Can I File a Consumer Proposal If I Am Self-Employed?

Yes. If you are self-employed as a sole proprietor, you can qualify for a Consumer Proposal in Canada. You file as an individual under the Bankruptcy and Insolvency Act, and the proposal can cover both your personal debts and your business debts, including what you owe to CRA. The process is designed for people, not business structures, so being your own boss does not disqualify you. At Metus Lykos Debt Law Firm, we work with self-employed clients across Ontario who are carrying business debt, CRA arrears, and personal debt all at once, and we help them find the clearest legal path forward.

If you are self-employed and debt is piling up, you probably already know the feeling: irregular income, surprise tax bills, creditors calling at the worst times. You are not irresponsible. Running a business is hard. What matters now is finding a real solution.

What Is a Consumer Proposal for Self-Employed Canadians?

A Consumer Proposal is a legal process available under the Bankruptcy and Insolvency Act (BIA). It lets you legally settle your unsecured debt for less than the full amount owed. Instead of paying back everything, you make fixed monthly payments over a period of up to five years. At the end of the term, any remaining unsecured balance is legally discharged.

Consumer Proposals are government-regulated. That means once your creditors vote to accept the proposal, they are legally bound by its terms. They cannot keep calling. They cannot continue collecting. They cannot garnish your wages. The legal protection kicks in the moment the proposal is filed, not at the end of the process.

Do Self-Employed Canadians Qualify for a Consumer Proposal?

If you operate as a sole proprietor, you and your business are the same legal entity. There is no separation between your personal finances and your business finances. This means all of your qualifying unsecured debts, whether from business operations or personal accounts, fall under one Consumer Proposal filed in your name.

To qualify, you generally need to meet three conditions:

• You are insolvent, meaning you cannot pay your debts as they come due
• Your total unsecured debt is between $1,000 and $250,000 (not counting your mortgage)
• You have a source of income that can support a fixed monthly payment

The income requirement does not mean your income needs to be steady or predictable. It means the proposal payment must be affordable given your income over time. For self-employed individuals, income can be averaged across months to determine what is realistic. A strong month does not permanently raise your payment, and a slow month does not trigger default as long as you stay current.

Sole Proprietor vs. Incorporated Business: Which Debt Relief Option Applies?

This is where things get important. Whether you are a sole proprietor or you have incorporated your business changes which debt relief options are available to you. The table below breaks it down clearly.

If you have incorporated your business, the corporation is its own legal person. It cannot file a Consumer Proposal. However, you as an individual may still be personally liable for certain business debts, especially if you signed personal guarantees. In that case, both the corporation and you as a personal guarantor may need separate strategies. Our business debt restructuring service is designed for exactly these situations.

If your unsecured debt exceeds $250,000, you may need a Division 1 Proposal instead. This is a more complex, court-supervised process, but it works on the same principle: settle for less than you owe under a legally protected agreement.

What Debts Are Included in a Consumer Proposal?

One of the most common questions we hear from self-employed clients is: which of my debts actually get included? The answer depends on whether the debt is secured or unsecured, and whether it is the type of debt that survives a formal insolvency proceeding.

How CRA Debt Works in a Consumer Proposal

CRA debt is one of the most common reasons self-employed Canadians end up in financial difficulty. When you are running a business, taxes are not automatically withheld. HST collects in your bank account but does not always stay there. Income tax builds up through the year but only comes due in lump sums. A few bad quarters can create a tax debt that feels impossible to repay.

The good news is that CRA is a creditor like any other when it comes to Consumer Proposals. They are legally bound by the outcome of a creditor vote, just like a bank or a credit card company. If the majority of your creditors (measured by dollar value) vote to accept the proposal, CRA cannot reject it and continue collecting on the terms that existed before.

In practice, CRA does vote on Consumer Proposals. They have internal guidelines for what they will and will not accept, and they are not always the easiest creditor to negotiate with. That is exactly why having legal representation matters. We work within the formal process to ensure your interests are protected throughout every stage of the proceedings, including the creditor vote.

