Can you borrow during a consumer proposal?

In summary:

• Obtaining credit is still possible, but it can be difficult because your credit score is affected during the proposal.
• Some options exist: small loans (often expensive), secured credit cards (the best option), and loans with a co-signer.
• Caution is essential: borrowing can worsen your situation; it’s better to prioritize financial stability and savings before taking on new debt.

control of your situation. It allows you to reduce your debts, avoid personal bankruptcy, and maintain a certain level of financial stability. However, a common question arises: can you obtain credit during a consumer proposal?

Understanding a consumer proposal

Before answering, it’s helpful to recall what a consumer proposal is. It is an agreement negotiated by your licensed insolvency trustee with your creditors to reduce the amount of your debt to a level you can afford. Once accepted, you agree to repay that amount through monthly payments over a maximum period of 5 years, without interest.

During this agreement, you benefit from several advantages, but it also involves certain restrictions, particularly when it comes to accessing credit. Indeed, for your debts to be discharged, the amount promised under the proposal must be fully paid. If you miss payments and the proposal is annulled, the original debts (minus the amounts already paid) are reinstated.

Borrowing during a consumer proposal: is it possible?

The short answer is: yes, but with significant limitations. There is no law that formally prohibits borrowing during a consumer proposal. However, in practice, obtaining credit is more difficult. Why?

• Your credit report is affected: the proposal notation lowers your credit score.
• Your debts are only discharged once you complete the proposal, making lenders more hesitant to extend new credit.
• Your repayment capacity is limited: part of your income is already allocated to your proposal, leaving little room for additional credit.

So, while it is legally possible, access to credit is restricted and often more expensive.

Types of borrowing available during a consumer proposal

If you try to borrow during a consumer proposal, the following options are the most likely to be accessible:

1. Small loans or alternative credit
   Some specialized lenders are willing to lend to individuals in financially vulnerable situations. However, interest rates are often very high and repayment terms are strict. We invite you to read our article “Getting a quick loan: what you need to know!”
2. Secured credit cards
   This is often the best option during a consumer proposal. You deposit an amount (e.g., $500), which becomes your credit limit. This helps rebuild your credit gradually while demonstrating responsible financial management.
3. Co-signed loans
   If someone with good credit agrees to co-sign your loan, your chances of obtaining credit increase. However, this person assumes significant risk. However, this person is taking on a significant risk, which we detail in our article “Co-signing a loan for a loved one: impacts and consequences on your credit report.”

Borrowing during a consumer proposal: precautions to take

Before taking on new debt during a consumer proposal, it’s important to ask yourself the right questions:

• Is it truly necessary?
• Can I repay this loan without jeopardizing my consumer proposal?
• Are the terms reasonable?

Keep in mind the risks of poorly planned borrowing: you could worsen your financial situation and even put your consumer proposal at risk.

Prioritize financial stability over credit

The main goal of a consumer proposal is to stabilize your finances and rebuild your credit profile. Although borrowing during this period is possible, it should remain the exception rather than the rule. The idea is to use this process as an opportunity to start fresh on solid financial footing, adopt better money management habits, and avoid new debt. To make the best decision for your situation, it is recommended to consult the licensed insolvency trustee administering your consumer proposal. They can guide and advise you before you take on any new debt.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee