Top FAQs on Consumer Proposals and Insolvency

If you’re facing insolvency, bankruptcy doesn’t have to be the only solution. A consumer proposal can help you take control of your debt and pay less than what you originally owed. Filing a consumer proposal can save you from the effects of bankruptcy or unresolved debt.
We answered the consumer proposal FAQs below to empower you to take control of your finances and eliminate debt smoothly.

What Is a Consumer Proposal?

A consumer proposal is an offer you make to your creditors to settle your unsecured debt(s) for less than the current amount.

This debt management solution is made possible through the Bankruptcy and Insolvency Act, and consumer proposals are binding offers filed through a Licensed Insolvency Trustee like Harris & Partners. The goal is to settle your unsecured debts for a lower amount and/or to work out a payment plan to handle outstanding debt.

If accepted, you may repay your debt in a lump sum or make monthly payments over a specified term.

On the plus side, a consumer proposal can:

• Reduce the total debt you owe
• Protect you from creditors/debt collectors
• Help you avoid bankruptcy
• Let you keep your assets 
• Help you avoid additional interest after filing your proposal
• Achieve flexible payment terms

However, these arrangements also have certain drawbacks, such as:

• Negatively impacting your credit history for up to six years after filing
• Potentially lengthening your debt repayment period
• Hurting your ability to obtain new credit
• Only covering unsecured debt, not secured debt (e.g., mortgage, auto loans)

In weighing these pros and cons, many consumers discover that consumer proposals are preferable to filing for bankruptcy, especially since their assets are protected.

What Is Insolvency?

Insolvency is a term for when someone is unable to meet their debt obligations as they come due. This can occur when your existing debt exceeds your current assets or from the inability to pay your bills in a timely manner.

Insolvency vs. Bankruptcy

Insolvency happens when an individual’s liabilities exceed their assets, meaning they owe more money than they have and cannot pay off their debt. Insolvency isn’t the same as bankruptcy. The latter is a specific legal process in which insolvent individuals declare their inability to pay their debts. 

Here’s a quick snapshot that outlines the difference between insolvency and bankruptcy:

• Scope: Insolvency isn’t a matter of public record, while bankruptcy is.
• Outcome: Insolvency is a state of financial affairs, while bankruptcy is a legal process.
• Credit Impact: Bankruptcy typically has more severe and persistent effects on credit.

In other words, insolvency is an informal status that lacks the legal and financial implications of declaring formal bankruptcy.

What Are the Differences Between a Consumer Proposal and Bankruptcy?

Consumer proposals and bankruptcy are both legal processes for handling debt. The key difference is that in a consumer proposal, you’ll negotiate a new debt plan with your creditors that allows you to repay your debt over a set period, usually five years.

With bankruptcy, your assets are seized and used to repay your creditors, and your remaining debts are discharged.

So which is the better option? Generally, bankruptcy should be considered a last resort. While you’ll discharge your debt, you’ll lose your assets in the process, and it will usually have a larger impact on your credit report.

Only choose bankruptcy if you absolutely have no way to repay your debt and can’t negotiate a settlement amount low enough, given your current financial situation.

"It is always best to explore all options before making a choice on your debt relief solution, however, it is usually recommended to try a proposal first, before proceeding to bankruptcy."

Joshua Harris, Partner & Licensed Insolvency Trustee, Harris & Partners

Long-Term Impacts on Credit

Both a consumer proposal and bankruptcy will negatively affect your consumer credit history. However, these options will affect your credit differently, with bankruptcy typically having the most dramatic impact on credit scores.

How Long Will a Consumer Proposal Be on My Credit?

Consumer proposals will be listed on your credit score for either three years from the completion of the payments or six years from your filing date, whichever is sooner. 

During your repayment period, your credit report will be assigned an “R7” rating, indicating that you’re making consumer proposal payments through a consumer proposal.

How Long Will a Bankruptcy Be on My Credit?

In Canada, the length of time that bankruptcy remains on your credit report depends on whether it’s your first or second bankruptcy. First-time bankruptcies will remain on your report for six to seven years following the discharge, depending on your province, while second-time bankruptcies will remain on your credit report for 14 years.

Impacts on Your Existing Assets

One of the main reasons many people elect to file a consumer proposal is that it doesn’t affect their assets the same way filing bankruptcy does. As long as you’re capable of making monthly payments to repay your consumer proposal, what you own will remain yours.

What Happens to My Assets in a Consumer Proposal?

With a consumer proposal, you’ll negotiate with your unsecured creditors for a lower debt settlement, then submit a lump-sum payment or work out a monthly payment schedule that allows you to pay off your debt in a matter of years.

Your assets will be fully protected — your creditors can’t touch anything apart from the consumer proposal payments you submit.

What Happens to My Assets in Insolvency?

Insolvency is an informal state of being unable to repay your debts. Your assets aren’t in direct jeopardy when you’re insolvent, but if you file bankruptcy, your assets can be seized and then liquidated to help discharge your debt.

That said, certain assets are exempt, though the amount/value varies by province. Exemptions generally include:

• Personal clothing
• Tools of the trade
• Motor vehicles (value varies by province)
• Household furnishings/appliances
• Retirement accounts
• Life insurance policies

Many provinces set limits on these assets, with some also exempting a certain amount of farm property acreage from seizure.

How Do I Rebuild My Credit After a Consumer Proposal or Bankruptcy?

Once you repay your debt through a consumer proposal (or discharge debt through bankruptcy), it will be necessary to rebuild your credit. This can take time, so it’s important to develop sound financial habits that you can maintain over the long term. 

You can improve your credit score by:

• Paying your bills on time each month
• Automating your bills to ensure on-time payments
• Keeping your credit card balances low
• Avoiding new credit card applications
• Becoming a joint cardholder with another individual
• Checking your credit report for errors

Enrolling in credit counselling sessions can deepen your understanding of sound financial principles and provide you with tips that you can use to manage your bills, catch up on debt payments, and more.

Is My Spouse Liable for My Debts?

Generally speaking, your spouse isn’t liable for any debts you’ve personally incurred. However, if you’ve both taken on a loan together, you’ll be jointly responsible for the debt.

If this happens, you can file a joint consumer proposal, which allows both parties to negotiate a shared debt. Otherwise, Canada’s privacy laws prevent creditors from disclosing details to your spouse, even if one party files a consumer proposal. If you file for bankruptcy, this filing will become a matter of public record.

While one spouse may not be liable for another’s debt, financial gifts from a debtor may influence your tax liability.

According to the Canada Revenue Agency (CRA), if a debtor transfers money or property to you, the CRA can collect this debt under section 160 of the Income Tax Act. In other words, if you receive a gift from a debtor (including your spouse), the CRA may seize these assets once they’ve been transferred to you.

Overcome Your Debt

If you have outstanding unsecured debt owing to credit cards, utility bills, personal loans, or other causes, a consumer proposal is one option that can offer a way out. Filing a consumer proposal will allow you to negotiate a lower settlement without the drastic implications of filing bankruptcy while letting you keep your assets.