How to File a Consumer Proposal in Canada When You Cannot Repay Your Debts

Who qualifies for a consumer proposal in Canada?

A consumer proposal is a formal insolvency proceeding under the Bankruptcy and Insolvency Act (BIA). It is designed for an individual who is bankrupt or insolvent but wants to make a legally binding offer to creditors instead of proceeding directly into bankruptcy.

Under section 66.11 of the BIA, a consumer debtor is an individual whose aggregate debts are $250,000 or less, excluding debts secured by the person's principal residence.

The $250,000 test is therefore not simply a limit on credit cards or other unsecured debts. Your Licensed Insolvency Trustee must determine which liabilities count toward the statutory threshold in your circumstances.

What does a consumer proposal actually do?

A consumer proposal lets you make a formal offer to your creditors to:

• pay a percentage of what you owe;
• extend the time available to repay your debts; or
• combine reduced repayment with a longer payment period.

The proposal must provide for performance to be completed within 5 years.

You make the required payments through the Licensed Insolvency Trustee, who administers the proceeding and distributes funds to creditors in accordance with the proposal and the BIA.

You must file through a Licensed Insolvency Trustee

You cannot create a legally effective consumer proposal by negotiating privately with creditors or submitting a form yourself to the federal government.

A Licensed Insolvency Trustee (LIT) is the federally regulated insolvency professional authorized to administer consumer proposals. The LIT evaluates your financial situation, explains your options, helps develop the offer, prepares the required documents and files the proposal with the Office of the Superintendent of Bankruptcy (OSB).

The OSB states that you do not need to pay another debt adviser or intermediary to gain access to an LIT. Initial consultations are commonly offered without charge, although you should confirm the trustee's terms before receiving services.

What information must you give the trustee?

You must give the LIT a complete and accurate picture of your finances. The OSB specifically identifies a complete list of assets and liabilities as one of the debtor's responsibilities.

Expect the trustee to require information about:

• all creditors and amounts owed;
• secured and unsecured debts;
• real estate and other assets;
• bank accounts, investments and vehicles;
• employment and other income;
• household and personal expenses; and
• the circumstances that led to the financial difficulties.

Current OSB guidance for trustees identifies documents such as the Statement of Affairs and Monthly Income and Expense Statement as important sources of financial information used in a consumer proposal.

How long can your repayment plan last?

The Bankruptcy and Insolvency Act requires a consumer proposal to provide for completion within a maximum of 5 years.

Your actual term may be shorter. The offer can involve periodic payments, a lump sum or another arrangement that complies with the legislation and is acceptable to creditors.

What happens to collections when the proposal is filed?

Once the LIT files the consumer proposal, the BIA provides a statutory stay of proceedings that generally stops unsecured creditors covered by the proceeding from continuing or starting collection action.

The OSB specifically explains that if creditors are garnishing your wages or have started lawsuits against you, those actions are stopped once the proposal is filed while the statutory protection remains in effect.

You also stop making payments directly to the unsecured creditors covered by the proposal and instead make the payments required under the proposal through the LIT.

This protection is not the same as eliminating every financial obligation. Secured debts and debts that receive special treatment under the BIA require separate consideration.

Do you keep your house, car and other assets?

One important difference between a consumer proposal and bankruptcy is that an accepted consumer proposal generally allows you to retain your assets, provided you continue making required payments to secured creditors.

For example, filing a consumer proposal does not automatically eliminate mortgage or vehicle-loan obligations. If you want to keep property securing a debt, you generally need to keep complying with the secured lending agreement unless another arrangement applies.

The statutory $250,000 consumer-debt limit specifically excludes debts secured by your principal residence.

Creditors have 45 days to respond

After filing, the LIT sends the proposal and required information to creditors. Creditors then have 45 days to accept the proposal or request a meeting of creditors.

If no meeting is required and the statutory conditions are satisfied, the proposal can be deemed accepted at the end of the creditor-response process.

When is a meeting of creditors required?

A meeting is not automatic in every consumer proposal.

The OSB explains that a meeting is held if one or more creditors whose proven claims represent at least 25% of the total value of proven claims request one within the 45-day period. The OSB can also direct the LIT to call a meeting within that period.

If a meeting is held, creditors can vote to accept or reject the proposal as filed or accept an altered proposal.

How does the creditor vote work?

At a creditor meeting, voting power is based on the dollar value of proven claims. The OSB states that each creditor has one vote for each dollar of its proven claim.

If the required majority accepts the proposal and the court approval stage is completed, the consumer proposal becomes binding in accordance with the BIA.

Is court approval always required?

Once a consumer proposal has been accepted or deemed accepted, the OSB or another interested party has 15 days to ask the LIT to apply to court for review.

If nobody requests court review during that period, the proposal is deemed approved by the court. If review is requested, the court can consider whether the proposal should be approved.

Which debts are covered by an accepted proposal?

