This article covers several strategies for dealing with overwhelming consumer debt. How common is this problem? In 2018 alone, over 125,000 Canadian consumers filed for either bankruptcy or consumer proposal. That’s enough people to fill a small city! Rest assured that, like you, these were honest people who found the payments on their credit accounts to be beyond their means, for a host of reasons.
If your situation is not serious enough to require bankruptcy, several options are available. Among them are consumer proposal and credit counselling.
What Is Consumer Proposal?
Consumer proposal is a legally binding process that provides immediate protection from your creditors, and allows you to discharge your debts over time – typically five years. The proposal, which your creditors vote to accept, is approved by the court. When you complete your proposal payments, your debts are legally discharged and your creditors may not approach you for any additional payments.
In turn, you are legally required to make your payments regularly for the full term of the proposal, or the proposal will be annulled and you will lose protection from your creditors.
Only a Licensed Insolvency Trustee can file a consumer proposal on your behalf. Most consumer proposals are accepted by the creditors.
What Is Credit Counselling?
Consumer credit counselling comprises several separate processes and strategies – the term can be confusing!
Every province has non-profit credit counselling agencies, which provide advice to those feeling overwhelmed by consumer debts. You may come across for-profit credit counselling businesses as well.
Counsellors can advise consumers on such things as budgetting and cost-saving strategies. Some agencies offer to set up debt management plans for those feeling financial stress.
For more serious situations, credit counselling agencies may provide assistance with accessing debt consolidation loans from banks, and consolidation orders in the provinces that provide these.
Ways to Compare Consumer Proposal and Credit Counselling
When choosing between consumer proposal and credit counselling you can consider the following questions:
- What are the basics of consumer proposal?
- What are the basics of credit counselling?
- When are these debt elimination options available?
- What are the pros and cons of consumer proposal?
- What are the pros and cons credit counselling?
- When might credit counselling be more attractive than consumer proposal?
These questions will be addressed in the following sections.
Consumer Proposal Basics
Consumer proposal is a uniquely Canadian debt solution. Consumer proposals are regulated by the federal government’s Office of the Superintendent of Bankruptcy. In Canada, both consumer proposals and personal bankruptcies are administered by Licensed Insolvency Trustees.
A consumer proposal is intended to deal with your unsecured debts, such as credit cards, loans and lines of credit for which no collateral has been offered as security. Consumer proposal does not directly deal with secured credit such as house mortgages and vehicle leases.
Note that your secured creditors are specifically prohibited by the Bankruptcy and Insolvency Act, 66.34(1) from terminating an agreement with you just because you have filed a consumer proposal.
There are five basic steps in the consumer proposal process:
- You must meet in person with a Licensed Insolvency Trustee
- You must provide a detailed list of all your debts
- Your consumer proposal will be filed with Canada’s Office of the Superintendent of Bankruptcy
- Your creditors must approve your consumer proposal
- You must make all the required payments under your consumer proposal, and meet any other requirements
You must meet with a Licensed Insolvency Trustee
To make a consumer proposal, you must meet with a Licensed Insolvency Trustee. Your first meeting is free of charge, and is no-obligation. If you and the Trustee conclude that consumer proposal is the best option for you, you may need to make additional visits to provide and discuss information.
You must provide detailed information about all your debts
The Licensed Insolvency Trustee will instruct you to complete a document called a Statement of Affairs. This document is a detailed list of your creditors, including the amounts owing to them. It is important to list all of your relevant creditors because listed creditors will be sent a copy of this document. When they receive it, they are required by law to suspend collection activity against you.
Your consumer proposal will be filed with the Office of the Superintendent of Bankruptcy
The Licensed Insolvency Trustee will prepare your consumer proposal after reviewing your Statement of Affairs and your current financial situation, including your monthly income and living expenses. This document will set out the percentage of your debt that you propose to repay, the number of months that you propose to make monthly payments, as well as the dollar amount of your monthly payment.
When complete, your consumer proposal will be filed with the Office of the Superintendent of Bankruptcy. On the day of filing, all lawsuits against you will be stayed or suspended, with certain exceptions including suits regarding child support and spousal support.
