Consumer Proposal 101: A Clear, Practical Guide for Canadians Considering Debt Relief

A consumer proposal is a formal, legally binding offer to settle unsecured debts for less than you owe, with fixed monthly payments spread across a period you can realistically afford. It’s one of the most powerful debt-relief tools available to Canadians, but it’s also a major financial decision that affects your credit, your budget, and your future borrowing options. Before committing, it's important to understand how proposals work, what they cost, and when they’re actually worth it.

Table of Contents

1. What a consumer proposal actually is
2. How the filing process unfolds
3. Who qualifies and who doesn’t
4. Which debts are included
5. Which debts a proposal cannot touch
6. Why consumer proposals have become so common in Canada
7. Comparing consumer proposals to bankruptcy
8. Comparing consumer proposals to consolidation loans
9. Comparing consumer proposals to credit counselling
10. The major advantages
11. The real disadvantages
12. CRA tax debt and proposals
13. Cost breakdown: how trustees are paid
14. How credit scores are affected
15. Provincial differences (Ontario, Alberta, BC, Atlantic Canada)
16. When a consumer proposal makes sense
17. When a consumer proposal is the wrong option
18. Examples of proposal amounts in real life
19. Full comparison table
20. FAQ

1. What a consumer proposal actually is

A consumer proposal is a legal settlement under the Bankruptcy and Insolvency Act.
It lets you repay a portion of your debt — usually somewhere between 20% and 70% — through structured payments that fit your budget. Once the proposal is accepted, creditors cannot chase you for the remaining amount. Interest stops. Collections stop. Wage garnishments stop. Lawsuits stop.

The big thing to understand is this:
A proposal is not a loan. You are not refinancing anything. You are negotiating permanent forgiveness of part of your debt in exchange for consistent, predictable payments.

Only a Licensed Insolvency Trustee (LIT) is authorized to file one. No lender, no private company, and no third-party consultant can legally file a proposal on your behalf.

2. How the filing process unfolds

Even though the process is federal and standardized, people are often surprised by how structured it is.

A. Initial consultation

You meet with a Licensed Insolvency Trustee. You review your income, budget, assets, and debt.
The trustee calculates what creditors are likely to accept based on your financial situation.

B. Drafting the proposal

The trustee writes a formal offer outlining:

• how much you can pay
• how often you will pay
• how long the payments will last

This is the document creditors will vote on.

C. Filing the proposal

The proposal is filed with the Office of the Superintendent of Bankruptcy. The filing alone triggers immediate protection. That means:

• no more interest
• no more calls
• no more garnishment
• no more lawsuits
• no more threats
• no more collection agents

D. Creditor voting period

Creditors have 45 days to review and vote.
If those holding more than 50% of the dollar value of your debt vote yes, the proposal becomes binding on all of them.

E. Monthly payments begin

You make one payment to your trustee. They divide it among your creditors after fees.

F. Completion and discharge

After finishing all payments (usually 36–60 months) and completing two mandatory financial counselling sessions, you receive a Certificate of Full Performance.
At that point, the remaining included debt is erased.

3. Who qualifies and who doesn’t

To qualify:

• You must owe no more than $250,000 in unsecured debt (not including your mortgage).
• You must be insolvent — unable to pay your debts as they come due.
• You must be a Canadian resident.
• You must have some form of stable income to support monthly payments.

People often assume their credit has to be at rock bottom. That’s not true. Many people file proposals to avoid bankruptcy even though their credit scores are still in the 500–600 range.

4. Which debts are included

A consumer proposal covers most unsecured debts in Canada, including:

• Credit cards
• Lines of credit
• Payday loans
• Personal loans
• Old student loans (7+ years from end of studies)
• CRA tax debt
• GST/HST debt
• Overdrafts
• Retail store credit cards
• Collection agency accounts
• Court judgments for unsecured loans

This wide coverage is why proposals are so effective.

5. Which debts a consumer proposal cannot cover

Several categories of debt cannot be included:

• Secured loans (mortgages, car loans)
• Child support
• Spousal support
• Student loans under 7 years old
• Court fines, traffic fines
• Fraud-related debts
• Debts arising from fraudulent misrepresentation

If the debt is tied to collateral (home, vehicle), it stays separate. You must continue those payments.