How Self-Employed Income Is Assessed

One concern we hear often from self-employed clients is this: my income changes every month. How can I commit to a fixed payment?

This is actually one of the features of a Consumer Proposal that works well for self-employed people. The monthly payment is fixed for the life of the agreement. It does not rise and fall with your income. You negotiate the payment amount upfront, based on what is reasonable and sustainable given your income history and your projected capacity to pay.

Unlike bankruptcy, where your payments are recalculated every year based on your surplus income, a Consumer Proposal locks in a payment that cannot increase even if you have a great year. This predictability is genuinely valuable when your cash flow is unpredictable.

Here is how the payment is typically established for self-employed filers:

• Your average monthly income is calculated over a recent period, usually the past 12 months, using bank statements, invoices, and tax returns.
• Your fixed living expenses are assessed: rent or mortgage, food, transportation, and other reasonable costs.
• The remaining capacity is what can realistically go toward the proposal payment each month.
• A total repayment amount is determined based on what your creditors would likely receive in a bankruptcy, and your proposal must offer more than that.
• The fixed monthly payment is set at a level your creditors accept and that you can actually sustain.

If you have a particularly slow month, missing one payment is not an automatic default. You can miss up to three monthly payments before a Consumer Proposal is annulled. This gives self-employed filers a real buffer during seasonal downturns or slow periods.

Can You Keep Running Your Business During a Consumer Proposal?

In most cases, yes. A Consumer Proposal does not prevent you from continuing to operate your business. You keep your tools. You keep your equipment. You keep your accounts and your contracts. A Consumer Proposal is not a business closure.

There are some things to be aware of. Certain professional licences or industry-specific requirements may have rules about insolvency proceedings. If your work is governed by a licensing body, it is worth checking whether a Consumer Proposal affects your standing. In most trades and general self-employment, it does not.

You will also need to stop accumulating new debt you cannot repay during the proposal term. This is not a legal restriction in most cases, but it is the practical reality of rebuilding your financial position. New business credit may be harder to obtain while the proposal is active, typically for a period of three years after completion when the R7 notation remains on your credit file.

The Advantage of Being a Self-Employed Filer

Being self-employed actually comes with a meaningful advantage in Consumer Proposals compared to employees. In a bankruptcy, your disposable income is calculated monthly and you owe more if you earn more. If your business has a strong year, your bankruptcy payments go up. In a Consumer Proposal, your payment is fixed. A great year does not cost you more. You keep every dollar you earn above the agreed repayment amount.

For a freelancer, contractor, consultant, or small business owner whose income can swing significantly year to year, locking in a fixed obligation is often the smarter structure. You get the legal protection and the debt reduction without exposing yourself to the income variability risk that comes with bankruptcy.

Why a Law Firm Makes a Difference for Self-Employed Filers

Self-employed Consumer Proposals often involve a more complex debt picture than a standard employee filing. You may have CRA arrears across multiple tax years. You may have signed personal guarantees on business loans. Your income documentation may be less straightforward than a pay stub. You may have creditors who are more aggressive because they are also your suppliers or business partners.

A Licensed Insolvency Trustee administers the formal insolvency process. But their legal duty is to remain neutral. They are not your advocate. They are not there to push for the best possible terms for you specifically. Their obligation runs to the process as a whole.

We work for you and only you. Our legal duty is entirely to our clients. We represent your interests at every stage of the proceedings, including through the creditor vote, and we make sure you understand every option before committing to any path.

Frequently Asked Questions

Can a self-employed person file a Consumer Proposal in Canada?

Yes. If you operate as a sole proprietor, you file a Consumer Proposal as an individual under the Bankruptcy and Insolvency Act. There is no restriction on self-employment. Your business debts and personal debts are treated together since you and your sole proprietorship are the same legal entity. As long as your total unsecured debt is between $1,000 and $250,000 and you can support a fixed monthly payment, you may qualify.