Your creditors must approve your consumer proposal
At the same time as the Licensed Insolvency Trustee files your consumer proposal with the Office of the Superintendent of Bankruptcy, he or she will also provide a copy of your consumer proposal to your creditors.
Your creditors, listed in your Statement of Affairs, must accept or reject your consumer proposal within 45 days. Each listed creditor is entitled to one vote for each dollar of debt owed to that creditor. Creditors who do not vote are considered to have accepted the consumer proposal. Where there is a vote, a consumer proposal is approved if at least fifty-one percent of the votes cast are in favour of accepting the proposal.
All creditors are bound by the result.
Occasionally, a consumer proposal is rejected by the creditors. In this case, you and the Licensed Insolvency Trustee can discuss a modified offer to the creditors, and the Trustee can submit this for their consideration.
You must make all the required payments under your consumer proposal
Typically, under a consumer proposal an individual must make monthly payments to the Licensed Insolvency Trustee over three to five years.
It is your responsibility to make regular payments into your consumer proposal. If you miss three monthly payments, the proposal will be automatically annulled. If this happens, you will get credit for any payments you made, but you will lose all the benefits afforded under your consumer proposal, and your creditors will be free to pursue you once again.
Credit Counselling Basics
When people refer to credit counselling they are often speaking about eliminating unsecured consumer debt by enrolling in a debt management plan with a credit counselling agency.
However, there is another debt relief option called a consolidation order, or “orderly payment of debts.” This is not credit counselling, but resembles a debt management plan. Debt management plans are available as a debt relief option to Canadians across the country, whereas consolidation orders are only available to the residents of Alberta, Saskatchewan and Nova Scotia using rules contained in the Orderly Payment of Debts Regulations enacted under the federal Bankruptcy and Insolvency Act.
For Quebec residents, there is a voluntary deposit program which is very similar to a consolidation order, available through a consumer’s local courthouse.
Comparison Between Debt Management Plan and Consolidation Order
| Factor | Debt Management Plan | Consolidation Order |
| Where available | Anywhere in Canada | Limited to residents of Alberta, Saskatchewan, and Nova Scotia |
| Procedure for setting up this debt relief option | Enrollment with a credit counselling services provider | Must be approved in accordance with federal law |
| Debts to be included | Each and every unsecured consumer debt | Each and every unsecured consumer debtStudent loansMonies owing to the government |
| Suspend or stay current court proceedings against debtor | No | Yes |
| Terminate existing wage garnishments | No | Yes |
| Debtor must make monthly payments | Yes | Yes |
| Percentage of outstanding debt to be repaid | 100 % | 100 % |
| Interest to be paid on outstanding balance | To be negotiated | Fixed rate of five percent |
| Total cost to consumer to eliminate one dollar of indebtedness | Between 100 and 130 cents | A minimum of 105 cents |
| 100 percent | Repayment of original indebtedness |
| 5 percent | Fixed interest rate on outstanding balance |
In many respects, a consolidation order is a hybrid between a consumer proposal and a debt management plan. It is similar to a consumer proposal in these ways:
- Type of debts eliminated
- Level of protection from creditors
A consolidation order resembles a debt management plan in that both require that a consumer pay a minimum of 100 percent of their original indebtedness to eliminate their debt.
To compare these options in depth, we will examine the following factors:
- Credit counselling is a comparatively expensive debt relief option
- There are different types of credit counselling providers
- Care is needed in selecting a credit counselling provider
- How a debt management plan works
- How a consolidation order works (Alberta, Saskatchewan, Nova Scotia residents only)
Credit counselling is an expensive way to eliminate debt
If you decide to eliminate your debt by enrolling in a debt management plan or using a consolidation order, you are choosing a debt relief option that may be three times as expensive as a consumer proposal! Under a debt management plan, you will pay between 100 cents and 130 cents to eliminate one dollar of your debt; under a consolidation order, you will be paying a minimum of 105 cents on the dollar to eliminate one dollar of your debt. These two debt relief options do not look very attractive compared to a consumer proposal, under which it may cost as little as 35 cents to eliminate a dollar of debt.
