When debts pile up faster than you can pay them, two formal options exist in Canada: a consumer proposal or a bankruptcy. Both stop collection calls and wage garnishments, and both are handled by a Licensed Insolvency Trustee. But they work very differently. This guide compares consumer proposal vs bankruptcy so you can understand which one may fit your situation before you meet a professional.
What is a consumer proposal?
A consumer proposal is a legally binding offer to your unsecured creditors to repay part of what you owe, or to repay over a longer period. It is filed under the federal Bankruptcy and Insolvency Act through a Licensed Insolvency Trustee, who negotiates on your behalf.
- Your total debts (excluding the mortgage on your principal residence) must not exceed $250,000.
- Payments can be spread over a maximum of five years.
- Creditors vote on the offer. If creditors holding a majority of the dollar value of claims accept, it binds all unsecured creditors.
- You keep your assets, such as your home and car, as long as you keep paying any secured loans on them.
What is a bankruptcy?
A bankruptcy is a legal process that releases you from most of your debts in exchange for giving up certain assets and following duties set by the law, such as attending two financial counselling sessions and reporting your income monthly.
- For a first bankruptcy with no surplus income, discharge can happen after 9 months.
- For a first bankruptcy with surplus income, the period is usually 21 months.
- Second and later bankruptcies last longer.
- Some assets are exempt under provincial law, while others may have to be surrendered to the trustee.
Consumer proposal vs bankruptcy: side by side
| Factor | Consumer proposal | Bankruptcy |
|---|---|---|
| Debt limit | Up to $250,000 (excluding principal residence mortgage) | No limit |
| Duration | Up to 5 years | Usually 9 or 21 months for a first bankruptcy |
| Assets | You generally keep them | Non-exempt assets may be surrendered |
| Payments | Fixed amount agreed with creditors | Based on income (surplus income rules) |
| Creditor approval | Required (vote) | Not required |
| Credit impact | Negative, generally less severe | More severe, lasts longer |
How to decide which option fits
A consumer proposal may fit if…
- you have a stable income and can afford a monthly payment;
- you own a home with equity or other assets you want to protect;
- your income is high enough that bankruptcy would require large surplus income payments;
- your total debts are under the $250,000 limit.
A bankruptcy may fit if…
- your income is low or unstable and you cannot afford a proposal payment;
- you have few non-exempt assets;
- your debts exceed the consumer proposal limit;
- you want the shortest possible path to a fresh start.
A trustee will look at your full budget, assets and debts. Before your meeting, list every debt, its balance and interest rate, along with your monthly take-home pay and expenses. Keeping your accounts organized and secure also helps; our guide to safe and secure online banking covers good habits for managing your accounts online.
Debts that are not erased
Neither a consumer proposal nor a bankruptcy wipes out every type of debt. Common exceptions include:
- child and spousal support payments;
- court fines and penalties;
- debts arising from fraud;
- student loans, if you stopped being a student less than seven years before filing;
- secured debts such as a mortgage or car loan, if you want to keep the asset.
What happens to your credit?
Both options are recorded on your credit report and will make borrowing harder for a while. A consumer proposal usually leaves a shorter mark than a bankruptcy, though the exact duration depends on the credit bureau and your province. Many people start rebuilding with a secured credit card and on-time payments once the process is complete.
Alternatives to consider first
A formal insolvency is a serious step. Depending on your situation, these options might solve the problem without one:
- Budget adjustments and a payment plan with your creditors.
- Debt consolidation loan, if your credit still allows you to borrow at a lower rate.
- Debt management plan through a non-profit credit counselling agency, which can reduce interest but repays the full principal.
To see how interest and payments add up before you decide, the Canadian debt and loan calculators at Calculateur.online let you compare scenarios side by side. You can also find more articles on the Dettes.online home page.
Where to get official information
Only a Licensed Insolvency Trustee can file a consumer proposal or bankruptcy. The federal Office of the Superintendent of Bankruptcy lists licensed trustees and explains the process. Be cautious with companies that charge upfront fees to help you with debt but are not licensed trustees.
FAQ
Is a consumer proposal better than bankruptcy?
Not always. A proposal protects your assets and usually has a lighter credit impact, but it requires steady payments for up to five years. Bankruptcy can be faster and cheaper for people with low income and few assets.
Can I keep my house in a consumer proposal?
Generally yes, as long as you keep up with your mortgage payments. The proposal deals with your unsecured debts.
What happens if creditors reject my consumer proposal?
Your trustee may negotiate an improved offer. If no agreement is reached, the proposal fails and you may need to consider other options, including bankruptcy.
How long does a first bankruptcy last in Canada?
A first bankruptcy usually lasts 9 months without surplus income, or 21 months with surplus income, if there are no complications.
