Consumer Proposal in Canada: Complete Guide to Costs, Process & Impact

Debt Solutions

Consumer Proposal in Canada: Complete Guide to Costs, Process & Impact

Mar 20, 202620 min read

If you’re drowning in credit card debt, personal loans, or tax arrears and someone just mentioned a “consumer proposal,” you probably have a hundred questions. What exactly is it? How much does it cost? Will you lose your house? How bad is the hit to your credit? And most importantly — is it the right move for you?

This guide answers every one of those questions in plain language. By the time you finish reading, you’ll know whether a consumer proposal makes sense for your situation, what the process looks like step by step, and how to compare it honestly against the alternatives — including bankruptcy, debt consolidation, and just white-knuckling your way through minimum payments.

What Is a Consumer Proposal?

A consumer proposal is a formal, legally binding offer you make to your unsecured creditors through a Licensed Insolvency Trustee. You propose to repay a percentage of what you owe — often somewhere between 20% and 50% — in fixed monthly payments over a period of up to 60 months (5 years). If the majority of your creditors (by dollar value) accept, the proposal is binding on all of them, even those who voted against it or didn’t vote at all.

The moment your LIT files the proposal with the Office of the Superintendent of Bankruptcy (OSB), something called a stay of proceedings kicks in automatically. That means:

• Wage garnishments stop immediately
• Collection calls and letters must stop
• Lawsuits against you are paused
• Interest stops accruing on your included debts
• CRA collection actions freeze

For many Canadians, that immediate relief alone is transformative. Going from daily creditor harassment and the stress of wage garnishment to legal silence overnight can feel like surfacing after years underwater.

Who Qualifies for a Consumer Proposal?

Eligibility for a consumer proposal is defined in the Bankruptcy and Insolvency Act. You qualify if:

• You are insolvent — meaning you cannot pay your debts as they come due, or your total debts exceed the total value of your assets
• Your total unsecured debts are less than $250,000, not including the mortgage on your principal residence
• You are a Canadian resident (or have assets or business dealings in Canada)

The $250,000 cap is important. If your unsecured debts exceed that threshold, you’d need to look at a Division I Proposal, which is a more complex commercial-style process with a higher approval threshold. For the vast majority of individual Canadians struggling with personal debt, the consumer proposal limit is more than adequate.

The trend toward proposals over bankruptcy is significant. In 2010, consumer proposals made up only about 30% of insolvency filings. Today, they account for more than two-thirds. Canadians are increasingly aware that a proposal preserves more and punishes less than bankruptcy.

What Debts Can Be Included?

Not every debt can be wiped out or reduced through a consumer proposal. It’s critical to understand which debts are eligible before you commit to the process.

Debts that CAN be included:

Debts that CANNOT be included:

The Role of the Licensed Insolvency Trustee (LIT)

Here’s something most people don’t realize: in Canada, only a Licensed Insolvency Trustee (LIT) can file a consumer proposal. Not a debt settlement company. Not a credit counsellor. Not a paralegal. Only an LIT licensed by the federal government through the Office of the Superintendent of Bankruptcy.

This is critically important because a significant debt-relief industry has grown up in Canada offering “consumer proposal services” or “debt negotiation” that either involve referring you to an LIT for a fee (which inflates your costs) or flat-out aren’t actually consumer proposals at all. If someone other than an LIT is asking you to sign documents for a consumer proposal, stop and verify their credentials immediately.

Your LIT’s responsibilities include:

• Reviewing your financial situation and determining if a proposal is appropriate
• Calculating a proposal amount that will likely be accepted by creditors
• Drafting the proposal documents
• Filing the proposal with the OSB to trigger the stay of proceedings
• Notifying all your creditors
• Holding a creditors’ meeting if requested
• Collecting and distributing your payments to creditors
• Issuing your Certificate of Full Performance once the proposal is complete

How the Consumer Proposal Process Works: Step by Step

1. Free Initial Consultation

   Schedule a free consultation with a Licensed Insolvency Trustee. This is a no-obligation meeting where the LIT reviews your income, assets, and debts. Come prepared with a list of all debts, recent pay stubs or income statements, and a list of assets. The LIT will explain all your options — not just the consumer proposal. This meeting typically takes 60–90 minutes.

2. Proposal Calculation and Drafting

   If a consumer proposal is the right fit, your LIT calculates the proposal amount. The offer must be at least as much as creditors would receive if you went bankrupt (this is the legal floor), and attractive enough that creditors will accept. Your LIT uses their experience with how specific creditors typically vote to craft a realistic offer. This stage takes days to a couple of weeks.