Cost of eliminating debt using a debt management plan
Three types of cost are associated with a debt management plan arranged through a credit counselling agency:
- Your original indebtedness: You will repay 100 percent of the monies owing to your unsecured consumer creditors whose debts are included in your debt management plan – and you are required to include all of your unsecured consumer debts in your plan.
- Fees paid to your credit counselling service provider: Unless you are fortunate enough to find a credit counselling service provider that does not charge for its services, you will pay fees. These fees can add 10 to 15 percent to the total cost of your debt management plan.
- Interest charges: In some instances, a consumer will not pay any interest under a debt management plan. However, typically most or all of the creditors will continue to demand interest.
Cost of eliminating debt using a consolidation order
If you are a resident of Alberta, Saskatchewan or Nova Scotia, and you obtain a consolidation order to eliminate your debt – excluding secured debt and non-dischargeable debt – it will cost you a minimum of 105 cents to eliminate one dollar of your debt. These costs can be broken down as follows:
- Your original indebtedness: As with a debt management plan, you will repay 100 percent of the monies owing to your unsecured consumer creditors.
- Interest charges: A 5% fixed rate of interest will apply to your debts until they are eliminated under the consolidation order.
Different types of credit counselling service providers
In Canada, credit counselling agencies are regulated by provincial and territorial governments. There are three categories of credit counselling service providers:
- Credit counselling services provided by government agencies
- Non-profit credit counselling agencies
- For-profit credit counselling agencies
The most common type of credit counselling service provider in Canada is the non-profit credit counselling agency. There are, however, some credit counselling agencies which do not have non-profit status.
Take care in choosing a credit counselling agency
Typically, if you enroll in a debt management plan with a credit counselling agency you will sign an agreement setting out your rights and obligations. This document will contain details about fees for the credit counselling agency’s services. Before entering into an agreement with a credit counselling agency, make sure to do some research, including inquiring into the following:
- The reputation of the credit counselling agency
- The complaints history of the credit counselling agency
- Details about fees charged by the credit counselling agency
- To what extent, if any, you will obtain interest relief on your unsecured debts
We recommend that you do not sign an agreement with a credit counselling agency if its fees are “front-end loaded.” It is reasonable for the agency to receive a fee equal to a small percentage of your total monthly or bi-weekly payment, but unreasonable to expect a consumer to pay a large fee before any monies are paid to a consumer’s creditors. Such a request may be a sign that the agency is expecting to make a large profit from assisting you.
You should try to determine whether a credit counselling service provider is a for-profit or non-profit agency. Creditors prefer to work with government-sponsored, or non-profit, credit counselling agencies. Your creditors may decline to cooperate with your credit counselling agency if they determine that it is a for-profit agency.
How does a debt management plan at a credit counselling agency work?
If you enroll in a debt management plan, a representative from your credit counselling agency – often referred to as a “counsellor” – will contact all of your unsecured consumer creditors on your behalf. There are three purposes to this initial communication. First, the counsellor will attempt to secure your creditors’ agreement to participate in your debt management plan. Second, your counsellor will attempt to negotiate the number of months you will have to repay a particular outstanding debt. Finally, your counsellor will try to negotiate a level of interest relief with each creditor.
Once you enroll in a debt management plan, you will make regular payments to your credit counselling agency. The agency will then distribute these monies, less any fees paid to it, to your creditors. Within a few days of enrollment in a debt management plan, collection calls from creditors whose debts are included in your plan should stop.
Your enrollment in a debt management plan will not stop existing wage garnishments, nor will it stop lawsuits that have already been commenced against you. Furthermore, enrollment in a debt management plan will not prevent your secured creditors from attempting to recover monies from you if they deem this necessary.
How does a consolidation order work?
If you are a resident of Alberta, Saskatchewan or Nova Scotia, you have the option of obtaining a consolidation order. The rules governing consolidation orders are found in the Orderly Payment of Debts Regulations enacted under the federal Bankruptcy and Insolvency Act.
