How to Keep Your House Through a Consumer Proposal in Canada

By Julien Brault, founder of MooseMoney.

Filing a consumer proposal does not force you to give up your home. If your mortgage payments are current and your budget can handle both your mortgage and proposal payments, you can keep your house. Your home equity will factor into how much you offer creditors, but a Licensed Insolvency Trustee (LIT) can structure a repayment plan that satisfies creditors while letting you stay in your property. In fact, most Canadians who file consumer proposals keep their homes.

A consumer proposal is a legally binding agreement, filed through a federally regulated LIT, to repay a portion of your unsecured debts over a period of up to five years. It covers obligations like credit card balances, personal loans, and tax debt. It does not cover secured debts such as your mortgage. Once filed, an automatic stay of proceedings kicks in, which stops collection calls, wage garnishments, and lawsuits from unsecured creditors. This breathing room often makes it easier to stay on top of your mortgage.

How Home Equity Affects Your Consumer Proposal

Before you file, your LIT will ask for a home appraisal and a current mortgage statement to calculate your equity. Equity is the difference between your home's market value and what you still owe on the mortgage. This number matters because creditors expect a consumer proposal to offer at least as much as they would receive if you filed for bankruptcy, where equity could be seized and distributed.

If your home equity in lower than the bankruptcy exemption in your province (less than $10,783 in Ontario, for example), your proposal can be lower than the amount you owe, even if you own house. The reason your creditors are likely to accept such a proposal is that they would not have access to your home equity if you were to file for bankruptcy. If you have significant equity, your LIT may recommend higher monthly payments spread over the full five-year term, or you may need to explore refinancing options to satisfy creditor expectations.

Jeremy Kroll, Licensed Insolvency Trustee and Partner at Baigel Corp, illustrates how this works in practice with jointly owned property. "Let's say a husband and wife own a house and that their total equity in the house is $200,000. So the husband's share is worth $100,000 and he owes $50,000. The wife may refuse to sell or the bank won't want to do a second mortgage. In such a case, he could file a proposal where he offers to pay his creditors in full and the trustee can register a certificate against his share of the house only to protect them from the house being sold and the proposal not being paid off. Creditors will accept such an offer 99% of the time," concludes Kroll.

That scenario highlights an important point. Even when equity is substantial, there are legal mechanisms available to protect the home while still giving creditors confidence they will be repaid.

You must continue making your mortgage payments on time throughout the proposal period, as your mortgage lender retains the right to take action if you fall into arrears. Under Canadian law, a lender cannot cancel your mortgage solely because you filed a consumer proposal, as long as payments remain current.

What Happens to Your Mortgage Renewal and Future Home Purchases

A consumer proposal will appear on your credit report and lower your credit score. However, if you are renewing your mortgage with your existing lender, the process typically does not require a new credit application. Most borrowers can renew at their current institution without issue while still in an active proposal.

Switching lenders during a proposal, however, would be harder. A new lender will pull your credit report, see the proposal notation, and may offer less favourable terms or decline the application entirely. For this reason, many LITs recommend staying with your current lender until your proposal is completed and your credit has been rebuilt.

If you plan to buy a home after completing your proposal, traditional lenders generally look for at least two years of re-established credit history following discharge. They want to see two or more active credit accounts and roughly $2,500 in available credit that has been managed responsibly. 

One practical way to start rebuilding credit during or after a consumer proposal is with a secured credit card, such as the Secured Neo Mastercard, which reports to the major Canadian credit bureaus. Making small purchases and paying the balance in full each month demonstrates responsible credit behaviour to future lenders.

If only one spouse files a consumer proposal and the other has strong credit, the spouse with better credit can apply for the mortgage independently. The filing spouse can be added as a co-signer if needed, though this depends on lender requirements and the status of the proposal.

When Keeping Your Home May Not Be Realistic

There are situations where holding on to the house does not make financial sense. If your housing costs consume too large a share of your income and you cannot afford both the mortgage and proposal payments, your LIT may advise selling the property. You can sell the home yourself and use the proceeds, after paying off the mortgage, to fund your proposal. Alternatively, you can surrender the home to your lender, and any shortfall remaining after the sale becomes an unsecured debt folded into the proposal.

Your consumer proposal can also be rejected by creditors, though this outcome is uncommon when the proposal is prepared by an experienced LIT who understands what creditors will accept. If a proposal is rejected, the trustee can negotiate amended terms or you may need to consider other options.