By Jason Williams, Personal Finance Editor at Loanspot.ca · Published May 2024 · Last updated June 2026
Drowning in debt and wondering how a consumer proposal works? A consumer proposal is a legally binding agreement, filed through a Licensed Insolvency Trustee, that lets you repay part of what you owe over up to five years — interest-free — while stopping collection calls and protecting you from bankruptcy. Here is the consumer proposal process in Canada step by step, who qualifies, the pros and cons, and the alternatives to weigh first.
When debt becomes unmanageable, a consumer proposal is one of the most powerful legal tools Canadians have to regain control — short of declaring bankruptcy. It can dramatically reduce what you owe and freeze the interest, all while keeping your assets. But it is a formal insolvency process with real consequences for your credit, so it is worth understanding exactly how it works before you commit.
This guide explains the process from first consultation to final discharge. At Loanspot.ca we are not a trustee and we do not file proposals — only a Licensed Insolvency Trustee can do that — but we help Canadians understand their options, including whether a simpler step like a debt consolidation loan could solve the problem first.
What a Consumer Proposal Is
A consumer proposal is a legally binding agreement between you and your creditors, made under the federal Bankruptcy and Insolvency Act and administered by a Licensed Insolvency Trustee (LIT). You agree to repay a portion of your unsecured debt — often a significant reduction — in affordable monthly payments over a maximum of five years, with no interest added.
It is available to individuals who owe up to $250,000 in unsecured debt (excluding the mortgage on a principal residence). Crucially, it lets you keep your assets, including your home and car, which is the main reason many people choose it over bankruptcy. Once accepted, it covers debts like credit cards, personal loans, lines of credit, and tax debt.
How the Consumer Proposal Process Works, Step by Step
The consumer proposal process follows a clear, regulated path from start to finish:
- Free consultation with an LIT. A Licensed Insolvency Trustee reviews your income, debts, and assets and explains whether this is your best option.
- Building the offer. The trustee helps you work out an affordable monthly amount and the total you can realistically repay — usually far less than the full balance.
- Filing the proposal. The trustee files the proposal with the Office of the Superintendent of Bankruptcy, which makes it official.
- Automatic stay of proceedings. The moment it is filed, creditors must stop collection calls, wage garnishments, and legal action against you.
- Creditor review and vote. Creditors have 45 days to accept or reject. If those holding a majority of the debt accept, it is binding on all of them.
- Making your payments. You make the agreed monthly payments through the trustee, who distributes the funds to creditors.
- Credit counselling. You complete two financial-counselling sessions designed to help you avoid future debt trouble.
- Certificate of full performance. Once you finish the payments, the trustee issues a certificate confirming the debt covered by the proposal is legally cleared.
You can verify how the process is regulated through the Office of the Superintendent of Bankruptcy, the federal body overseeing insolvency in Canada.
Who Qualifies for a Consumer Proposal
A consumer proposal is designed for people who cannot keep up with their debts but still have some ability to pay. You generally qualify if you:
- Owe between roughly $1,000 and $250,000 in unsecured debt, not counting the mortgage on your home.
- Are insolvent — unable to pay your debts as they come due.
- Have steady income to support the agreed monthly payments.
- Are a Canadian resident or have assets and debts in Canada.
Those who benefit most are people with a reliable income who are overwhelmed by unsecured debt and want to avoid bankruptcy while protecting their home and other assets. An LIT will confirm your eligibility during the free consultation.
Pros and Cons of a Consumer Proposal
Like any major financial decision, this option has clear trade-offs. The advantages are significant:
- You repay less than you owe, often a substantial reduction, with all interest frozen.
- Collection calls and garnishments stop as soon as it is filed.
- You keep your assets, including your home and vehicle.
- Predictable payments on a single monthly schedule, with no surprises.
The drawbacks are real and worth weighing carefully:
- Credit impact. A consumer proposal is noted on your credit report (rated R7) and typically stays for three years after you complete it, making new credit harder to get in the meantime.
- It is public record. The filing is recorded in the insolvency register.
- It is binding. Once accepted you must keep up the payments, or the proposal can be annulled.
