What Happens if You Miss Payments or Default on a Consumer Proposal in Canada?

A Consumer Proposal is a valuable debt relief option that allows Canadians to repay unsecured debt—without declaring Bankruptcy.

But what happens if, after your Proposal is accepted, you still miss payments? It’s a concern that weighs heavily on many people going through the Consumer Proposal process.

In this post, we’ll walk through what happens when you default on a Consumer Proposal, and what steps you can take next.

Understanding the Basics: Filing a Consumer Proposal

Filing a Consumer Proposal means you have agreed to settle some or all of your debt in a formal payment plan. This agreement, established with the assistance of a Licensed Insolvency Trustee (LIT), is legally enforceable and protects you from creditor actions.

When you accept the Consumer Proposal, you are responsible for meeting the new terms and payment schedule. These are legal obligations, not mere suggestions. If you are late on payments by more than three months worth (or the equivalent of three if your payment frequency is biweekly or otherwise), your Proposal may be deemed annulled or defaulted.

Defaulting on a Consumer Proposal

A defaulted or annulled Consumer Proposal results in several actions and consequences:

• Creditor rights reinstall (leading to legal action, collection calls, and wage garnishment).
• You are responsible for the full original amount of the debt minus payments you have made.
• You might not be able to make another Consumer Proposal.
• Your credit score may reflect the default.

Life happens. You may find yourself unable to pay bills due to a job loss, illness, or surprise expenses. But missed payments on a Consumer Proposal are not something to accept lightly. Unlike a credit card or loan, there’s less flexibility in a Consumer Proposal.

The Bankruptcy and Insolvency Act makes it clear that when a Consumer Proposal is cancelled, you lose access to benefits and exemptions offered by the Proposal. This is why you should speak to your Licensed Insolvency Trustee before you fall behind on a payment.

Choices When You’re Struggling to Make Payments

Luckily, if you act right away, your LIT can present additional options that support your repayment journey:

• Adjust your Consumer Proposal: Your LIT can amend your Consumer Proposal to reduce your payments or extend the term of the Proposal. The creditors once again must vote and reach a majority to agree to the changes.
• Revive your Consumer Proposal: Under certain conditions, your LIT can request the courts to revive your Consumer Proposal, but this requires special permission.

The courts and your creditors will consider the assets you have, the amount you must yet repay, and the reasonableness of any secondary plans.

Filing Bankruptcy After a Failed Consumer Proposal

If your Consumer Proposal is annulled and you are not allowed to submit a new one, Bankruptcy will most likely be your next step. While Bankruptcy has harsher consequences on your credit record and might compel you to surrender some of your assets, it does provide an avenue that wipes your debt clean. Your LIT will help you determine if this is the right move for you.

How Does Default Affect Your Credit Score?

Most information stays on your credit report in Canada for six or seven years, depending on the province. Some banks and credit bureaus may downgrade your ranking, with some debt situations leading to an R7 label (for context, an R9 is the lowest score).

How to Prevent Defaulting in the First Place

Early action is by far the best option; before you must deal with the fallout of an annulled Consumer Proposal. If you have had a major life change, take these steps:

• • Automate your accounts to ensure timely payment.
  • Check your budget periodically so your balance is sufficient to cover debt withdrawals.
  • Communicate with your LIT as soon as you are having issues.
  • Stick to a reasonable payment plan from the start.
  • Avoid new debt when repaying your Consumer Proposal.

Final Thoughts

Defaulting on a Consumer Proposal or missing payments presents a severe financial setback, but it is not the end of your story. With some quick action and help from a Licensed Insolvency Trustee, you can save your financial future. Whether it’s amending your Consumer Proposal, seeking alternative debt relief options, or rebuilding following default, there is always an exit.