Getting trapped in a perpetual cycle of debt with seemingly no way out is one of the most stressful situations life can throw at you. For anyone looking for a way forward, experts say a consumer proposal can break the chain without the need for a bankruptcy filing.
While everyone's debt tolerance is different, Véronique Lalonde says if someone is failing to get ahead in their month-to-month finances, it's a sign they need help.
"You need to look at what's going on," said Lalonde, partner and licensed insolvency trustee at Montreal-based Raymond Chabot. "If you're behind, you're receiving collection calls or notices, if your phone's being cut off, your hydro is being cut off — obviously, these are all signs."
If you find yourself in this situation, there are lifelines available.
Consumer proposals are settlements a trustee negotiates with banks and other lenders that buy you time to pay back creditors a portion of what they're owed, based on your ability to pay. The agreement is seen as a win-win compared with bankruptcy because companies receive some of the money they're due and you avoid signing over all your assets.
Usually, Lalonde said, "We have to make an offer that's going to be better for the creditor than what they would get in a bankruptcy scenario."
Lalonde said she receives calls from a broad range of clients, from those who missed payments for a couple of months in a row to those who haven't paid their lenders in two years.
"People wait a long, long time," she said. "They're afraid they will lose everything, that it's going to get publicized somehow."
Experts say the process is less scary than most people think.
Generally, consumer proposals are for debt such as personal loans, lines of credit, credit cards and unpaid income tax. Assets funded by secured debt such as car payments and mortgage payments are not included.
A licensed insolvency trustee looks at your full financial picture — the value of assets, equity in your home and everyday life expenses, Lalonde said. Then there's a thorough budgeting process to understand what a person can afford to pay off.
"We'll go over all of the expenses and see what's realistic, what's reasonable, depending on that individual's situation," she said. "If there's money left at the end of the month, then we'll see how much we can offer to the creditors."
On average, creditors settle for 20 to 30 cents for every dollar owed but no two people would pay the same amount on the same debt, Lalonde said. A proposal is tailored to each person's specific situation and the specific lenders they're dealing with.
Once a proposal is offered to a creditor, Lalonde said lenders have 45 days to respond — either accepting or refusing it. While most are accepted, there's a small percentage that trustees have to negotiate further, she added.
When the proposal is accepted, a monthly payback amount is set for the client for a maximum of five years — with no strings attached.
That means if the client's financial situation changes after the proposal is accepted, such as receiving an inheritance, they don't have to disclose it to the creditors.
"Once it's settled, it's settled. You just have to make your payment," Lalonde said.
Bankruptcy is another option for the financially distressed. Rather than the negotiation of a consumer proposal, bankruptcy is a court action, said Mark Kalinowski, a partnership and education specialist at Credit Counselling Society.
The value of assets is also counted in a bankruptcy. While consumer proposals have a set amount, bankruptcies can vary month-to-month based on monthly bank statements and income.
"As you make more money, you have to pay more money in a bankruptcy," Kalinowski said. However, the timeline is much shorter, compared with a consumer proposal — lasting between nine months and 21 months. A second bankruptcy could go up to 36 months.
A bankruptcy works well for people who don't have cash flow or enough assets to sell off and settle debt, while consumer proposals work better for those who have some cash and can start paying down debt after an amount is negotiated, he said.
Kalinowski said there are fees associated with a consumer proposal — including trustee fees, filing fees and proposal administration fees.
"A lot of people don't understand that you have to have money to go bankrupt or to do a consumer proposal," he said. "You can't say, 'Oh, I got no money, I'll do this.'"
Whichever option works best for you, bankruptcy or a consumer proposal will affect your credit rating.
Kalinowski recommends choosing the option you can afford and that has the least impact on your credit.
A consumer proposal affects your credit rating for three to six years. Equifax and TransUnion remove consumer proposals from credit reports either three years after a client pays off all debt negotiated in the agreement or six years after signing the proposal — whichever comes first, according to the Financial Agency of Canada.
Meanwhile, credit-reporting agencies remove bankruptcies six to seven years after the date a debtor is discharged.
Despite its seriousness, clearing your debt and starting over may be what you need to move forward.
"You're going to build your credit back. It's not the end of the world," said Kalinowski.
This report by The Canadian Press was first published May 20, 2025.
Ritika Dubey, The Canadian Press
