Consumer Proposal vs Credit Counselling in Ontario

If you are researching your options, you are probably carrying more debt than you can manage. That is not a character flaw. Debt accumulates fast, especially when interest compounds month after month. You deserve a clear, honest comparison so you can choose what actually fits your situation.

What Is Credit Counselling?

Credit counselling is a service provided by non-profit agencies and, increasingly, by for-profit companies. The core product is a Debt Management Plan (DMP). Under a DMP, the credit counsellor contacts your creditors and negotiates to reduce or eliminate the interest charges on your outstanding balances. You then make one monthly payment to the agency, which distributes it to your creditors on your behalf.

There is an important distinction to understand: a DMP does not reduce your principal debt. You still owe the full amount. What changes is the interest rate, which makes repayment more manageable over a set period, typically three to five years.

How a Debt Management Plan Works

1. Initial assessment: You meet with a credit counsellor who reviews your income, debts, and budget.
2. Creditor contact: The agency approaches your creditors and asks them to reduce or freeze interest charges.
3. Monthly payment: You make one consolidated payment to the agency each month.
4. Distribution: The agency passes those funds to your creditors according to the agreed schedule.
5. Completion: Once all principal balances are paid in full, typically within 3 to 5 years, the plan ends.

Who Is Credit Counselling Best For?

Credit counselling works best when your debt is manageable and your main problem is high interest rates. If you have a steady income, your total unsecured debt is relatively low, and you could realistically pay it all back given enough time, a DMP may be a reasonable option. It can also be a good entry point for people who need budgeting guidance and financial education alongside their repayment plan.

What Is a Consumer Proposal?

A consumer proposal is a formal, legally binding process governed by the Bankruptcy and Insolvency Act (BIA). It allows eligible Canadians to settle their unsecured debts for less than the full amount owed. The proposal is filed by a Licensed Insolvency Trustee (LIT), who administers the process under federal regulations. You offer your creditors a reduced amount, structured as monthly payments over up to five years, with no interest.

If creditors holding more than 50% of your debt by value vote in favour of the proposal, all creditors are legally bound by its terms, including those who voted against it. Once you complete your payments, the remaining unpaid balance is permanently discharged. That means it is gone by law. You can learn more about the full details on our Consumer Proposal service page.

At Metus Lykos, we are a law firm, not a Licensed Insolvency Trustee. We provide legal representation and advice throughout the consumer proposal process, advocating for your interests from start to finish. We work for you, not your creditors.

Who Qualifies for a Consumer Proposal?

To be eligible for a consumer proposal, you must meet all of the following criteria:

• You are an individual (not a corporation)
• Your total unsecured debt is between $10,000 and $250,000 (not including a mortgage on your principal residence)
• You are insolvent, meaning you cannot pay your debts as they come due
• You have a source of income sufficient to make the proposed monthly payments

If your unsecured debt exceeds $250,000, a Division 1 Proposal may be a better fit. Our team can walk you through what a Division 1 Proposal involves and whether it applies to your circumstances.

What Debts Can Be Included?

Consumer Proposal vs Credit Counselling: Side-by-Side Comparison

The table below covers the key differences between a consumer proposal and a credit counselling Debt Management Plan. Use it to identify which option matches your circumstances.

Which Option Is Right for You?

The right choice depends on how much you owe, what type of debt you carry, and whether your primary goal is to manage interest or to reduce the total balance you owe.

Choose Credit Counselling If:

• Your total unsecured debt is relatively small (under $10,000)
• You have a stable income and can realistically repay the full principal over 3 to 5 years
• You do not owe CRA debt or student loans
• Your main problem is high interest rates, not the size of the debt itself
• You have not yet been threatened with legal action or wage garnishment

Choose a Consumer Proposal If:

• Your unsecured debt is between $10,000 and $250,000
• You cannot realistically repay the full amount even without interest
• You owe CRA tax debt or student loans (if out of school for 7+ years)
• You are already dealing with wage garnishment, collection calls, or a creditor lawsuit
• You want legal protection from the moment the process begins
• You want to avoid bankruptcy while still getting meaningful debt relief

How a Consumer Proposal Compares to Other Debt Options

A consumer proposal sits between credit counselling and bankruptcy on the spectrum of debt solutions. It is more powerful than a DMP because it actually reduces the principal. It is less severe than bankruptcy because you keep your assets and avoid the R9 credit notation that bankruptcy carries. For most Ontarians with significant unsecured debt, it is the most balanced option available under Canadian law.

If you are also weighing other paths, our guide on debt relief options in Canada walks through the full landscape of what is available, including informal debt settlement and bankruptcy.

The Credit Score Impact: What You Should Know

Both options affect your credit score, but the impact works differently.

A consumer proposal results in an R7 credit rating on the accounts included in the proposal. This notation stays on your credit report for 3 years after the proposal is completed, or 6 years from the date it was filed, whichever comes first.

A Debt Management Plan also results in an R7 rating on the affected accounts. This stays on file for 2 years after the program is completed.

So on paper, a DMP may have a slightly shorter credit impact window. But that comparison only matters if you can actually repay your full debt within the DMP timeline. If you cannot, staying in a DMP that you later default on will cause far more credit damage than completing a consumer proposal successfully.

