Consumer Proposal in Canada: A Complete Guide to Debt Relief Under the Bankruptcy and Insolvency Act
JASON CAMPBELL
December 4, 2025
Consumer Proposal in Canada: A Complete Guide to Debt Relief
Debt can feel overwhelming, especially when monthly payments keep piling up and interest rates make it impossible to catch up. For Canadians struggling with unsecured debt, a consumer proposal offers a formal, legally binding solution under the Bankruptcy and Insolvency Act. It’s an alternative to bankruptcy that allows you to repay a portion of what you owe while keeping your assets and avoiding the harsh consequences of bankruptcy.
In this guide, we’ll cover:
What a consumer proposal is
How it works
Eligibility requirements
The step-by-step process
Pros and cons
Impact on credit
Common myths and FAQs
What Is a Consumer Proposal?
A consumer proposal is a formal debt settlement option available to individuals in Canada who owe between $1,000 and $250,000 (excluding a mortgage on their primary residence). It allows you to propose a repayment plan to your creditors, typically over a period of up to five years, where you pay back only a portion of your total debt (some exceptions apply).
Key points:
Governed by the Bankruptcy and Insolvency Act
Administered by a Licensed Insolvency Trustee (LIT)
Legally binding once accepted by creditors and approved by the court
Stops collection calls, wage garnishments, and legal actions
Unlike informal debt settlement, a consumer proposal is legally enforceable, giving you peace of mind and protection from creditors.
How Does a Consumer Proposal Work?
Here’s the basic process:
Assessment: You meet with a Licensed Insolvency Trustee to review your financial situation.
Proposal Drafting: The trustee helps you create a repayment plan based on what you can afford.
Creditor Vote: Creditors vote on whether to accept the proposal. A majority (by dollar value) must agree.
Court Approval: Once accepted, the proposal is approved by the court and becomes binding.
Payments: You make monthly payments to the trustee, who distributes funds to creditors.
The proposal often includes:
Reduced total debt
Lower or zero interest
Single monthly payment
Eligibility for a Consumer Proposal
To qualify, you must:
Be insolvent (unable to pay debts as they come due)
Owe $1,000–$250,000 in unsecured debt
Have a steady income to make the proposed payments
If your debt exceeds $250,000 (excluding your mortgage), you may need a Division I Proposal, which is similar but designed for higher debt levels.
Benefits of a Consumer Proposal
Why choose a consumer proposal over bankruptcy or other options?
Avoid Bankruptcy: Keep your assets, such as your home and car.
Stop Collection Actions: No more harassing calls or wage garnishments.
Interest-Free Payments: Proposals eliminate interest charges.
Single Monthly Payment: Easier to manage than multiple creditors.
Credit Rebuilding Opportunity: While your credit will take a hit, it’s generally less severe than bankruptcy.
Drawbacks and Considerations
Consumer proposals aren’t perfect. Here are some downsides:
Credit Impact: Your credit score will drop, and the proposal stays on your report for the period that you are in your proposal plus 3 years.
Commitment: You must make all payments on time; missing payments can lead to annulment.
Public Record: Like bankruptcy, consumer proposals are recorded in a public database.
Consumer Proposal vs. Bankruptcy
Feature Consumer Proposal Bankruptcy
Asset Retention Keep most assets May lose non-exempt assets
Payment Amount Based on income and assets Based on income and assets
Duration Up to 5 years 9–21 months (first bankruptcy)
Credit Impact Moderate (R7 rating) Severe (R9 rating)
Step-by-Step Process
Initial Consultation: Meet with an LIT to review your finances.
Draft Proposal: Determine affordable monthly payments.
File Proposal: LIT submits to the Office of the Superintendent of Bankruptcy.
Notices Sent: LIT will send notice of your consumer proposal to your creditors.
Creditor Vote: Creditors have 45 days to vote.
Court Approval: Proposal becomes legally binding.
Payments: You make payments to the LIT.
Completion: Once all payments are made and two credit counselling sessions have been completed, you receive a Certificate of Full Performance.
Impact on Credit Score
A consumer proposal results in an R7 rating on your credit report, indicating a debt repayment arrangement. It remains for 3 years after completion
While this is a negative mark, it’s less damaging than bankruptcy (R9 rating). Many people start rebuilding credit during the proposal by using secured credit cards and responsible financial habits.
Common Myths About Consumer Proposals
Myth 1: You’ll lose your house or car.
False. Most people keep their assets in a consumer proposal.
Myth 2: It’s the same as bankruptcy.
No. A consumer proposal is an alternative to bankruptcy with less severe consequences.
Myth 3: Credit repair is impossible.
Not true. Many people rebuild credit within 2–3 years after completing a proposal.
Is a Consumer Proposal Right for You?
A consumer proposal is ideal if:
You have unsecured debt you can’t manage
You want to avoid bankruptcy
You have income to support monthly payments
If you’re unsure, speak with a Licensed Insolvency Trustee. They’ll review your situation and explain all options, including debt consolidation, credit counseling, and bankruptcy.
Final Thoughts
Debt can feel like a heavy burden, but solutions exist. A consumer proposal offers a structured, legal way to reduce your debt, stop collection actions, and regain financial stability without the harsh consequences of bankruptcy. If you’re struggling with debt, consider reaching out to a Licensed Insolvency Trustee for a free consultation.