3. Filing the Proposal

   Your LIT files the consumer proposal with the Office of the Superintendent of Bankruptcy. This is the moment the stay of proceedings begins. All collection action, wage garnishments, and interest charges stop immediately. You receive a signed copy of the filed proposal.

4. Creditor Voting Period

   After filing, creditors have 45 days to vote on your proposal. They can accept, reject, or make a counter-proposal. If creditors representing more than 25% of the dollar value of your debt request a meeting, a formal creditors’ meeting must be held. If creditors representing more than 50% of the dollar value of debt reject your proposal, it fails (and you may need to negotiate, amend, or consider bankruptcy).

5. Proposal Accepted — Payments Begin

   If accepted (either through a vote or by default after 45 days with no objection from the majority), you begin making your monthly payments directly to the LIT. These payments are fixed — no interest, no surprises. The LIT holds your funds and distributes them to creditors quarterly after deducting their regulated fees.

6. Two Credit Counselling Sessions

   The BIA requires you to complete two mandatory credit counselling sessions with your LIT or a qualified counsellor. These cover budgeting, money management, and rebuilding credit. Most people find them genuinely useful rather than punitive.

7. Certificate of Full Performance

   Once you’ve made all payments and completed the counselling sessions, your LIT issues a Certificate of Full Performance. Your remaining included debts are legally discharged — eliminated. You are no longer legally obligated to pay them.

How Much Does a Consumer Proposal Cost?

This is where many people are pleasantly surprised. Consumer proposal fees in Canada are not charged separately on top of your proposal payments. Instead, the LIT’s fees are paid from the funds you submit as part of your proposal. The federal government regulates these fees under the Bankruptcy and Insolvency Act General Rules.

In practice, the LIT fees on a typical consumer proposal of $20,000–$40,000 in total payments range from roughly $3,500 to $8,000 — all taken from the payments you’re already making, not added on top. Your proposal is structured knowing these costs, so creditors receive their agreed-upon amount after the LIT takes their regulated share.

How a Consumer Proposal Affects Your Credit Score

Let’s be honest: a consumer proposal does hurt your credit. But understanding exactly how it works — and how it compares to the alternatives — shows that the damage is far more manageable than most people fear.

The R7 Rating

When you file a consumer proposal, each included debt on your credit report gets coded as R7 — meaning “paid through a consumer proposal.” Canada’s credit rating scale runs from R0 (too new to rate) to R9 (bad debt, written off or bankrupt). An R7 is two full steps better than the R9 you’d receive in bankruptcy.

The consumer proposal notation appears on both your Equifax and TransUnion reports in two places:

• In the public records section, where it stays for 3 years after the completion of the proposal (or 6 years from the date of filing, whichever comes first)
• On each individual account included in the proposal, showing the R7 rating for 6 years from the date of last activity on that account

Consumer Proposal vs. Bankruptcy: A Detailed Comparison

If you’re considering a consumer proposal, you’ve likely also heard about personal bankruptcy. Here’s an honest, side-by-side comparison of both options across the dimensions that matter most to Canadian consumers.

Will You Lose Your House or Car?

This is the question that keeps more Canadians up at night than any other. The short answer: in a consumer proposal, you keep your house and your car — full stop.

Here’s why: a consumer proposal only addresses your unsecured debt. Your mortgage and car loan are secured debts, meaning the lender holds the asset as collateral. The consumer proposal doesn’t touch these debts. You continue making your mortgage and car payments exactly as before. As long as you stay current on those payments, the lenders have no grounds to repossess or foreclose.

What if you have equity in your home? This is where it gets nuanced. In a consumer proposal, the equity in your home doesn’t matter for creditor decisions the way it does in bankruptcy. Creditors only need to receive more than they’d get in bankruptcy — and in bankruptcy, home equity would be calculated. So a proposal with significant home equity can still be accepted by creditors if the total offer beats the bankruptcy equivalent.

What Happens if You Miss a Payment?

Life happens. The good news is that a consumer proposal has built-in flexibility for short-term difficulties. If you miss a payment, your proposal doesn’t automatically fail. You have a 3-month grace period — meaning you can miss up to 3 months of payments over the life of the proposal without the proposal being annulled.

