Consumer Proposals in British Columbia: A Complete Guide

If you’re struggling with debt in BC, a Consumer Proposal might be the lifeline you need. It’s a legal, government-regulated alternative to bankruptcy that helps reduce your debt and protects your assets while allowing you to make affordable monthly payments. This guide will walk you through how they work, who qualifies, the pros and cons, the step-by-step process to get started, and special situations for business owners and directors.

What is a Consumer Proposal?

A Consumer Proposal is a legally binding agreement filed with the help of a Licensed Insolvency Trustee (LIT). You propose to your creditors to repay a portion of your unsecured debts over a period of up to five years. If the creditors holding the majority of your debt (by dollar value) accept the proposal, it becomes binding on all.

It’s regulated under the Bankruptcy and Insolvency Act (BIA) and is only available through an LIT, who will guide and assist you throughout the process.

Who Qualifies?

To be eligible for a consumer proposal in BC:

• You must be insolvent (unable to meet your financial obligations).
• You must owe between $1,000 and $250,000 in unsecured debt (excluding your mortgage).
  • For higher debts, a Division I Proposal is available (ask your LIT).
• You must reside in Canada or have Canadian property.
• You must have a stable source of income or assets to support the repayment offer.

Step-by-Step: How to File a Consumer Proposal in BC

1. Consult a Licensed Insolvency Trustee (LIT)

• This initial consultation is free.
• The LIT reviews your income, debts, and assets and helps you evaluate all debt relief options (including bankruptcy).

2. Financial Assessment & Application

• You’ll complete a detailed financial statement, including income, expenses, assets, and debts.
• Tax returns must be up to date. If personal or corporate tax debt exists, the LIT will help calculate it.

3. Offer to Creditors

• The LIT drafts a formal proposal. The offer must give creditors a better return than bankruptcy.
• Typical proposals repay 30% to 50% of the debt owed, often with no interest.

4. Submission and Stay of Proceedings

• Once filed, an automatic stay of proceedings halts wage garnishments, lawsuits, and collection calls.
• You also stop making payments directly to unsecured creditors.

5. Creditor Voting Period (45 Days)

• Creditors have 45 days to vote. A majority vote (by dollar value) approves the proposal.
• If approved, it’s binding on all creditors.
• If 25% request a meeting, one is held within 21 days.

6. Make Monthly Payments

• Proposals typically last up to 5 years (maximum 60 months).
• Payments go through the LIT and are distributed to creditors.

7. Complete the Proposal and Receive Discharge

• You must complete all payments and attend 2 mandatory financial counselling sessions.
• After successful completion, you receive a Certificate of Full Performance—you’re released from the included debts.

What Does It Cost?

• LIT fees are regulated federally and built into your monthly payment.
• There are no upfront fees.
• The total cost depends on what you offer to repay—not on your total debt load.

Benefits of a Consumer Proposal

Downsides and Risks

What Happens If You Fail a Consumer Proposal?

In the insolvency world, failing a consumer proposal is referred to as the terms default or defaulting. While consumer proposals offer flexible and structured debt relief, they require commitment. Here’s what happens next, and what you can do about it.

What Does “Defaulting” Mean?

Under the Bankruptcy and Insolvency Act (BIA), a consumer proposal is automatically deemed annulled (cancelled) if:

• You miss three payments (not necessarily consecutive), or
• You’re more than three months behind on a lump-sum payment or other non-monthly term

Once in default, the proposal is no longer legally binding, and the protection you had from creditors immediately ends.

What Happens After Default?

1. Creditors Can Resume Collection
   • Creditors regain the right to:
     • Collect the full original debt amount (minus what you’ve paid).
     • Charge interest retroactively (unless prohibited by law).
     • Resume collection calls, lawsuits, wage garnishments, and other legal actions.
2. The Debt Returns
   • The debt included in the proposal is reinstated in full, less any payments already made.
   • You now owe what you originally owed before the proposal was filed, and the clock restarts on collection.
3. Credit Report Impact Continues
   • The default will be noted on your credit report.
   • The consumer proposal will still appear for up to 6 years from the original filing date or 3 years from the default, whichever is later.

What Are Your Options After a Proposal Defaults?

If your proposal is annulled, you still have options. Here’s what you can consider:

1. File for Bankruptcy

• If your financial situation has worsened and you can’t afford to continue payments, bankruptcy may be the next step.
• Any unpaid debts from the annulled proposal can be included.

2. Apply to the Court to Reinstate the Proposal

• In limited cases, you may apply to court within 30 days of annulment to have your proposal revived.
• This is more likely to succeed if:
  • You missed payments due to short-term hardship (e.g., illness, temporary job loss).
  • You now have the means to resume and catch up on payments.

3. Start a New Proposal (If Allowed)

• You may be able to file a new proposal, but this depends on:
  • The reason for your default
  • Whether creditors are willing to accept a second proposal
  • The timing and your current income situation

Discuss this with your LIT immediately after default to determine feasibility.