A debtor must include all of his or her debts – excluding secured debt and non-dischargeable debt – in their consolidation order. Under the consolidation order, he or she must repay 100 percent of his or her debts to listed creditors. Furthermore, the debtor must pay a fixed rate of five percent interest on the outstanding balance.
Under a consolidation order, a debtor makes payments to the plan administrator, and the administrator then distributes monies to the debtor’s creditors.
A consumer who obtains a consolidation order is entitled to greater protection from creditors than one enrolled in a debt management plan. When a consumer obtains a consolidation order, any lawsuits against the consumer regarding money – with certain exceptions – are suspended or stayed. The order also terminates any wage garnishments, except those involving secured creditors, child support or spousal support. A consolidation order does not provide a debtor with any protection from secured creditors.
Learn more about Debt Management Plans, and Orderly Payment of Debts (Consolidation Orders).
When Are Consumer Proposal and Credit Counselling Available?
To make a fair comparison of these debt-relief options, we need to know under what circ*mstances they are available to a consumer. The following factors come into play:
- The province in which you live
- The types of debts to be eliminated
- Limitations regarding the dollar amount that can be eliminated
- Whether or not you can cherry-pick the debts you want to eliminate
- Whether having equity in your home will prevent you from using these options
The effect of the province in which you live
Consumer proposal (arranged through a Licensed Insolvency Trustee) and debt management plans (arranged by credit counselling agencies) are available to residents throughout Canada. Consolidation orders, however, are only available to residents of Alberta, Saskatchewan and Nova Scotia. Quebec residents can obtain debt relief comparable to a consolidation order via Quebec’s Voluntary Deposit program.
Credit counselling vs. consumer proposal: types of debt that can be eliminated
The chart below lists five debt categories and identifies those debt types that can be eliminated using a debt management plan, a consumer proposal, or a consolidation order.
At the top of the chart, you will have noticed secured debt. In a secured debt arrangement, your creditor, known as a secured creditor, has collateral they can legally seize to if you fail to repay monies owing to them. Two common examples of secured debt are mortgages on homes and liens placed on vehicles that have been purchased or leased. Any debt that is not secured debt can be described as unsecured debt. Most consumer debt, including most credit cards, are unsecured debt. Unsecured debt which is not consumer debt includes the following:
- Student loans
- Monies owing to the government
- Non-dischargeable debt
Non-dischargeable debt is a category of unsecured debt which cannot be forgiven or discharged under a consumer proposal, personal bankruptcy, or consolidation order. Examples of non-dischargeable debt include:
- Child support and spousal support obligations
- Civil judgments involving fraud
- Court fines
- Award of damages by a court for sexual assault or the intentional infliction of bodily harm
The same types of debt can be included in both a consumer proposal and a consolidation order.
Limitations on the dollar amount of debt that can be eliminated
If you are interested in embarking on a debt management plan through a credit counselling agency (or in obtaining a consolidation order) there are no restrictions on the dollar amount.
In contrast, consumer proposal is:
- typically not practical if the debtor’s relevant debt is less than $10,000
- not available if the debtor owes more than $250,000, excluding mortgage debt
Availability of debt management plan, consolidation order, and consumer proposal
by dollar amount of debt
Can I cherry-pick the debts you want to eliminate?
No. Whether you eliminate your unsecured consumer debt via a debt management plan, consolidation order or consumer proposal, you cannot pick and choose which debts to eliminate. Furthermore, if you make a consumer proposal or obtain a consolidation order, you will include all of your student loans and monies owing to the government.
Will having equity in my home prevent me from using these options?
If you own real property in your own name, you might have sufficient equity to effectively disqualify you from proceeding with a debt management plan, a consumer proposal, or, where applicable, a consolidation order.
If you own real property, one or more of your unsecured consumer creditors might refuse to include its debt in your debt management plan because they believe you could sell your home or refinance it to pay your creditor.
To file a consumer proposal, you must be insolvent. If you have substantial equity in your home, and your assets including that equity amount to more dollar value than your debts, you would not satisfy this insolvency requirement and would be ineligible to file a consumer proposal. The same insolvency requirement applies to personal bankruptcy.