Does my business have to close if I file a Consumer Proposal?

No. A Consumer Proposal does not require you to close your business. You can continue operating as a sole proprietor throughout the proposal term. You keep your equipment, tools, contracts, and accounts. A Consumer Proposal is a debt resolution process, not a business closure. There are limited exceptions for certain regulated industries, so if you hold a professional licence, it is worth confirming that a Consumer Proposal does not affect your standing.

Can a Consumer Proposal include my CRA tax debt?

Yes. CRA debts, including income tax arrears, HST/GST arrears, and in many situations payroll-related debts, are unsecured creditors and can be included in a Consumer Proposal. CRA is legally bound by the outcome of the creditor vote, just like any other creditor. Once the proposal is accepted, CRA collections stop and any agreed balance is discharged at the end of the term. Payroll remittances that were held in deemed trust may be treated differently depending on the circumstances, which is why it is important to discuss your specific situation with us before proceeding.

What if my income is irregular? Can I still qualify?

Yes. Irregular income does not disqualify you from filing a Consumer Proposal. Your income is assessed on average over time, not just based on your best or worst month. The monthly payment is fixed for the life of the agreement, so it does not increase during a strong month or trigger default during a slow one. You can also miss up to three consecutive payments before the proposal is annulled, which gives self-employed filers a buffer during seasonal slow periods.

What is the difference between a Consumer Proposal and bankruptcy for self-employed people?

In a bankruptcy, your monthly surplus income payments are recalculated every year. If your income rises, you owe more. In a Consumer Proposal, your payment is locked in at the start and cannot increase even if you have a strong year. You also keep your assets in a Consumer Proposal in most cases, and you avoid the more significant credit impact of a bankruptcy. For self-employed individuals with variable income, a Consumer Proposal typically offers better protection and more predictability. You can read a full comparison in our article on Consumer Proposal vs. Bankruptcy.

Can an incorporated business file a Consumer Proposal?

No. A Consumer Proposal under Division II of the BIA is available to individuals only. A corporation is a separate legal entity and cannot file a personal Consumer Proposal. Incorporated businesses can file a Division 1 Proposal, which is a court-supervised process for more complex debt situations with no upper debt limit. Our team can also help incorporated businesses through our business debt restructuring service. If you are the director of a corporation and have signed personal guarantees, you may also have personal liability that can be addressed separately.

What happens to my tools and equipment if I file a Consumer Proposal?

You keep them. A Consumer Proposal does not require you to surrender your business assets. You continue to own your tools, equipment, and any other assets used to run your business. This is one important difference from bankruptcy, where asset values and exemptions are assessed more formally. In a Consumer Proposal, your assets are not liquidated. They may factor into the calculation of what creditors would receive in a bankruptcy, which helps determine the minimum acceptable offer, but you do not give them up.

Will my clients or customers find out I filed a Consumer Proposal?

Consumer Proposals are registered on the federal insolvency registry, which is a public database. However, it is not widely monitored by clients or customers in the ordinary course of business. Your banking relationships, trade accounts, and client contracts generally continue as normal during the proposal term. There is no requirement to disclose the proposal to clients unless a specific contract or licensing body requires it. Most self-employed filers find that their day-to-day client relationships are not affected.

How long does a Consumer Proposal last?

A Consumer Proposal lasts up to five years, or 60 monthly payments. Many proposals are structured for three to four years depending on the total debt and what monthly payment is feasible. Once all payments are made and the two mandatory financial counselling sessions are completed, the remaining unsecured balance is legally discharged. The R7 credit notation remains on your file for three years after the proposal is completed.

How do I know if a Consumer Proposal is right for my situation?

The best way to know is to talk through your numbers with someone who can assess your full picture. Self-employed debt situations often involve a mix of CRA debt, business debt, and personal debt that requires a clear legal strategy, not a one-size-fits-all answer. We offer a free, confidential consultation with no pressure and no obligation. We will tell you honestly which options apply to your situation and what each one would mean for you.