Drowning in Debt? Why a 'Consumer Proposal' is Better Than Bankruptcy

Drowning in Debt?

Interest rates are stabilizing, but the cost of living remains high. Grocery prices are soaring, and your credit card minimum payments are eating up your entire paycheck.

You feel trapped. The "B-word" (Bankruptcy) crosses your mind, but you are terrified. You don't want to lose your house, your car, or your dignity.

In Canada, there is a powerful legal alternative that banks don't like to advertise. It is called a Consumer Proposal. It is the #1 way for Canadians (with debts under $250,000 excluding mortgage) to avoid bankruptcy while legally slashing their debt.

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What is a Consumer Proposal?

A Consumer Proposal is a legally binding agreement between you and your creditors, administered ONLY by a federally Licensed Insolvency Trustee (LIT).

Unlike a consolidation loan (where you borrow new money to pay old debt), a Consumer Proposal asks creditors to accept a reduced amount to settle the debt in full.

• The Deal: You might owe $50,000, but propose to pay $15,000 over 5 years.
• The Interest: 0%. Once accepted, interest stops accumulating immediately.
• The Protection: It legally stops all collection calls, wage garnishments, and lawsuits (Stay of Proceedings).

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Proposal vs. Bankruptcy: The Key Differences

Why choose this over bankruptcy? It comes down to protecting your Assets and your Future Income.

✅ Why Proposal Wins

• Keep Your Assets: In bankruptcy, you might be forced to sell your house or car if they have high equity. In a proposal, you keep them (as long as you continue making your mortgage/car payments).
• No "Surplus Income" Penalties: In bankruptcy, if you earn too much, you are penalized and have to pay more. In a proposal, your monthly payment is fixed from Day 1, even if you get a big raise or bonus later.

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Does It Ruin Your Credit Score?

It impacts your score, but less severely than bankruptcy.

• Bankruptcy: Rated R9 (The worst rating). Stays on your report for 6-7 years after discharge.
• Consumer Proposal: Rated R7. Stays on your report for 3 years after you finish paying (or 6 years from the date of filing, whichever is sooner).

While an R7 rating is a flag, it is temporary. More importantly, it is better than drowning in minimum payments for the next 20 years with no end in sight.

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Can I Include Government Debt (CRA)?

This is a huge advantage. Yes.

Unlike the USA, in Canada, you CAN include unpaid income taxes and GST debt in a Consumer Proposal. The Canada Revenue Agency (CRA) is treated just like any other creditor.

(Note: Student loans can only be discharged if it has been 7+ years since you ceased to be a student.)

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Chief Editor’s Verdict

If you have a steady income but simply cannot handle the total debt load, a Consumer Proposal is often the smartest financial "reset button."

Don't suffer in silence. Contact a Licensed Insolvency Trustee for a free consultation. It’s not about giving up; it’s about making a legal deal to get your life back.