The Pros and Cons of Consumer Proposal
Advantages of Consumer Proposal
- A consumer proposal stops most wage garnishments against the consumer. Once your consumer proposal is filed with the Office of the Superintendent of Bankruptcy, wage garnishments against you will end except those for spousal support and child support.
- A consumer proposal stops most lawsuits against a consumer. If you make a consumer proposal that is accepted by your creditors, most lawsuits against you regarding monies owed will be stayed or suspended. Are you defending a lawsuit already? Make sure to file a consumer proposal before a judgment is registered against you. Otherwise, even an unsecured creditor may be awarded the power to register a lien against your real property – in effect, making them into a secured creditor.
- A consumer proposal stops collection activity against a consumer. Once your consumer proposal is filed with the Office of the Superintendent of Bankruptcy, all collection activity with respect to unsecured consumer debt, monies owing to the government, and student loan debt should stop.
- A consumer proposal offers the opportunity to eliminate most types of debt for as little as 35 cents on the dollar. The single most important advantage of a consumer proposal is that it affords the consumer an opportunity to eliminate unsecured consumer debt, monies owing to the government, and outstanding student loans for as little as 35 cents on the dollar by reducing the amount of the debt to be paid. Also, interest stops accruing on your debts once you have filed a consumer proposal.
- You can pay out your consumer proposal early with a lump-sum payment. When a consumer’s creditors approve a consumer proposal, a debtor will typically make monthly payments to the Licensed Insolvency Trustee for a period of three to five years. However, the consumer has the option of “paying out” the consumer proposal early if the necessary funds become available. This might come about because of funds made available from a friend or family member, or a high-paying new job. A consumer who pays out his or her consumer proposal early will be able to embark on credit repair that much sooner.
Disadvantages of consumer proposal
- It is a very inflexible, structured debt relief option. Making a consumer proposal is a formal, structured process, without much flexibility. The consumer must meet with the Licensed Insolvency Trustee in person.
- The applicant must include all of his or her debt – excluding secured debt and non-dischargeable debt – in the consumer proposal. The consumer’s creditors have the right to vote and accept or reject the consumer proposal.
- A consumer proposal is automatically annulled if a consumer becomes more than 90 days in arrears in making payments to the Licensed Insolvency Trustee. By law, if you are more than 90 days in arrears making your payments under your consumer proposal, the proposal is automatically annulled.
- You must be able to make monthly payments for three to five years. There is no point in making a consumer proposal if you are unable to make the necessary monthly payments. This means that consumer proposal may not be practical for those who do not earn a regular income or who routinely experience unemployment.
- You must include all of your debts in a consumer proposal. If you make a consumer proposal you must include all of your debts in it, except for non-dischargeable debt and secured debt. In this way, consumer proposal is similar to a debt management plan or a consolidation order.
- You can seldom eliminate your debt for less than 30 cents on the dollar. Most large creditors accept consumer proposals because with this arrangement they receive more money than if a debtor were to file or bankruptcy. In general, large companies therefore only accept consumer proposals for more than 35% of the amount owing. The percentage they will accept also depends on the consumer’s ability to pay, as determined by the Licensed Insolvency Trustee and reported in the paperwork that reaches the creditor.
The Pros and Cons of Credit Counselling
Advantages of Credit Counselling
- Some collection activity will cease. Collection activity will stop in connection with debts included in your debt management plan. Note that enrollment in a debt management plan will not stop collection activities against you in connection with secured debt, non-dischargeable debt, monies owing to the government, or outstanding student loans. If you live in Alberta, Saskatchewan or Nova Scotia, and you arrange a consolidation order, you would enjoy more robust protection from creditors. A person who obtains a consolidation order is entitled to the same level of protection from creditors as a person making a consumer proposal.
- You can reduce your monthly payments. Debt management plans and consolidation orders usually reduce the dollar amount of monthly payments to unsecured consumer creditors.
- A debt management plan is not automatically terminated if the debtor is 90 days in arrears making payments. In contrast to consumer proposal, there is no automatic annulment of a debt management plan if you are 90 days late with payments.
