Consumer Proposal

What is a consumer proposal?

Here’s a video that explains the consumer proposal process:

A consumer proposal is a legally binding deal between you and the people you owe money to.  Here’s an example:

Fred and Brenda Jones owe $50,000 on credit cards, lines of credit, payday loans, and income taxes.  They have jobs, but they don’t make enough to make all of the minimum payments.  They own a home, but it has a large mortgage, so they can’t refinance.  They don’t want to file bankruptcy, because they are afraid they might lose their home, and they don’t like the idea of bankruptcy.

They can afford payments of $350 per month, so they offer a proposal to their creditors where they will pay $350 per month for five years, and in return the balance of their debts will be written off.  The creditors accept the proposal, so now Fred and Brenda have one monthly payment to deal with all of their unsecured debts.  They can afford to keep paying their mortgage, so they can keep their house.

Why would the creditors accept a proposal of $350 per month for five years?  That’s only $21,000 on $50,000 in debt.  The answer is simple: the creditors don’t want Fred and Brenda to go bankrupt, because the creditors might get even less.  Something is better than nothing.

Why would Fred and Brenda decide to file a consumer proposal, instead of just filing bankruptcy?

Certainty.  With a consumer proposal you know exactly how much you have to pay each month; it never changes.  With a bankruptcy in Canada you are required to report your income to your trustee each month, and if you earn more, you pay more; it’s called surplus income.  You also don’t lose your house, RRSP, or RESP when you file a consumer proposal.

If you have no assets, and low income, personal bankruptcy may still be your best choice.  But if your income is expected to increase, or if you own assets, a consumer proposal is a bankruptcy alternative you should consider.