Why Working With a Law Firm Makes a Difference

Most people navigating this decision deal directly with a Licensed Insolvency Trustee. A trustee is required by law to remain impartial. They administer the insolvency process on behalf of both the debtor and the creditors. They are not your advocate.

We are different. We are a law firm. Our legal duty runs entirely to you. We review your situation, explain your legal rights, and represent your interests throughout the consumer proposal process. We make sure the terms of your proposal are structured to work in your favour, not just to satisfy creditor requirements.

We also only make money when we save you money. Our fee is 33% of whatever we negotiate off your debt. That means our goal is exactly the same as yours: reduce your debt as much as possible.

If you are considering debt settlement as an alternative, our debt settlement service outlines when that approach may apply and what to expect.

Frequently Asked Questions

What is the main difference between a consumer proposal and credit counselling?

The main difference is what happens to the total amount you owe. Credit counselling through a Debt Management Plan does not reduce your principal debt. You repay 100% of what you borrowed, usually with reduced or eliminated interest. A consumer proposal allows you to settle your debt for less than the full amount owed. The remaining balance is legally discharged once you complete the proposal. For people with significant debt, this distinction is the most important factor in choosing between the two options.

Does credit counselling stop collection calls and wage garnishments?

No, not automatically. Credit counselling does not provide legal protection from creditors. Individual creditors may agree to pause collections while you are in a DMP, but they are not legally required to do so. A creditor can still pursue a lawsuit or request a wage garnishment while your DMP is active. A consumer proposal, by contrast, triggers an automatic Stay of Proceedings the moment it is filed. This immediately and legally stops all collection activity, wage garnishments, and creditor lawsuits.

Can I include CRA tax debt in a consumer proposal?

Yes, in most cases. Tax debt owed to the Canada Revenue Agency (CRA) can be included in a consumer proposal. This is one of the significant advantages a consumer proposal has over credit counselling. A Debt Management Plan does not include government debts, which means CRA balances remain outside the plan and continue to accumulate interest and penalties. If you owe CRA debt alongside other unsecured balances, a consumer proposal is generally the stronger option.

How does credit counselling affect my credit score?

Accounts included in a Debt Management Plan are typically assigned an R7 credit rating. This notation stays on your credit file for 2 years after you complete the program. While this is a shorter window than some other options, the credit impact still exists and applies to all accounts covered under the plan. Your ability to access new credit during the DMP period will also be limited.

How does a consumer proposal affect my credit score?

A consumer proposal also results in an R7 rating on the accounts included. This notation remains on your credit report for 3 years after the proposal is completed, or 6 years from the filing date, whichever comes first. While the credit impact period is slightly longer than a DMP on paper, successfully completing a consumer proposal and becoming debt-free provides a far better foundation for rebuilding credit than remaining in an unaffordable repayment plan you cannot finish.

Can I keep my house and car if I file a consumer proposal?

Yes. A consumer proposal addresses unsecured debt only. Secured debts, such as your mortgage or a car loan where the vehicle is collateral, are not included in the proposal. As long as you continue making payments on those secured debts, you keep the assets. This is one of the most important differences between a consumer proposal and bankruptcy. You do not have to surrender your home, vehicle, or registered savings to complete a proposal.

What happens if creditors reject my consumer proposal?

If creditors holding more than 50% of your unsecured debt by value vote against your proposal, it is rejected. However, this does not mean the process ends. A creditors meeting can be called, and there is typically an opportunity to amend the terms of the proposal. A Licensed Insolvency Trustee manages this process, and having a legal team advising you during negotiations can help you reach terms that work. If a revised proposal is still not accepted, other options, including bankruptcy, can be explored.

Is credit counselling free in Canada?

Non-profit credit counselling agencies in Canada typically charge a small monthly fee, often between $20 and $50 per month, to administer your DMP. For-profit credit counselling companies may charge significantly more, sometimes as a percentage of your monthly payment. These fees are paid on top of your regular debt payments, which means you are paying more than just the principal and any remaining interest. Always ask for a clear fee breakdown before agreeing to any credit counselling program.

What is the minimum debt required for a consumer proposal in Canada?

The Bankruptcy and Insolvency Act does not set an absolute minimum, but in practice most consumer proposals involve at least $10,000 in unsecured debt. The maximum is $250,000, not including any mortgage on your principal residence. If your unsecured debt exceeds $250,000, a Division 1 Proposal may be available. We can help you determine which formal process applies to your situation based on the type and total of your debts.

Can a consumer proposal include student loans?

Yes, under certain conditions. Student loans can be included in a consumer proposal if you have been out of school for at least 7 years. If you left school fewer than 7 years ago, student loans cannot be discharged through the proposal process and must be repaid separately. Credit counselling DMPs cannot include student loans at all, regardless of when you finished school. If student loan debt is a significant part of what you owe, the 7-year rule is an important factor in your timing.

Should I try credit counselling before a consumer proposal?

Not necessarily. Many people assume they should exhaust every informal option before pursuing a formal legal process. But if you carry significant unsecured debt and cannot realistically repay the full principal, a DMP may only delay the inevitable, and delay costs money in ongoing interest and fees. We recommend getting a clear picture of your total debt before deciding. If repaying 100% of what you owe is genuinely feasible, credit counselling may work. If it is not, a consumer proposal is a more direct path to real relief.