Disadvantages of credit counselling
- You repay creditors a minimum of 100 cents on the dollar – and often much more. A great disadvantage of a debt management plan or consolidation order is that they are relatively expensive debt relief options. If you complete a debt management plan (or a consolidation order) you will have paid a minimum of 100 cents on the dollar to eliminate a dollar of your debt – possibly almost three times what you would have paid had you filed a consumer proposal.
- If your total debt is more than $10,000, credit counselling is rarely more attractive than a consumer proposal. If your total unsecured consumer debt – or if your combined indebtedness for unsecured consumer debt, government debt and outstanding student loans – is more than $10,000, and you eliminate the debt using credit counselling options, you will pay between 100 cents and 130 cents to eliminate one dollar of your debt. In contrast, if you were to file a consumer proposal, it could cost you as little as 35 cents to eliminate a dollar of your debt.
- If your total debt is less than $10,000, credit counselling will rarely be beneficial. The odds are good that you can obtain better results by doing one of the following:
- Simply waiting until your indebtedness exceeds $10,000 and then filing a consumer proposal
- Not making any payments on selected unsecured consumer debt and relying upon the expiry of your province’s limitation period to avoid paying your debt altogether (but be prepared for creditor calls!)
- Not making any payments to selected unsecured consumer creditors until such time that you can set aside some monies and negotiate a one-time lump sum payment for less than one hundred percent of the outstanding balance as settlement in full – possibly at a substantial discount
You might not obtain interest relief from your creditors. After you enroll in a debt management plan, a counsellor from your credit counselling agency will speak to your creditors and attempt to negotiate interest relief on your accounts. There is, however, no guarantee that your creditors will agree to provide you with such relief. It is common for creditors to refuse interest relief to those debtors enrolled in a debt management plan with a for-profit credit counselling agency. In contrast, if you file a consumer proposal, interest is halted immediately.
A debt management plan will not terminate existing lawsuits brought by creditors. In contrast, both a consumer proposal and a consolidation order include a suspension or stay of proceedings against you, with certain exceptions. Your liability to your secured creditors and your liability for child support and spousal support are not affected by a debt management plan or a consolidation order.
A debt management plan will not terminate existing wage garnishments. In contrast, filing a consumer proposal or obtaining a consolidation order will terminate wage garnishments except for those arising from liability for child support and spousal support payments.
A debt management plan cannot eliminate student loans or monies owing to the government. Enrolling in a debt management plan with a credit counselling agency will not enable a consumer to eliminate student loan debt or monies owed to the government. In contrast, under a consolidation order a consumer can potentially eliminate these debts.
When Might Credit Counselling Be More Advantageous Than Consumer Proposal?
In a few very limited circ*mstances, credit counselling might be more attractive than filing a consumer proposal. In these instances, however, credit counselling is simply a bridging strategy, intended to provide immediate relief and assist in a transition to a different debt relief option.
You anticipate your income will increase dramatically sometime in the next 12 to 36 months. Some Canadians experiencing debt problems will see their incomes or their net household income rise dramatically in the next 12 to 36 months. This situation can arise in several different scenarios:
- You anticipate starting a high-paying job soon
- Improved financial situation will arise from impending marriage or cohabitation
- You anticipate receiving payment from a lawsuit
- You anticipate receiving a sizable inheritance soon
In these situations, credit counselling can be an attractive short-term strategy, providing the consumer with some protection from creditors and a reduction in monthly payments. Once the consumer’s income undergoes the anticipated increase, he or she can “drop out” of the debt management plan (or cease making payments to the consolidation order), and then pay outstanding debt in full at the earliest opportunity.
A Trustee Can Help You Make a Decision
A Licensed Insolvency Trustee can help you file a consumer proposal, but did you know that he or she is also an expert in other debt resolution strategies? To learn more about what solution would be best for your specific situation, contact a Trustee in your area today for a free, no-obligation, confidential first appointment.
More reading:
- Consumer Proposal vs. Settling Debts On Your Own
