Consumer Proposal vs. Bankruptcy in Canada: Clear Differences, Real Examples, and Smart Ways to Choose

Facing unmanageable debt can feel overwhelming. In Canada, two of the most powerful legal options for a fresh start are a consumer proposal and personal bankruptcy. Both are governed by the Bankruptcy and Insolvency Act and must be administered by a Licensed Insolvency Trustee (LIT). While each option can stop collections and help you reset, they work very differently and have distinct impacts on your budget, assets, and credit profile. This guide breaks down Consumer Proposal vs. Bankruptcy in plain language so you can make a confident, well-informed decision.

Consumer Proposal vs. Bankruptcy: A Quick Overview

At a high level, a consumer proposal is a negotiated settlement with your unsecured creditors to repay a portion of what you owe over time—usually up to five years—while keeping your assets. Bankruptcy is a more formal insolvency process that can eliminate most unsecured debts faster, but it may require you to surrender certain non-exempt assets and make income-based payments if you earn over government thresholds.

Both options immediately trigger a legal stay of proceedings that stops collection calls, lawsuits, and wage garnishments. Learn how this protection works in detail in our explainer on the stay of proceedings and creditor actions.

What Is a Consumer Proposal?

A consumer proposal is a binding agreement filed through an LIT where you offer to pay creditors a portion of your unsecured debts in fixed monthly payments (or a lump sum). Terms can run up to 60 months. If the majority of voting creditors (by dollar value) accept the offer, it becomes binding on all unsecured creditors included in the proposal. When you complete the terms, the remaining balance of those included debts is legally forgiven.

Common advantages include:

• Keep your home, car, and other assets (as long as you maintain payments on any secured loans such as your mortgage or car loan).
• Predictable fixed payments with no interest on the unsecured portion included in the proposal.
• Less severe credit impact over time compared to bankruptcy.

To go deeper, see our plain-language guide, Understanding Consumer Proposals: Your Guide to Debt Relief Solutions, and our asset-focused explainer, What Happens to Your Assets in a Consumer Proposal?

What Is Bankruptcy?

Bankruptcy is a legal process that offers a discharge from most unsecured debts—often faster than a consumer proposal—when you cannot reasonably repay your obligations. You assign your non-exempt assets (which vary by province) to the LIT for the benefit of creditors. You may also make surplus income payments if your earnings exceed government-set thresholds, which can extend the timeline and increase the cost.

For a first-time bankruptcy in Canada, discharge can occur in as little as nine months if your income is below the surplus threshold and you comply with all duties. If you have surplus income, a first bankruptcy usually extends to 21 months. For repeat bankruptcies, timelines are longer. For current context and thresholds, see the Government of Canada and Financial Consumer Agency of Canada (FCAC) resources.

Consumer Proposal vs. Bankruptcy: Key Differences That Matter

Choosing between Consumer Proposal vs. Bankruptcy comes down to how each affects your property, payments, credit, and long-term recovery. Here are the big differences:

Asset Retention

• Consumer Proposal: You generally keep your assets (home equity, vehicle, RRSPs with certain exceptions), as long as you keep up with secured payments. The proposal addresses unsecured debts.
• Bankruptcy: You may need to surrender non-exempt assets; exemptions (like basic household goods, a protected amount of home equity, and tools of the trade) vary by province. The LIT advises what is exempt in your province.

Cost and Payments

• Consumer Proposal: Payments are fixed and based on what creditors are willing to accept, often less than the full amount owing. No interest accrues on included unsecured debts. Terms can stretch up to five years for affordability.
• Bankruptcy: Cost depends on your income (surplus calculations), assets, and whether this is a first or subsequent bankruptcy. If you have higher income, a consumer proposal can sometimes be less expensive overall than bankruptcy.

For a detailed, side-by-side breakdown, review our Complete Canadian Guide (2025): Bankruptcy vs Consumer Proposal.