4. Informal Negotiation with Creditors

• If the debt load is manageable, you might try to settle directly with some creditors.
• This typically only works with lump-sum offers and cooperative creditors.

How to Avoid Default

• Set up automatic payments to avoid missed payments.
• Communicate with your LIT immediately if your financial situation changes.
• Consider amending the proposal (before missing payments) to reduce your monthly amount or extend the term (still limited to 5 years + 3 months).
• Budget regularly and track your spending to stay on top of your commitment.

Alternatives to a Consumer Proposal

1. Personal Bankruptcy
   • Suitable if you can’t afford a proposal.
   • May be faster and cheaper, but assets and windfalls may be lost.
2. Debt Consolidation Loan
   • If your credit allows, you might combine all debts into one loan with lower interest.
3. Credit Counselling
   • Not-for-profit agencies help with budgeting and informal repayment plans.
4. Informal Settlements
   • You can negotiate lump-sum settlements directly with creditors.

Special Situations: Business Owners and Directors

If you’re a business owner, corporate director, or recently operated a limited company, filing a consumer proposal comes with extra considerations. The financial relationship between you and your corporation must be carefully reviewed before filing a proposal, particularly if there are unpaid business taxes or corporate debts that may be transferred to you personally.

Key Facts for Directors and Former Business Owners

1. Corporations Cannot File Consumer Proposals
   A limited company (corporation) cannot file a consumer proposal. Consumer proposals are for individuals only. However, a corporation with debt may file a Division I Proposal or a corporate bankruptcy through a Licensed Insolvency Trustee, depending on the business’s financial viability and the desire to restructure or wind down operations.
2. You May Be Personally Liable for Certain Corporate Debts
   Even if your company has shut down, some corporate debts can follow you personally, especially if:
   • You personally guaranteed loans or lines of credit for the company.
   • You’re a director and the company owes:
     • GST/HST (Goods and Services Tax)
     • PST (Provincial Sales Tax)
     • Payroll source deductions (like CPP, EI, and income tax withheld from employees)
     • Wages or vacation pay owed to employees

These are known as director liabilities, and they become part of your personal debt profile, meaning they must be included in your personal consumer proposal or bankruptcy.

3. Tax Filings Must Be Up to Date Before Filing a Proposal
   If you want to include corporate-related debts in your personal consumer proposal, the corporation’s tax returns and payroll filings must be current. Why?
   • The Licensed Insolvency Trustee needs to confirm how much of the corporate debt will be assessed to you personally.
   • This allows your LIT to accurately include all debts in your proposal and avoid nasty surprises later on.
4. The LIT Will Help You Review Corporate Exposure
   Before filing, the LIT will:
   • Review your role in the company (owner, director, shareholder).
   • Check the status of corporate tax filings and CRA account balances.
   • Determine what portion of corporate liabilities could be added to your personal consumer proposal.
   • Advise whether the company needs to be shut down formally or if further steps (like corporate bankruptcy or tax filings) are needed.
5. Inactive or Closed Corporations Still Matter
   Even if your business has closed, unresolved tax or payroll issues can still affect you. CRA may pursue directors for unpaid source deductions, GST/HST, or unremitted taxes—even if the business is no longer operating.
6. No “Hiding Behind the Corporation”
   If you were a director of a company that owes government debt, simply walking away from the business doesn’t erase the liability. The CRA and other creditors may re-assign the debt to you personally, and this debt must be addressed in your consumer proposal or bankruptcy.

Example Scenario

Let’s say you’re the sole director of a landscaping business that closed last year. You didn’t file the final GST returns, and the company owes $20,000 in unpaid payroll deductions. The CRA can assess you personally for those debts.

Before you can file a personal consumer proposal:

• Your LIT will request the missing filings be completed.
• CRA will confirm how much of the corporate tax debt is now your personal responsibility.
• That debt will be listed in your personal proposal.

Can You Exit a Proposal Early?

Yes. Options include:

1. Lump-Sum Payoff
   • You can pay the remaining balance of the consumer proposal early.
2. Debt Consolidation Loan
   • Use a loan to pay off the proposal (though you’ll now be subject to interest again).
3. Amend the Proposal
   • If your situation worsens, the LIT can help you amend the terms, but act before you default.

Conclusion: Is a Consumer Proposal Right for You?

A consumer proposal is a powerful debt solution that offers legal protection, asset preservation, and debt reduction. It’s best for people with stable income, some assets, and unmanageable unsecured debt, who want to avoid bankruptcy and work toward financial recovery.

Feel like you still have questions? Visit our Resource page where we discuss many debt topics such as Bankruptcy, CRA debt, Seize & Sue laws and more.

Or speak to our Licensed Insolvency Trustee at C.E. Craig & Associates Inc., we’re here to guide BC residents through every step of the debt relief process.

Contact Us Today for a Free Consultation!