A consumer proposal is a legally binding debt settlement under Canada's Bankruptcy and Insolvency Act that lets you repay a portion of your unsecured debts over up to five years, under the administration of a Licensed Insolvency Trustee. It stops most collection action and is reported on your credit file, so understanding the eligibility rules, creditor vote, and credit consequences before filing matters.

A consumer proposal is a formal, legally binding offer to your unsecured creditors to settle your debts for less than you owe, administered under Canada's Bankruptcy and Insolvency Act. It is not a loan, not a debt consolidation program, and not a private negotiation with each lender: once accepted by the required majority of creditors, it binds all unsecured creditors included in the proposal.

It is designed for people who owe relatively modest amounts, are insolvent, and can afford some repayment but not the full balance on the original terms. The proposal usually runs for up to five years. During that time, you make payments to a Licensed Insolvency Trustee (LIT), who distributes the money to creditors. In exchange, collection calls, lawsuits, and wage garnishments for unsecured debts generally stop. The Financial Consumer Agency of Canada explains the wider landscape of consumer loans and borrowing, which is useful context if you are weighing a proposal against other debt options.

The consumer proposal process, step by step

Consumer proposals follow a structured legal process. The exact steps can vary slightly with your file, but the sequence below is the standard path.

1. Meet with a Licensed Insolvency Trustee. The LIT reviews your income, expenses, assets, debts, and financial history. They assess whether a consumer proposal is possible and what payment you can afford. This first meeting is confidential.
2. The LIT prepares the proposal. Your offer may be a monthly payment over up to five years, a lump sum, or a combination. The proposal explains what creditors will receive, how the money will be distributed, and what happens to your assets.
3. You file the proposal. Once you sign, the LIT files it with the Office of the Superintendent of Bankruptcy. Filing creates a stay of proceedings, which generally stops unsecured creditors from suing, garnishing wages, or continuing collection action.
4. Creditors are notified and vote. Creditors receive the proposal and can vote on it. If a meeting is requested, the creditors vote at that meeting. To pass, the proposal must be accepted by creditors representing a majority of the dollar value of the unsecured claims that vote.
5. You make payments to the LIT. If accepted, you make the agreed payments. The LIT distributes the funds to creditors according to the proposal. You also complete two mandatory credit counselling sessions.
6. The proposal is completed and you receive a certificate. After the final payment and counselling, the LIT issues a certificate of completion. Debts included in the proposal are then legally settled, and the credit bureaus are updated.

If creditors reject the proposal, you and the LIT can revise the offer, negotiate, or consider other options. A rejected proposal does not automatically mean bankruptcy, but it does mean the protection of the stay may end unless another filing is made.

What a consumer proposal can and cannot include

A consumer proposal is for unsecured debts. Typical examples include credit card balances, lines of credit, personal loans, payday loan balances, utility arrears, and past-due accounts. The total debt limit for a consumer proposal is $250,000, not counting debts secured by your principal residence. If you owe more than that, you may need a different insolvency filing, such as an ordinary proposal or bankruptcy.

Secured debts, such as a mortgage or a car loan, are not automatically included. If you want to keep the asset, you normally keep paying the secured lender as agreed. If you surrender the asset, any shortfall after the sale may become an unsecured claim in the proposal. Student loans have special treatment under the insolvency rules; in general, government student loans may not be released if you have not been out of school for seven years, so you should confirm your situation with an LIT.

Joint debts are another important exception. If you and another person owe money together, your consumer proposal can deal with your share, but the creditor may still pursue the other person for the full amount. That is why joint borrowers and co-signers need to understand their exposure. The FCAC outlines the disclosure rules for joint borrowers, and cosigners.ca has a separate guide on what it means to be a co-signer.

What it does to your credit

A consumer proposal is a serious negative item on your Canadian credit report. It tells future lenders that you did not repay your debts as originally agreed, even though you resolved them through a legal process. The impact on your credit score can be significant, and the proposal may make it harder to qualify for new credit cards, loans, or a mortgage while it is active.

The credit reporting agencies, Equifax and TransUnion, each publish their own retention periods for consumer proposals. In general, the record stays on your file for several years and is visible to lenders. It is commonly removed about three years after the proposal is completed, but the exact timing depends on the bureau and whether you complete the proposal. If you do not complete it, the negative information can remain longer. The FCAC has a plain-language explanation of credit reports and credit scores that explains how items like proposals are viewed.

After completion, rebuilding credit takes time and consistency. Using a secured credit card responsibly, keeping balances low, and making every payment on time can gradually improve your score. A consumer proposal does not permanently bar you from borrowing, but it does change the terms and interest rates you are likely to be offered. If you are comparing options, cosigners.ca's guide to bad credit loans in Canada discusses how lenders assess damaged credit.

Costs, payments, and legal protection

Consumer proposal fees are regulated, and the LIT is generally paid from the payments you make into the proposal rather than requiring the full fee upfront. The exact cost depends on the complexity of your file and the terms of the proposal. You should ask the LIT for a written explanation of fees, disbursements, and what happens if you miss a payment.

Missing payments can put the proposal in default. The LIT may give you a chance to catch up, but if the default continues, the proposal can be annulled. If that happens, creditors may resume collection action, and the debts may no longer be settled. This is one reason a realistic payment amount matters more than an aggressive offer that you cannot sustain.

The legal protection during an accepted proposal is significant. For unsecured debts included in the filing, creditors cannot sue you, garnish your wages, or seize your bank account without court permission. Secured creditors may still enforce their security if you fall behind on a mortgage or car loan. The stay does not cover debts you incurred after the proposal was filed, nor does it cover certain obligations such as court-ordered support payments or debts arising from fraud.

Who a consumer proposal may suit

A consumer proposal may be worth exploring if you have steady income, owe less than the consumer proposal debt limit, and cannot repay your unsecured debts on their current terms. It can be a middle path between informal debt settlement and bankruptcy. It may not be suitable if your debts are mostly secured, if you can repay everything with a disciplined budget, or if you have no ability to make any meaningful payments.

Before filing, compare the proposal with other options: debt consolidation, credit counselling, a debt management plan, or bankruptcy. Each has different costs, credit consequences, and legal effects. A Licensed Insolvency Trustee can explain all of them, and the FCAC's loans and credit resources can help you ask better questions. You can also estimate how regular payments fit your budget with cosigners.ca's loan payment calculator.

Common mistakes to avoid

• Waiting too long. Missed payments, garnishments, and lawsuits can make your financial situation harder to fix. Earlier advice usually gives you more choices.
• Using a debt consultant instead of a Licensed Insolvency Trustee. Only an LIT can file a consumer proposal. Some private companies charge fees for services an LIT provides under the regulated insolvency process.
• Ignoring co-signers and joint borrowers. Your proposal may settle your obligation, but the other person can still be pursued. They need to understand the risk before you file.
• Proposing payments you cannot afford. A low offer that fails after six months can leave you worse off than a realistic offer that completes.
• Not checking your credit reports. Errors are common. Review your reports from Equifax and TransUnion before and after the proposal so you can correct mistakes.
• Borrowing during the proposal without a plan. New credit can be expensive, and it may complicate your budget and your proposal payments.

A consumer proposal is not a quick fix, but for some Canadians it is a structured, legally protected way to deal with unmanageable unsecured debt. The key is to get regulated advice, understand the credit consequences, and choose a payment plan you can actually finish.