For many people the relief outweighs these downsides — but only if a lighter option cannot solve the problem first.
How Much Does It Cost?
One of the most reassuring things about this route is that you do not pay a separate, upfront fee to the trustee. The Licensed Insolvency Trustee’s fees are regulated by the federal government and are paid out of the monthly payments you already agree to make — not on top of them. In other words, the amount you negotiate is the amount you pay, full stop.
Your total cost is simply the agreed sum spread over the term, with no interest added. For example, if your creditors accept a repayment of $12,000, you might pay around $200 a month for five years — and the trustee’s regulated fee comes out of that $12,000 rather than being charged to you separately. Because the figure is fixed and interest-free, you know your exact cost from day one, which is a major reason this option is more predictable than juggling high-interest debts. Your trustee will lay out the full numbers in writing before anything is filed, so always ask for that breakdown during your free consultation.
Consumer Proposal vs. the Alternatives
A consumer proposal sits between informal debt management and full bankruptcy. Before filing, compare it with the other routes:
- Debt consolidation loan. If you can still qualify, rolling your debts into one lower-interest loan keeps your credit largely intact and avoids an insolvency filing. This is often the best first step — see how debt consolidation works.
- Debt management plan. A non-profit credit counsellor negotiates reduced interest with creditors; it is informal and not legally binding.
- Bankruptcy. A last resort that can clear most debts but may require surrendering some assets and carries a heavier, longer credit impact than a consumer proposal.
The right choice depends on how much you owe, your income, and whether you can still access affordable credit. If consolidation is within reach, it is usually worth trying before a formal proposal. Compare your borrowing options first, and speak with an LIT if your debt is beyond what a loan can fix.
Rebuilding Credit Afterward
Completing your proposal is a genuine fresh start. Your covered debts are cleared, and you can begin rebuilding your credit right away. A few steps speed that recovery:
- Get a secured credit card and pay it off in full every month to show new, positive history.
- Pay every bill on time, since payment history is the biggest driver of your score.
- Build a small emergency fund so the next surprise does not send you back into debt.
- Check your credit report to confirm the proposal is recorded correctly and drops off on schedule.
Many Canadians rebuild a healthy score within a couple of years of finishing their proposal. The habits you learn during the process — budgeting, living within your means, and steady repayment — are exactly what keep you out of trouble long term.
Frequently Asked Questions
How long does a consumer proposal last?
Up to five years. You can pay it off sooner with no penalty, and once your payments are complete the trustee issues a certificate of full performance clearing the covered debt.
Will a consumer proposal stop collection calls?
Yes. As soon as the proposal is filed, an automatic stay of proceedings legally requires creditors to stop collection calls, wage garnishments, and lawsuits related to the included debts.
How much of my debt do I repay?
It varies, but a consumer proposal usually lets you repay a portion of what you owe — often a significant reduction — with no interest. The exact amount is negotiated with your creditors through your Licensed Insolvency Trustee.
Does a consumer proposal hurt my credit?
Yes. It is noted on your credit report with an R7 rating and generally stays for three years after completion. That said, you can start rebuilding right away with a secured card and on-time payments.
Can I keep my house and car?
Generally yes. Keeping your assets, including your home and vehicle, is one of the main advantages of this route over bankruptcy, as long as you stay current on any secured loans like your mortgage or car loan.
Is a consumer proposal better than a debt consolidation loan?
Not always. If you still qualify for an affordable debt consolidation loan, it usually protects your credit better and avoids an insolvency filing. A consumer proposal is for when your debt is beyond what a loan can realistically fix.
A consumer proposal can be a lifeline when debt becomes unmanageable — reducing what you owe, freezing interest, and protecting your assets — but it is a formal process best entered with full understanding and professional advice. Before you file, see whether debt consolidation could solve the problem, and compare your borrowing options.
Not sure a proposal is right? Compare it with what debt consolidation is and when it is a good idea.
This article is for general information only and is not legal or financial advice. A consumer proposal can only be filed through a Licensed Insolvency Trustee; rules and outcomes vary by situation. Loanspot.ca does not file proposals or make lending decisions. Consult a Licensed Insolvency Trustee for advice on your circumstances.
