What Happens If You Default on a Consumer Proposal in Canada?

If you miss 3 monthly payments on a consumer proposal, it is automatically annulled under Section 66.31 of the Bankruptcy and Insolvency Act. Annulment means you owe the full original debt again—minus whatever you already paid—and creditors can resume collections, garnishments, and lawsuits immediately. The stay of proceedings that was protecting you vanishes the moment that third missed payment comes due. Interest that was frozen during your proposal starts accruing again from the original default dates, not from the annulment date. But you can prevent annulment if you act before the third missed payment hits.

This article breaks down exactly what happens at each stage of missed payments, what you lose financially, and the specific steps you can take right now to save your proposal. If you are behind on payments, the worst thing you do is nothing. Every day you wait pushes you closer to annulment—and the consequences are severe.

The 3-Payment Rule: How Default Works

Section 66.31(1)(a) of the BIA establishes the automatic annulment threshold: 3 cumulative missed monthly payments. This is not 3 consecutive misses. If you miss January, pay February, miss March, pay April, then miss May—your proposal is annulled the day that May payment was due. The BIA counts total arrears, not consecutive months.

Your Licensed Insolvency Trustee tracks every payment. They know the moment you fall behind, and they are required to report to the Office of the Superintendent of Bankruptcy. The LIT is also your first line of defence. They want your proposal to succeed—an annulment means more administrative work for them with no additional compensation.

Here is what happens at each stage:

The annulment is not a decision your LIT makes. It happens by operation of law. Your LIT cannot extend grace periods or waive the 3-payment rule. The BIA does not allow exceptions. Once you hit 3 missed payments, annulment is automatic and immediate.

Lisa, a grade 4 teacher from Sudbury, filed a consumer proposal to deal with $38,000 in credit card debt and a $7,200 CRA balance. Her monthly proposal payment was $420 over 48 months. Fourteen months in, she went on maternity leave and her income dropped by 40%. She missed her March payment, made April late, then missed May and June. On June 15—the date her third missed payment came due—her proposal was automatically annulled. She owed $26,100 in reinstated debt plus $3,400 in re-accrued interest. If she had contacted her LIT after missing the March payment, she could have filed an amendment to reduce her monthly payment to $250 during her leave. Instead, she lost the $5,880 she had already paid and faced the full balance again.

Don’t be Lisa. If you have missed even one payment, contact your LIT today. Understand the full consumer proposal timeline so you know exactly where you stand.

What Happens the Moment Your Proposal Is Annulled

Annulment triggers a cascade of consequences that starts the same day the third payment is missed. There is no grace period, no warning letter, no court hearing. The law executes automatically.

The Stay of Proceedings Lifts Immediately

The stay of proceedings is the legal shield that stopped creditors from garnishing your wages, calling you, or suing you while your proposal was active. The moment annulment occurs, that shield disappears. Every creditor included in your proposal regains full collection rights—simultaneously.

Wage Garnishments Restart

Creditors with existing garnishment orders before your proposal simply reactivate them. CRA is the fastest—they can issue a Requirement to Pay to your employer within days of annulment, garnishing up to 50% of your wages for tax debt. Other creditors with court-ordered garnishments typically resume deductions within 2-4 weeks. If you are concerned about stopping wage garnishment, you need to act before annulment—not after.

Collection Calls Resume

Creditors and collection agencies restart phone calls the moment they receive notice of annulment from your LIT. Expect calls within the first week. Debts that were sold to collection agencies during your proposal may now be pursued aggressively, with multiple agencies contacting you about different accounts.

Lawsuits Proceed

Any lawsuits that were stayed when you filed your proposal can resume. Creditors who had already obtained judgments before your proposal can enforce those judgments immediately. New lawsuits can be filed without restriction.

Interest Resumes from Original Default Dates

This is the detail that shocks most people. Interest does not start accruing from the date of annulment. It resumes from the original default dates on each debt, as if the proposal never existed. Credit cards restart at 19.99-29.99% APR. CRA compounds daily interest on tax balances. A $30,000 credit card balance at 22% APR accumulates $550 per month in interest charges alone.

Credit Report Impact

Your credit report does not reset to pre-proposal status. The R7 rating from your original filing remains. But the proposal status changes from “active” to “annulled.” This is significantly worse than a “completed” notation. A completed proposal is removed 3 years after your final payment. An annulled proposal stays on your report for 6 years from the filing date with no early removal path.