Credit Impact

• Consumer Proposal: Notation remains on your credit report for a period after completion (commonly three years after you finish payments with one major bureau). During the proposal, your score will be impacted, but many Canadians rebuild within 12–24 months after completion.
• Bankruptcy: A first bankruptcy typically remains for roughly six to seven years after discharge with one major bureau. A second bankruptcy stays longer. Rebuilding is possible but may take additional time.

Policies can vary by credit bureau and change over time, so consult the Financial Consumer Agency of Canada for best practices on credit rebuilding.

Timeline and Process

• Consumer Proposal: Approval process can take several weeks, followed by a repayment term up to five years. If you can afford it, you can pay off early to complete sooner.
• Bankruptcy: Discharge can occur in 9–21 months for a first bankruptcy (longer for repeats), depending on surplus income and compliance with duties.

Eligibility and Debts Covered

• Unsecured debts: Most unsecured debts (credit cards, lines of credit, personal loans, payday loans, utility arrears, certain tax debts) can be included in both a proposal and bankruptcy.
• Government student loans: These are typically dischargeable only if you’ve been out of studies for seven years. The seven-year rule applies under the Bankruptcy and Insolvency Act.
• Secured debts: Mortgages and car loans are not automatically included; you decide whether to keep paying and keep the asset or surrender it.

For how tax debt is handled and how collections pause, see the Canada Revenue Agency (CRA) guidance and our resource on the stay of proceedings.

How Each Option Affects Your Day-to-Day Life

Regardless of whether you file a proposal or bankruptcy, the immediate relief of the stay of proceedings can be life-changing. Here’s how daily life may differ:

• Collections stop: Calls, lawsuits, and wage garnishments must cease, including most CRA actions.
• Budgeting: Proposal payments are fixed, making monthly budgeting predictable. Bankruptcy payments vary if surplus income applies, potentially changing if your income changes.
• Housing: If you’re up to date on mortgage or rent, you can typically stay put. Always review your lease or mortgage terms and speak with your LIT.
• Employment: Most jobs are unaffected. Certain professions with fiduciary responsibilities may have specific requirements; confirm with your professional body or HR.

Realistic Examples and Scenarios

These examples are hypothetical and for illustration. Your outcome depends on your income, assets, province, and debts.

• Example 1: Keeping a home and car, moderate income. Sam owes $48,000 in unsecured debt, owns a car with a loan, and has a mortgage with little equity. A consumer proposal offering $18,000 over 60 months ($300/month) is accepted. Sam keeps the home and car, makes fixed payments, and no interest accrues on included debts.
• Example 2: Lower income, no significant assets. Jordan earns below the surplus threshold and rents. First-time bankruptcy with no surplus income could lead to discharge in 9 months with lower overall cost than a proposal. If Jordan’s income rises, the bankruptcy could extend and cost more due to surplus income rules.
• Example 3: Higher income, protecting a tax refund. Taylor earns well above the surplus threshold and receives sizable tax refunds. A consumer proposal could be cheaper over time than bankruptcy (which would likely require surplus payments and may capture part of tax refunds). Proposal payments are fixed; Taylor keeps assets while addressing CRA debt in the proposal.

For more data-driven context on Canadian insolvency trends, see Statistics Canada, which publishes monthly insolvency statistics.

How to Choose Between a Consumer Proposal and Bankruptcy

Use this simple framework to guide a conversation with a Licensed Insolvency Trustee:

• Assets to protect? Significant home equity, a paid-off vehicle, or investments you want to keep can tilt the decision towards a consumer proposal.
• Income level now and expected later? Higher or rising income can make bankruptcy costlier due to surplus income. A proposal offers fixed payments.
• Debt mix and creditors: Large balances with high-interest unsecured creditors or CRA tax arrears may be well-suited to a proposal. Review each debt with an LIT to confirm eligibility.
• Timeline goals: If you need the absolute fastest discharge and have minimal assets/income, bankruptcy may be quicker. If you need predictable budgeting and asset retention, a proposal fits.

For a deeper comparison, explore our expert breakdown: Consumer Proposal vs Bankruptcy in Canada: Expert Debt Relief Guide.