An accepted or deemed-accepted proposal that is approved or deemed approved by the court is binding on creditors for unsecured claims and on secured claims for which the prescribed proof of claim has been filed, subject to the BIA.

However, certain liabilities listed in section 178(1) of the BIA receive special treatment. A consumer proposal does not release you from one of those particular debts unless the proposal explicitly compromises that debt and the creditor concerned actually votes in favour of accepting that compromise.

This can matter for liabilities such as certain support obligations, fraud-related debts, court fines and some student-loan debts. Your LIT should determine how each of your debts is treated before you rely on the proposal as a solution.

How much does a consumer proposal cost?

There is not one simple public application fee that you independently pay to the OSB to file your proposal. Instead, the administrator's fees and expenses are federally regulated and must be provided for in the proposal.

Rule 129 of the Bankruptcy and Insolvency General Rules currently provides for administrator fees and expenses including:

• $750 payable when a copy of the consumer proposal is filed with the official receiver;
• $750 payable when the proposal is approved or deemed approved by the court;
• 20% of money distributed to creditors under the proposal;
• prescribed counselling costs;
• the prescribed consumer-proposal filing fee;
• the applicable registrar fee; and
• applicable federal and provincial taxes.

These regulated administration amounts form part of the proposal process. Discuss the complete payment structure with the LIT before signing so you understand exactly what you will pay under the proposed terms.

You must complete two counselling sessions

A consumer debtor must participate in 2 insolvency counselling sessions as part of completing the proposal obligations.

Under the current OSB counselling directive, the first session is conducted between 10 and 90 days after filing the consumer proposal. The second session takes place at least 30 days after the first session and before the LIT can issue the certificate of full performance.

The counselling is intended to address financial management and help reduce the risk of future insolvency.

What happens if you miss payments?

Missing payments can cause the consumer proposal to be deemed annulled.

For a proposal requiring payments monthly or more often, the BIA provides for deemed annulment when you are in default by an amount equal to or greater than 3 payments, unless the court has already ordered otherwise or an amendment was filed before annulment.

If payments are scheduled less frequently than monthly, deemed annulment can occur when a payment remains in default for 3 months.

Once a proposal is annulled, creditor rights can revive for unpaid balances, although the BIA contains procedures that can allow revival in certain circumstances. Contact your LIT before payment problems reach this stage.

Can you change the proposal after filing?

A consumer proposal can potentially be amended through the statutory process. This can be important if your financial circumstances materially change and the existing terms are no longer workable.

An amendment is not simply an informal agreement to skip payments. It must be handled through your LIT and is subject to the applicable creditor and BIA procedures.

What happens when you finish the proposal?

Once you have fulfilled the terms of the proposal and completed the required counselling, you receive a certificate of full performance.

The OSB recommends keeping all documents relating to your proposal and sending a copy of the certificate to the major credit-reporting agencies to help ensure that your credit record is updated.

How does a consumer proposal affect your credit?

The Office of the Superintendent of Bankruptcy reports consumer proposal filings and completion information to Canada's major credit-reporting agencies.

Current OSB guidance states that Equifax removes a consumer proposal from a credit report 3 years after the proposal is completed. TransUnion removes it either 3 years after completion or 6 years after the proposal was signed, whichever occurs sooner.

Filing also becomes part of Canada's public bankruptcy and insolvency records.

Consumer proposal versus bankruptcy

Both consumer proposals and bankruptcy are formal proceedings governed by the Bankruptcy and Insolvency Act, but they work differently.

With a consumer proposal, you negotiate a legally binding repayment arrangement with creditors and generally retain your assets while complying with secured-debt obligations. The proposal can run for up to 5 years.

Bankruptcy involves a different statutory process involving the debtor's property, income and discharge. A consumer proposal that is rejected does not automatically mean you must declare bankruptcy; OSB guidance says you may amend and resubmit the proposal, consider another solution or choose bankruptcy.

Related debt and tax procedures

If tax penalties and interest are part of your financial problem, a consumer proposal is different from asking the tax authority for discretionary relief. Helpydo separately explains how to ask the CRA to cancel or waive tax penalties and interest.

If student loans are a significant part of your debt, repayment assistance is also a separate federal student-loan option. See how to apply for Canada Student Loan Repayment Assistance before assuming that insolvency is the only available route.

Common consumer proposal mistakes

• Using an unlicensed debt company as an unnecessary intermediary: a Licensed Insolvency Trustee is the professional authorized to administer the proposal.
• Leaving out assets or creditors: you must disclose your full financial position to the LIT.
• Assuming every debt disappears: certain section 178 debts receive special statutory treatment.
• Ignoring secured payments: keeping a financed home, vehicle or other secured asset can require continued payments to the secured creditor.
• Agreeing to an unaffordable payment: the proposal must be sustainable for its full term.
• Missing three monthly payments: this can trigger deemed annulment and loss of creditor protection.
• Skipping counselling: both counselling sessions are mandatory obligations.
• Assuming filing is private: proposals are recorded in the public federal insolvency system and reported to credit bureaus.