Derek, an electrician from Thunder Bay, had $52,000 in debt including $14,000 owed to CRA. His consumer proposal payment was $540/month over 60 months. After 22 months, a work injury put him on WSIB benefits at 85% of his regular earnings. He missed three payments over four months and his proposal was annulled. Within 6 business days, CRA issued a Requirement to Pay to his WSIB payments, garnishing $890/month directly from his benefits. Two credit card companies reactivated garnishment orders within three weeks. Derek went from paying $540/month under his proposal to losing $1,340/month in garnishments—while still owing $40,120 in reinstated debt.

If your proposal is at risk, use the consumer proposal calculator to understand what you owe and what amended payments could look like.

The Financial Damage: What You Lose

Annulment does not just reset the clock. It puts you in a worse financial position than when you first filed. You lose the payments you already made, you lose the debt forgiveness creditors agreed to, and you gain a worse credit record.

Payments Already Made Are Gone

You do not get refunds on proposal payments. Your LIT distributed those funds to creditors as they came in. Those payments reduced your original debt, but without the forgiveness component of a completed proposal, the reduction is minimal compared to what you still owe.

The Math of Annulment

Consider this example. You owed $46,000 in original debt across credit cards, a line of credit, and CRA. Your consumer proposal offered creditors $32,000 paid over 60 months at $533/month. You paid $18,000 over 34 months before annulment.

After annulment:

• Original debt: $46,000
• Payments already made: -$18,000
• Remaining principal owed: $28,000
• Re-accrued interest (estimated 34 months at average 18% APR): +$11,200
• Total debt after annulment: approximately $39,200

You paid $18,000 and still owe $39,200. Had you completed the proposal, you would have paid $32,000 total and owed nothing. The difference between completing and defaulting is $25,200 in this scenario. That is the true cost of annulment.

Understanding the full cost of a consumer proposal before you file helps you plan for financial disruptions. And knowing the fees your LIT charges ensures there are no surprises in your payment schedule.

How to Prevent Default Before It Happens

If you are reading this because you have missed a payment—or you are about to—stop and take action right now. You have options, but only if you use them before the third missed payment triggers annulment. Every one of these options requires you to contact your LIT. Pick up the phone today.

Option 1: Amend Your Proposal

Section 66.37 of the BIA allows you to formally amend your consumer proposal. An amendment can extend your payment period (up to the 60-month maximum), reduce your monthly payment amount, or restructure the payment schedule entirely. Your LIT files the amendment, and creditors vote on it following the same process as the original proposal filing.

Amendments are approved at high rates when you demonstrate a legitimate change in circumstances. Job loss, medical leave, reduced hours, divorce—these are all recognized reasons. Creditors prefer an amended proposal over annulment because annulment means they have to spend money on collection efforts with no guarantee of recovery. A reduced payment is still better than no payment for them.

The amendment process takes 45 days for creditor voting. During that time, your existing proposal stays active and the stay of proceedings remains in place. You are protected while the amendment is being considered.

Option 2: Catch-Up Payments

If you have missed one or two payments but can catch up, do it immediately. Make a double payment this month. Call your LIT and confirm your payment schedule is back on track. The proposal stays alive as long as you never reach 3 cumulative missed payments at any point.

Some LITs allow you to add missed payments to the end of your proposal term rather than requiring a lump-sum catch-up. Ask about this option—it spreads the missed amounts over remaining months rather than requiring an immediate large payment.

Option 3: Convert to a Lump Sum

If you receive a tax refund, an inheritance, help from family, or any unexpected funds, apply them directly to your proposal. A lump-sum payment can eliminate arrears and even accelerate your completion date. There are no penalties for paying ahead on a consumer proposal.

This option works well combined with an amendment. For example, you use a $2,000 tax refund to catch up on missed payments while simultaneously amending your proposal to reduce monthly payments from $500 to $350 going forward.

Kevin, a welder from Sarnia, was 28 months into a 48-month consumer proposal paying $475/month on $41,000 in debt. His shop reduced overtime and his take-home pay dropped by $600/month. He missed one payment in October and knew he would miss November. Instead of waiting, he called his LIT on November 3. His LIT filed an amendment to extend the proposal from 48 to 58 months and reduce the monthly payment to $340. Creditors approved the amendment in 39 days. Kevin never missed a third payment, his stay of proceedings remained in place, and he is on track to complete his amended proposal by 2028. His total cost increased by $1,220 compared to the original terms—but that is $24,000 less than what he would owe if the proposal had been annulled.

If you see signs that you need a consumer proposal adjustment, act immediately. Review the consumer proposal FAQ for additional details on the amendment process.

