When unsecured debt becomes unmanageable, two formal options exist under federal law in Canada: a consumer proposal and personal bankruptcy. Both are regulated by the Bankruptcy and Insolvency Act, and both stop collection calls, wage garnishments, and creditor lawsuits the moment they are filed. But they work in very different ways, and choosing the wrong one can cost you assets, time, or thousands of dollars in extra payments.
This guide walks through the real, practical differences between a consumer proposal and bankruptcy in Canada in 2026 — what each one costs, how long each takes, what happens to your home and car, and how your credit report is affected. If you are behind on payments and trying to figure out which path makes sense, start here.
What a Consumer Proposal and Bankruptcy Actually Are
A consumer proposal is a formal, legally binding offer to your creditors to pay part of what you owe — typically 30 to 70 cents on the dollar — over a period of up to five years, interest-free. Only a Licensed Insolvency Trustee (LIT) can file one. Your unsecured debts must total between $1,000 and $250,000 (excluding your mortgage). Once the proposal is accepted by the majority of creditors and the court approves it, those creditors are legally bound to the new terms.
Bankruptcy is a different process entirely. Instead of negotiating a repayment plan, you surrender your non-exempt assets to the LIT, who sells them and distributes the proceeds to creditors. In exchange, most of your unsecured debts are legally discharged. A first-time bankruptcy with no surplus income is typically complete in nine months; with surplus income it extends to 21 months. Both options are only available through an LIT, who is licensed and regulated by the Office of the Superintendent of Bankruptcy.
Consumer proposals are now far more common than bankruptcies in Canada. According to recent OSB data cited by BDO Debt Solutions, proposals accounted for roughly 78% of all consumer insolvencies, while bankruptcy made up the remaining 22%. The shift reflects a preference among Canadians for a solution that protects assets and causes less credit damage.
Pros of Each Option
Consumer Proposal
- You keep your home, car, RRSP, and other assets
- Fixed monthly payment that does not change with your income
- Stops collection calls, lawsuits, and wage garnishments
- No interest accrues during the proposal
- Less severe credit impact than bankruptcy
Bankruptcy
- Typically shorter — as little as 9 months for first-time filers
- Immediate legal protection from creditors
- Most unsecured debts are discharged completely
- Works even when you cannot afford any monthly payment
- A genuine fresh start when nothing else is realistic
Cons of Each Option
Consumer Proposal
- You still repay a portion — often 30 to 70% of the debt
- Creditors must vote to accept it, and can reject it
- R7 credit rating stays for 3 years after completion, up to 6 years total
- Missing 3 months of payments can annul the proposal
- Not available if unsecured debts exceed $250,000
Bankruptcy
- Non-exempt assets may be sold to repay creditors
- Surplus income payments can extend the process to 21 months
- R9 rating — the most severe — stays on your credit report for 6 to 7 years
- Some debts (student loans under 7 years, court fines, support payments) are not discharged
- Certain professions may face licensing complications
Who a Consumer Proposal Fits
- You have steady employment income and can afford a fixed monthly payment
- Your unsecured debts total between $1,000 and $250,000
- You own a home, vehicle, or other assets you want to protect
- You have enough equity or income that bankruptcy would require large surplus payments anyway
- You want to avoid the stigma and career impact of a bankruptcy filing
Who Should Avoid a Proposal
- You have no stable income and cannot commit to a fixed monthly payment
- Your debt is primarily secured (mortgage, car loan) — a proposal does not cover those
- Your unsecured debts exceed $250,000 — bankruptcy or a Division I proposal may be required
- Most of your debt is from sources that cannot be discharged, like recent student loans or support arrears
- You could realistically repay the debt in full through credit counselling or debt consolidation without insolvency
A Side-by-Side Financial Example
Consider a Canadian with $40,000 of unsecured debt — credit cards, a line of credit, and a personal loan. Here is how each option might look:
The right choice depends on your income, your assets, and how much you can reasonably afford each month. An LIT runs these numbers with you before anything is filed, and the initial consultation is free.
How to Choose Between Them: Step by Step
- List every debt and who you owe it to. Write down balances, interest rates, whether each debt is secured or unsecured, and any collection status. This is the raw material an LIT works from.
- Calculate your real monthly cash flow. After rent, groceries, utilities, and transportation, how much is left? If the answer is “nothing or close to it,” bankruptcy may be the only realistic path. If you have $200 to $500 of room, a proposal often works.
- Value your assets honestly. Home equity, a vehicle, savings, RRSPs, tools of the trade. Provincial exemptions protect some of these in bankruptcy, but not always all. The more equity you want to protect, the more a proposal makes sense.
- Book a free consultation with a Licensed Insolvency Trustee. Only an LIT can file either a proposal or bankruptcy. They will review your situation, explain both options, and give you the numbers side by side. You are not obligated to file after meeting with one.
- Compare the total cost and impact. Add up total payments, duration, credit impact, and asset risk for each option. Read through real Canadian outcomes if it helps you visualize what life looks like during and after.
- File through the LIT once you decide. The trustee handles paperwork, notifies creditors, and stops collection activity the moment the filing is registered with the OSB.
Ready to see if you qualify?
Does a consumer proposal hurt my credit as badly as bankruptcy?
No. A consumer proposal results in an R7 credit rating, which stays on your credit report for three years after you complete payments or six years from the filing date, whichever comes first. Bankruptcy results in an R9 — the most severe credit rating — which remains for six to seven years after discharge for a first-time filing, and longer for repeat filings. Both hurt your credit significantly, but a proposal recovers faster.
Will I lose my house or car in a consumer proposal?
No. One of the main reasons Canadians choose a consumer proposal is that it protects your assets. You keep your home, vehicle, RRSPs, and personal belongings as long as you continue making your mortgage and car loan payments on time. Bankruptcy is different — provincial exemptions protect some assets, but equity above the exemption limit may need to be surrendered or bought back through surplus payments.
How long does each process take from start to finish?
A consumer proposal can last up to five years, though many Canadians choose shorter terms of three to four years. You can also pay it off early without penalty. A first-time bankruptcy with no surplus income is complete in nine months. If your household income exceeds the OSB’s threshold, surplus income payments extend a first bankruptcy to 21 months. Second bankruptcies take 24 to 36 months.
What debts cannot be included in either a proposal or bankruptcy?
Secured debts like mortgages and car loans are not eliminated by either process — you keep paying them if you want to keep the asset. Student loans are only discharged if it has been at least seven years since you stopped being a full- or part-time student. Court-ordered fines, support payments, debts from fraud, and certain tax obligations also survive both processes. An LIT will identify exactly which of your debts qualify.
Can I file a consumer proposal or bankruptcy myself without a trustee?
No. By federal law in Canada, only a Licensed Insolvency Trustee can administer a consumer proposal or bankruptcy. LITs are regulated by the Office of the Superintendent of Bankruptcy and must follow strict rules about fees, disclosures, and conduct. Most offer a free initial consultation, and their fees for a proposal are built into your monthly payments rather than paid separately up front.
After 20 years of structuring multi-million dollar corporate debt facilities and corporate turnarounds in investment banking, Marcus now leads Canadian Debt Relief to apply those exact same balance-sheet optimization frameworks to Canadian household debt.