6. Why consumer proposals have become so common in Canada

Consumer proposal filings have been increasing every year for nearly a decade. Three main reasons explain why:

1. Rising household debt

Canadians carry some of the highest household debt levels in the world. With many households juggling credit card balances, high interest rates, and rising living costs, proposals have become a steady fallback.

2. Proposals protect assets

People want to keep homes, cars, RRSPs, and personal belongings. Bankruptcy makes asset seizure possible; proposals avoid that.

3. CRA tax pressure

Many Canadians fall behind on taxes — not because of negligence, but because of fluctuating income, self-employment, or unexpected reassessments. CRA collection can be aggressive, and proposals are one of the few tools that can stop CRA garnishments immediately.

7. Consumer proposal vs bankruptcy

Although both are legal insolvency options, they’re very different experiences.
This comparison is one of the most important parts of deciding whether a proposal is right for you.

Key differences

A. Assets

• Proposal: You keep your home, car, RRSPs, and other assets (as long as you stay current on secured loans).
• Bankruptcy: Some assets may be sold to pay creditors, depending on provincial exemptions.

B. Cost

• Proposal: Costs more because creditors receive partial repayment.
• Bankruptcy: Often cheaper, especially if income is low. High income can make bankruptcy expensive due to surplus income payments.

C. Credit rating

• Proposal: R7
• Bankruptcy: R9

The R9 rating is the lowest possible score.

D. Duration on credit file

• Proposal: Stays for length of proposal + 3 years.
• Bankruptcy: Stays for 6–7 years after discharge (longer for repeat bankruptcies).

E. Public record

Both appear in the public bankruptcy and insolvency records.

8. Consumer proposal vs consolidation loan

A consolidation loan is not a form of debt settlement.
It’s simply refinancing — moving multiple balances into one loan.

When consolidation works

• You still have decent credit
• Your income is stable
• You qualify for a reasonable interest rate
• You haven’t fallen into collections

Where proposals are different

• You don’t need a strong credit score
• You don’t need approval from a bank
• You reduce the total amount you owe, not just restructure it

People often attempt consolidation first. If they are denied or the rate is too high, proposals become the next consideration.

9. Consumer proposal vs credit counselling programs

A lot of Canadians mix these up, but they are completely separate solutions.

Credit counselling (Debt Management Plan)

• Not legally binding
• Interest may be reduced, not erased
• Full balance must still be repaid
• Does not cover CRA debt

Consumer proposal

• Legally binding
• Interest stops
• Total debt reduced
• CRA included
• Collections stop by law

Credit counselling is a good tool for moderate debt. Proposals are for heavier debt situations where repayment in full is unrealistic.

10. The advantages of a consumer proposal

A proposal has several benefits that make it stand out from other options.

1. You keep your assets

Homes, cars, investments, and personal belongings stay protected.

2. Payments are stable and predictable

Your trustee can’t raise the amount later unless you request changes.

3. Interest stops completely

This alone saves many people thousands of dollars.

4. Avoids bankruptcy

Many people file proposals specifically to avoid the long-term effects of bankruptcy.

5. Stops wage garnishments

If CRA or a creditor has already begun garnishing wages, filing a proposal stops it immediately.

6. Covers tax debt

This is important. A proposal is one of the only tools that reduces CRA tax debt legally.

11. The disadvantages of a consumer proposal

It’s important to understand the drawbacks clearly before deciding.

1. It is still a serious mark on your credit

You receive an R7 rating. Lenders view this as a sign of significant repayment difficulty.

2. Long commitment

A five-year payment plan requires consistency. Income disruptions can cause problems.

3. Missing payments can annul the proposal

If you fall more than three months behind, the proposal is cancelled and creditors regain their full rights.

4. Doesn’t include all debts

Child support, secured debts, and recent student loans remain.

5. More expensive than bankruptcy

If income is low and assets are limited, bankruptcy may cost less.

12. CRA tax debt and consumer proposals

Many Canadians file proposals because of tax debt alone.

CRA does accept consumer proposals

The government frequently agrees to settlements if the offer is reasonable. CRA becomes bound by the proposal once it is accepted.

Why CRA accepts proposals

• They receive structured payments
• They avoid costly legal action
• It provides guaranteed recovery

Tax debt included

• Personal income tax
• HST/GST
• Penalties
• Interest
• Payroll remittances for sole proprietors

CRA collections stop the moment the proposal is filed.

13. Cost breakdown: how trustees are paid

There are no upfront fees.