Can You File a New Consumer Proposal After Default?

Yes. The BIA does not limit the number of consumer proposals you can file. If your proposal is annulled, you can file a new one. But it is harder the second time.

Creditors Are Skeptical

Creditors who accepted your first proposal watched you default on it. They are less willing to accept a second proposal at the same terms. Your LIT typically needs to offer a higher repayment percentage or a shorter term to get approval. Where your first proposal might have offered 40 cents on the dollar over 60 months, a second proposal might need to offer 55 cents on the dollar over 48 months.

The consumer proposal acceptance rate for second filings is lower than the 99% rate for first filings. The exact rate varies by creditor mix—CRA is generally more willing to accept second proposals than major banks.

A New Filing Creates a New Stay

The good news: filing a new consumer proposal immediately triggers a new stay of proceedings. Garnishments stop. Collection calls stop. Lawsuits are stayed. This protection starts the day your new proposal is filed, not when creditors accept it.

The Cost Equation

A new proposal means new LIT fees, which are included in your total proposal amount (you do not pay them separately). But the total amount you offer creditors is almost always higher than your first proposal. Calculate the numbers using the consumer proposal calculator before deciding whether a new proposal makes financial sense.

New Proposal vs. Bankruptcy: The Strategic Decision

If your circumstances have changed permanently—not temporarily—bankruptcy may cost less than a second consumer proposal. This is especially true if your income has dropped significantly, because bankruptcy surplus income payments are based on current income, while a consumer proposal is based on what creditors are willing to accept.

Priya from Kitchener had her first consumer proposal annulled after losing her retail management position. She owed $37,000 in reinstated debt. Her LIT presented two options: a second consumer proposal offering creditors $24,000 over 54 months ($444/month), or bankruptcy with estimated surplus income payments of $310/month for 21 months ($6,510 total). Priya chose the second consumer proposal because she had recently started a new job at $58,000/year and wanted to avoid the R9 bankruptcy rating. Her creditors accepted the new proposal after her LIT demonstrated stable employment and a realistic budget. She is now 8 months in with zero missed payments.

Compare your options using the consumer proposal vs bankruptcy breakdown or the solutions comparison tool.

When Bankruptcy Is the Better Option After Default

Bankruptcy is not always worse than a second consumer proposal. In specific circumstances, it costs less, resolves faster, and gives you a cleaner path to rebuilding credit.

Permanent Income Drop

If your income dropped permanently—due to disability, career change, or retirement—bankruptcy surplus income payments are calculated on your current income. A consumer proposal requires creditor approval, and creditors base their expectations on your earning potential, not just current earnings. Bankruptcy may result in significantly lower total payments.

No Realistic Monthly Payment Capacity

If you cannot afford any meaningful monthly payment, a first-time bankruptcy with no surplus income results in automatic discharge after 9 months. Your total out-of-pocket cost is the bankruptcy filing fee ($1,800-$2,500 depending on your province). Compare that to a consumer proposal that requires monthly payments for up to 60 months.

The Decision Framework

Talk to your LIT about both options. They are legally required to present all alternatives, including bankruptcy, debt consolidation, and direct creditor negotiation. Get the numbers for both scenarios before deciding.

Read the full guide on when to file bankruptcy in Canada to understand the process, costs, and timeline.

Take Action Today—Not Tomorrow

If you are behind on your consumer proposal payments, the single most important thing you do right now is call your Licensed Insolvency Trustee. Not next week. Not when you “figure things out.” Today.

Every day you wait brings you one day closer to automatic annulment—and the consequences are severe. Reinstated debt. Restarted garnishments. Re-accrued interest. A damaged credit report that takes years longer to recover from.

But here is the reality: LITs deal with missed payments constantly. They have tools to help you—amendments, restructured payments, catch-up plans. They want your proposal to succeed. The conversation is not adversarial. It is problem-solving.

You have three paths forward:

1. If you have missed 1-2 payments: Call your LIT and arrange catch-up payments or file an amendment to reduce your monthly amount
2. If your proposal was just annulled: Ask your LIT about filing a new proposal or whether bankruptcy makes more financial sense
3. If you are struggling but haven’t missed yet: Contact your LIT now to discuss an amendment before you fall behind

Use the debt tracker to organize your balances and payment schedule. Find a Licensed Insolvency Trustee if you need a second opinion or don’t have one yet. And if you want to understand the full picture of what happens when a proposal is annulled, read the companion guide.

The worst decision is no decision. Your creditors are not waiting—and neither should you.