Consumer Proposal in Canada (2026): The Bankruptcy Alternative

Consumer proposals have become one of the most common ways Canadians deal with unmanageable debt — over 130,000 are filed every year. Less drastic than bankruptcy, more powerful than informal debt settlement. But still serious. Here’s what you actually get and what it costs.

What a consumer proposal actually is

A consumer proposal is a legally-binding agreement between you and your unsecured creditors (credit card companies, banks holding lines of credit, payday loan companies, etc.). You offer to pay back a portion of what you owe — typically 20-70% — over a fixed period of up to 5 years. Creditors vote on the proposal. If creditors holding the majority of debt accept, it’s binding on ALL creditors, even the ones who voted no.

Only a Licensed Insolvency Trustee (LIT) can file a consumer proposal. They’re federally regulated and act as a neutral administrator between you and your creditors.

What debts qualify

• Credit card balances
• Unsecured personal lines of credit
• Payday loans
• Personal loans
• Tax debts to CRA (yes, including back taxes)
• Old utility bills, phone bills sent to collections
• Medical bills (in provinces where these can become debts)
• Some student loans (only if you graduated 7+ years ago — Bankruptcy and Insolvency Act rule)

What debts do NOT qualify (you still have to pay these)

• Mortgage payments (secured by your home)
• Car loans (secured by your car)
• Child support and alimony
• Court-ordered restitution
• Government overpayments fraudulently obtained
• Student loans under 7 years old
• Property taxes (secured against your property)

Who qualifies for a consumer proposal

• You’re an individual (not a corporation)
• Your total unsecured debts are less than $250,000 (excluding mortgage on your primary residence)
• You have some income to make proposal payments (even part-time work)
• You’re insolvent — unable to pay your debts as they come due

If your debts are over $250K (excluding mortgage), you’d need a “Division 1 proposal” instead — same idea but for larger debt loads.

The typical settlement: 20-70¢ on the dollar

A Licensed Insolvency Trustee will calculate your “surplus income” (income above CRA‘s poverty-line thresholds) and your assets. Your proposal usually offers your creditors slightly more than they’d get if you went bankrupt. Real-world numbers:

You can pay the proposal off early without penalty. Many people use a tax refund or a small inheritance to pay it off in 18-24 months instead of the full 60.

How it affects your credit

• During the proposal: R7 credit rating on each affected account (R-rating scale: R1 = perfect, R9 = worst). Your overall credit score will likely drop to 500-580 range.
• After the proposal is paid off: stays on your credit report for 3 years after completion (or 6 years from filing, whichever is shorter).
• vs Bankruptcy: R9 rating, stays 6-7 years after discharge. Consumer proposal is meaningfully less damaging.

Many lenders will work with you DURING a consumer proposal for credit-rebuilding products: secured credit cards, small RRSP loans. After payoff, most people can qualify for prime credit within 2-3 years of disciplined rebuilding.

What you keep

• Your home — as long as you keep paying your mortgage
• Your car — as long as you keep paying the loan, AND its value is below the provincial exemption (~$5-15K depending on province)
• RRSPs — protected from creditors EXCEPT for contributions made in the 12 months before filing
• Pension plans + locked-in retirement accounts (LIRA) — fully protected
• RESPs — partially protected depending on province
• Household goods, tools of your trade — protected up to provincial exemption limits

The process timeline

1. Free consultation with a Licensed Insolvency Trustee (search “Licensed Insolvency Trustee + your city”). Most LITs offer free initial meetings.
2. Document gathering — income, expenses, debts, assets. 1-2 weeks.
3. Filing — LIT submits proposal to Office of the Superintendent of Bankruptcy. Creditor garnishments + collection calls STOP immediately upon filing.
4. 45-day creditor review period — they vote on accepting your proposal.
5. If accepted — make your scheduled payments for the agreed term (up to 60 months).
6. Two credit counselling sessions — required as part of the process, included in LIT fees.
7. Final discharge — debts are legally eliminated when proposal is paid off.

What it costs

Trustee fees are regulated + included in your monthly payments. You don’t pay a separate fee on top. Typical LIT fees are about 20% of what your creditors receive. The trustee takes their cut from each payment, creditors get the rest.

When a consumer proposal is the right call

• You have $10K+ unsecured debt at high interest rates (20%+ credit cards, payday loans)
• You can’t realistically pay it off in 5 years even with disciplined budgeting
• Your income is stable enough to make monthly proposal payments
• You have assets you want to protect (home, RRSP) that bankruptcy would force you to liquidate
• Debt consolidation loans aren’t available because of your credit score

When something else makes more sense

• Debt management plan through a non-profit credit counsellor — no settlement, just lower interest. Less damaging to credit. Best for $10-25K of debt you can pay off in 4-5 years at reduced interest.
• Debt consolidation loan — single loan at lower rate pays off all your debts. Best if your credit is still decent + you can qualify.
• Bankruptcy — if your debts are over $250K, you have no significant assets to protect, AND no income to support proposal payments.
• Informal negotiation — calling creditors directly. Works for older debts (1+ years) where they’d settle for 30-50¢. Doesn’t require a trustee.