However, if you miss more than 3 months of payments total, your consumer proposal is annulled. When a proposal is annulled:

• The stay of proceedings lifts immediately
• All your original debts are reinstated in full, minus any payments you’ve made through the proposal
• Creditors can resume collection actions, wage garnishments, and lawsuits
• You cannot refile the same consumer proposal

If you’re struggling with payments before reaching the 3-month limit, contact your LIT immediately. They may be able to amend the proposal (requiring creditor re-approval), arrange a temporary deferral, or counsel you on options before annulment occurs.

Real-World Examples: When a Consumer Proposal Makes Sense

Example 1: The Overwhelmed Homeowner

Situation: Maria, a 44-year-old nurse in Hamilton, Ontario, has $78,000 in unsecured debt: $35,000 on three credit cards, $28,000 in a personal line of credit, and $15,000 owed to CRA for unreported side income. She owns a home with $90,000 in equity and earns $72,000/year. She’s been making minimum payments for 6 years and the balances barely budge.

Why a Consumer Proposal: Bankruptcy would require Maria to surrender significant assets given her income and equity. In a proposal, she keeps her home entirely. Her LIT calculates that creditors would receive roughly $12,000 in a bankruptcy (after exemptions and trustee costs). Her proposal offers $550/month for 48 months — $26,400 total, roughly 34 cents on the dollar. Creditors accept because it beats bankruptcy by more than double.

Outcome: Maria completes her proposal in 4 years, saves $51,600 in principal (plus thousands in interest), keeps her home, and emerges with her retirement savings intact. Three years after her certificate of completion, her credit record is clean.

Example 2: The Small Business Owner with CRA Debt

Situation: David, a 38-year-old former restaurant owner in Calgary, closed his business during the pandemic and now carries $110,000 in CRA debt (HST and payroll deductions), $40,000 in business credit cards, and $20,000 in a personal line of credit. Total: $170,000 unsecured. He now works as a salaried manager earning $65,000/year.

Why a Consumer Proposal: CRA is notoriously aggressive in collections, and the amounts are crippling. However, CRA participates in consumer proposals and is bound by the same voting rules as other creditors. David’s LIT negotiates a proposal offering $800/month for 60 months — $48,000 total, roughly 28 cents on the dollar. Because CRA holds more than 50% of the debt, their acceptance is critical — and they accept because the alternative (bankruptcy with limited surplus income) would yield significantly less.

Pros and Cons: An Honest Assessment

Rebuilding Credit After Your Consumer Proposal

A consumer proposal is not the end of your financial story — it’s a reset button. Many Canadians who complete a proposal find that within 2–3 years of finishing their payments, they have better credit than they did at their lowest point before filing. Here’s how to accelerate that recovery:

• Get a secured credit card immediately. Products like the Home Trust Secured Visa or Neo Secured Card are accessible even during a consumer proposal. Use it monthly, pay it in full, and build a fresh positive payment history.
• Check your credit report at Equifax and TransUnion. Ensure all included debts are correctly listed as “included in consumer proposal” (not active collections). Dispute any errors.
• Build an emergency fund. Even $1,000 in savings prevents the next financial shock from becoming the next debt crisis.
• Keep your secured debt payments perfect. Mortgage and car loan payments made during and after the proposal are rebuilding your credit in real time.
• Apply for an RRSP loan after completion. Some credit unions offer small RRSP loans to proposal graduates — paying this on time is another positive credit event.

Finding a Licensed Insolvency Trustee in Canada

Your first consultation with an LIT is always free, and there is no obligation to proceed. The Office of the Superintendent of Bankruptcy maintains a searchable directory of all licensed trustees at ic.gc.ca/osb. You can search by province and city.

When choosing a trustee, consider:

• Office location and availability (in-person vs. virtual consultations)
• Experience with your type of debt (e.g., CRA debt, business debt)
• Whether you feel comfortable with the trustee — you’ll be working together for years
• Reviews from past clients (though given the private nature of insolvency, these may be limited)

The Bottom Line

A consumer proposal is one of the most powerful debt relief tools available to Canadians — and it’s vastly underutilized because people either don’t know it exists or are afraid of what it means for their credit and assets.

The reality is that if you’re carrying $20,000 or more in unsecured debt that you realistically cannot pay off in 5 years on your current income, a consumer proposal deserves serious consideration. You can:

• Eliminate 50–80% of your debt legally and permanently
• Stop collection calls, garnishments, and interest immediately
• Keep your home, car, RRSPs, and all other assets
• Emerge in 3–5 years with a clear path to financial recovery
• Have a cleaner credit slate in as few as 5–6 years from today

The hardest step is usually the first one: picking up the phone or filling out a form for a free consultation. Most people who take that step wish they’d done it sooner.