistically sustain.

Before deciding, compare the proposal with budgeting, consolidation, credit counselling, informal settlements, and bankruptcy. A confidential LIT consultation is the correct first step because the right choice depends on the complete picture: debts, income, assets, family situation, and creditor action.

Consumer Proposal vs. Bankruptcy

These are simplified contrasts, not a personal recommendation. Provincial exemptions, assets, income, secured loans, student loans, support obligations, and prior insolvency filings can change the answer.

Frequently Asked Questions