Trustees receive:

• A filing fee
• A percentage of each payment
• A completion fee

These fees are taken from the payments you make, not added on top.
That means if your proposal is $300 per month, you pay $300. You do not pay more.

On average, trustees receive roughly 20% of total payments.

14. How credit scores are affected

A consumer proposal results in an R7 rating.
This rating tells lenders you filed a formal repayment plan and did not pay debts as originally agreed.

How long does it stay?

• During the proposal (usually 3–5 years)
• Plus 3 years after completion

This means the total presence on your file is usually 6–8 years, depending on your repayment term.

Rebuilding after a proposal

People often start with:

• A secured credit card
• A small-limit mobile phone plan
• Subscriptions reported to bureaus
• Timely payments on all bills

Lenders begin opening doors again earlier than most expect.

15. Provincial differences

Even though proposals are federal, provincial circumstances influence acceptance rates and budget capacity.

Ontario

Ontario sees the highest number of filings.
The mix of debt is often credit cards, unsecured lines of credit, and tax debt.
Cost of living pressures in Toronto and Ottawa frequently push people toward proposals.

Alberta

Calgary and Edmonton experience higher fluctuations in income due to energy sector employment cycles.
Proposals are often used as a stabilizing tool when income drops unexpectedly.

British Columbia

High housing costs in Vancouver and Victoria reduce disposable income, making repayment plans tight.
Creditors in BC often accept lower monthly amounts but may expect longer terms.

Atlantic Canada

Lower average household incomes often mean proposals run the full five years with modest monthly payments.

16. When a consumer proposal makes sense

A proposal is usually a good fit when:

• You can’t pay your debt in full, even over a long period.
• Your income can cover essential expenses but not debt payments.
• You want to avoid bankruptcy.
• You have assets you want to protect.
• You have significant CRA tax debt.
• Collection calls or wage garnishments have started.
• Consolidation loans are not an option.

People often choose proposals when their situation is serious but they still have stable income.

17. When a consumer proposal is the wrong choice

Even though proposals are powerful, they’re not suitable for everyone.

1. Income is unstable

If you cannot reliably make monthly payments, the risk of annulment is high.

2. Debt is very small

If total debt is under $10,000, a proposal may be overkill.

3. Most debt is secured

Mortgages and car loans cannot be reduced through proposals.

4. Student loan is under 7 years old

It won’t be discharged.

5. Bankruptcy would cost dramatically less

Sometimes bankruptcy is financially healthier.

18. Examples of proposal amounts in real life

These examples illustrate how proposals reduce debt in practice.
(These are simplified approximate figures.)

Example: Ontario — credit card and tax debt

• Debt: $48,000
• Income: $4,000/month
• Offer: $300/month for 48 months = $14,400
• Debt forgiven: ~$33,600

Example: Alberta — job loss and high-interest loans

• Debt: $29,000
• Offer: $175/month for 60 months = $10,500
• Debt forgiven: ~$18,500

Example: BC — CRA debt + line of credit

• Debt: $65,000
• Offer: $22,000 total over 5 years
• Debt forgiven: ~$43,000

19. Comparison table: consumer proposal vs alternatives

Feature	Consumer Proposal	Bankruptcy	Consolidation Loan	Credit Counselling
Total debt	Reduced	Eliminated	Same	Same
Credit impact	R7	R9	Depends on credit	R7
Assets kept	Yes	Some risk	Yes	Yes
CRA debt	Included	Included	Not included	Not included
Term	Up to 5 years	9–36 months	Varies	2–5 years
Interest	0%	0%	Varies	Reduced
Who administers	LIT	LIT	Lender	Non-profit

20. Frequently Asked Questions

What is the downside of a consumer proposal?

It hurts your credit (R7), takes years to complete, and requires strict payment discipline. Missed payments can annul it. Some debts cannot be included.

How does a consumer proposal work?

A trustee creates a repayment offer. Creditors vote. If accepted, you make fixed payments. Remaining debt is discharged once the term is complete.

How much does a consumer proposal cost in Canada?

There are no upfront fees. Whatever amount you agree to pay is the full cost. Trustee fees come from that amount.

Will CRA accept a consumer proposal?

Yes. CRA regularly accepts proposals. Once filed, CRA must stop collections and interest.

Is it true that after 7 years your credit is clear?

Not exactly.
A consumer proposal stays for the duration of the proposal plus three years.
This usually totals 6–8 years, depending on the repayment term.