Consumer Proposals and Mortgages

The Office of the Superintendent of Bankruptcy describes a consumer proposal as a formal, legally binding process administered by a Licensed Insolvency Trustee. The borrower offers to repay a percentage of debts, extend the repayment period, or both; a consumer proposal cannot run longer than five years.

Unlike bankruptcy, the borrower is not assigned into bankruptcy and generally keeps assets subject to the proposal/legal structure. But both are formal insolvency proceedings under the Bankruptcy and Insolvency Act and both affect the credit file and mortgage options. Only a Licensed Insolvency Trustee should advise which insolvency option is appropriate.

HopeWell broker-channel experience is that many A-side lenders want the proposal fully completed and approximately two years of re-established credit before they will seriously consider the file. Sagen’s current public covenant guidance provides a concrete insured example: the proposal must have been fulfilled for at least two years with a minimum two years of re-established credit.

Some lenders want at least two new traditional credit facilities showing satisfactory repayment after the proposal and may not treat a line of credit as sufficient re-establishment on its own. That is a lender-specific underwriting requirement, not a universal Canadian law.

In HopeWell experience, B lenders can consider borrowers after a proposal much sooner than the A side. Most prefer the proposal to be paid out before or through the mortgage closing. The refinance then solves the insolvency obligation and may consolidate other debt at the same time.

Some B lenders can make an exception and leave an active proposal in place when the rest of the file is strong, the proposal payment is included as a liability, and debt-service ratios remain within that lender’s threshold. This is an exception, not a general rule.

Private lenders generally have less rigid score/seasoning requirements, but in HopeWell experience they commonly prefer the proposal paid out from proceeds if there is enough equity. Leaving a formal proposal active while adding expensive secured debt can be hard to justify unless the exit is unusually strong.

The borrower should compare the mortgage cost with the proposal obligation and obtain LIT advice before changing an insolvency arrangement.

The useful explanation is not “life happened.” Build a chronology: what event caused insolvency, when cash flow failed, which debts entered the proposal, when circumstances stabilized, when the proposal was completed, and what credit behaviour has been clean since.

A proposal caused by a one-time business closure followed by stable salaried employment presents differently from a proposal followed by new maxed credit cards and recent late payments.

The Belleville title-transfer case involved an active consumer proposal. A-lender financing was unavailable and many B lenders wanted the proposal paid, but a B-lender exception was obtained because the overall file and very low leverage made sense.

The Cambridge proposal/CRA private mortgage used mortgage proceeds to deal with the first mortgage, CRA debt and the consumer proposal. The Brampton trucking-company refinance shows a B-lender route after proposal/credit disruption.

FCAC currently says a proposal is removed by Equifax and TransUnion based on completion/signing timelines; a completed proposal can therefore remain visible after the borrower has fulfilled it.

Do not confuse bureau deletion with mortgage eligibility. The underwriting question is whether the proposal is fulfilled and whether the borrower has built enough clean new history for the target lender/product.

There is no responsible mortgage-only answer to which insolvency process is “better.” The legal/financial decision belongs with a Licensed Insolvency Trustee. From a later mortgage perspective, lenders will examine completion/discharge, severity, credit recovery, property losses and the borrower’s subsequent conduct in either case.

Use Consumer Proposal vs Bankruptcy: Mortgage Implications for the side-by-side mortgage framework.

Where a B lender makes an exception and allows the proposal to remain active, HopeWell experience is that the required proposal payment is included as a liability when calculating affordability. If the file no longer fits the lender’s ratio threshold after that payment, the exception does not solve the problem.

Use How Lenders Calculate Liabilities and Total Debt Service to model the payment before approaching the lender.

Compare the proposal balance/payment with the new mortgage cost, fees, amortization and equity used. Paying a proposal early can remove a monthly obligation and sometimes open more lender options later, but it can also convert an unsecured insolvency settlement into long-term debt secured against the home.

The borrower should understand both sides and obtain Licensed Insolvency Trustee advice before changing the proposal. A mortgage professional should not recommend insolvency strategy.

Some A-side lenders want at least two new traditional reporting trades with satisfactory payment history and may not count an LOC as sufficient rebuilding evidence. That is why simply waiting two years with no active credit can leave the file technically seasoned but poorly documented.

Build manageable credit, keep balances low and pay every obligation on time. The Credit Rebuilding page sets out the sequence.

If the proposal arose from business failure, is that business closed or now stable? If it arose from repeated consumer overspending, have balances remained controlled? If marital separation caused the event, is the new household budget sustainable?

The strongest file is not the one with the best explanation language; it is the one where current facts demonstrate that the old cause has changed.