Step-by-Step: What Happens Next

If you’re leaning toward a consumer proposal:

1. Meet with a Licensed Insolvency Trustee for a confidential assessment of your debts, income, and assets.
2. Design a proposal that creditors are likely to accept (payment amount, term, and any lump sum).
3. File the proposal; the stay of proceedings begins, and creditors vote (by dollar value) to accept/reject.
4. Once accepted, you make the agreed payments. On completion, remaining included balances are forgiven.

If you’re leaning toward bankruptcy:

1. Review your budget, assets, and surplus income calculation with the LIT.
2. File assignment in bankruptcy; the stay of proceedings begins immediately.
3. Attend two financial counselling sessions and complete all duties (e.g., monthly income reports).
4. Receive discharge when eligible (9–21 months for a first bankruptcy, depending on surplus income and compliance).

To understand timelines and costs that can change with income, see our guide on bankruptcy duration in Canada and key factors.

Alternatives to Consumer Proposal and Bankruptcy

Before filing, consider whether a non-insolvency option can solve the problem:

• Debt consolidation loan: Combine multiple debts into one payment—best if your credit and income still qualify for a good rate. Learn how consolidation works, including benefits and risks, in our guide to debt consolidation in Canada.
• Debt management program (DMP): A structured plan through a credit counselling agency that aims to reduce interest and create a payment plan (not a legal filing, so no formal stay of proceedings).
• Debt settlement: Negotiate lump-sum settlements. This can work in limited cases but carries credit and legal risks if not carefully handled.

Recovery and Rebuilding Credit

Whether you complete a proposal or receive a bankruptcy discharge, a disciplined rebuild plan can significantly improve your profile within 12–24 months:

• Create a realistic budget with room for savings—a buffer prevents relapses into credit reliance.
• Use a secured credit card responsibly (low limit, pay in full monthly), monitor utilization under 30%.
• Automate on-time bill payments to build a positive history.
• Review your credit report for accuracy and dispute any errors with the bureaus.

For more policy and best-practice guidance, refer to the Financial Consumer Agency of Canada.

Sources, Rules, and Protections You Can Trust

These processes sit under federal law and are overseen by licensed professionals. For authoritative information, consult:

• Government of Canada for consumer insolvency law basics and federal resources
• Financial Consumer Agency of Canada (FCAC) for money management, credit reporting, and borrower rights
• Canada Revenue Agency for how tax debt and garnishments are treated in insolvency
• Statistics Canada for monthly consumer insolvency trends by province

If you want a side-by-side refresher after reading this article, see our concise comparison: Consumer Proposal vs Bankruptcy: A 2025 Comparison.

FAQs: Consumer Proposal vs. Bankruptcy

Will a consumer proposal or bankruptcy stop a wage garnishment?
Yes. Filing either option triggers an automatic stay of proceedings that stops most garnishments and lawsuits, including many CRA actions.

Can I include CRA tax debt?
Usually, yes—both consumer proposals and bankruptcies can include eligible CRA tax debt. Confirm specifics with your LIT.

Which option is faster?
Bankruptcy often leads to a faster discharge (for first-time filers below surplus income thresholds). A consumer proposal takes longer but offers fixed payments and better asset retention.

Is a consumer proposal better for my credit than bankruptcy?
Generally, a completed consumer proposal has a shorter-lasting credit impact than a bankruptcy. Either way, disciplined rebuilding can improve your score over 12–24 months.

What about government student loans?
Government student loans are typically only dischargeable if you’ve been out of studies for seven years. Your LIT will help assess the timing and eligibility.

For a comprehensive walk-through beyond this summary, don’t miss our in-depth resource: Bankruptcy vs Consumer Proposal: Complete Canadian Guide (2025).

The Bottom Line

Consumer Proposal vs. Bankruptcy isn’t a one-size-fits-all decision. A consumer proposal typically helps you keep assets and budget with fixed payments, while bankruptcy can erase debts more quickly when income and assets are limited. Consider your income today (and tomorrow), the assets you need to protect, how predictable you want your payments to be, and how quickly you need debt freedom. With guidance from a Licensed Insolvency Trustee, you can choose the option that protects your essentials and restores your financial stability with confidence.