Consumer proposal vs bankruptcy in Canada
When the debt is past the point a loan can fix, Canada has two legal ways out — and a lot of for-profit noise in between. Here is the honest version: what each process actually does, the one professional allowed to file it, and how long it follows you. Every legal figure cited to its federal source.
First, the spectrum
Debt relief is not one decision but a ladder, from least to most serious. A consolidation loan refinances what you owe at a lower rate — you still repay it all. A debt-management plan through a non-profit credit counsellor keeps the principal but often cuts the interest. A consumer proposal and bankruptcy are different in kind: they are legal insolvency processes that can reduce what you owe and legally bind your creditors. The first two are borrowing and budgeting; the last two are the law. Most people should work down this ladder in order.
The four options, side by side
| Option | What it is | Who runs it | Reduces principal? | On your credit report |
|---|---|---|---|---|
| Debt consolidation loan | A new loan that pays off several debts into one payment, ideally at a lower rate. You still owe 100% of the principal — it is refinancing, not forgiveness. | A bank, credit union or lender (ordinary credit) | Repaid in full | Small, temporary dip |
| Debt-management plan (DMP) | A voluntary agreement arranged by a non-profit credit counsellor that often reduces or waives interest and repays your debts over roughly five years. | A non-profit credit counsellor | Repaid in full (interest often cut) | Noted while active |
| Consumer proposal | A legal offer to creditors to repay all or part of what you owe over up to five years. Can reduce the principal. Debts capped at $250,000 (excluding principal-residence mortgage). | Licensed Insolvency Trustee only | Can be reduced | 3 yrs after paid / 6 yrs after signing (sooner) |
| Bankruptcy | A legal process that discharges most unsecured debts. You may surrender certain assets and make surplus-income payments, but it can resolve faster than a proposal. | Licensed Insolvency Trustee only | Most unsecured debt discharged | ~6 yrs after a first discharge (longer if repeated) |
How a consumer proposal works
A consumer proposal is a formal, legally binding process administered by a Licensed Insolvency Trustee. You offer your unsecured creditors a single amount — often well below the full balance — paid over a term that cannot exceed five years. Once a majority of creditors (by dollar value) accept, the deal binds them all, and a legal stay stops collection calls, wage garnishments and interest. You keep your assets, including your home and car, as long as you keep up secured payments like the mortgage.
There is an eligibility ceiling. Under the Bankruptcy and Insolvency Act (s. 66.11), a "consumer debtor" is someone whose aggregate debts — excluding any debt secured by their principal residence — are not more than $250,000. Above that, the equivalent route is a Division I proposal. There is no legal minimum, but a proposal only makes sense when you genuinely cannot repay the debt in full yet can offer creditors a meaningful share.
How bankruptcy differs
Bankruptcy also runs through an LIT under the same Act, but instead of a negotiated repayment it discharges most unsecured debts. In exchange you may have to surrender certain non-exempt assets and, if your income is above a set threshold, make "surplus income" payments for the duration. A first bankruptcy is often discharged in nine to twenty-one months — faster than a five-year proposal — but it carries a heavier credit consequence and the asset/income trade-offs. For someone with steady income and assets to protect, a proposal is usually the better fit; for someone with little income and little to lose, bankruptcy can be the cleaner reset.
How long each follows you
These are credit-bureau retention rules summarized by the Financial Consumer Agency of Canada, not the legal length of the process:
- Consumer proposal: removed three years after you finish paying the included debts, or six years after you sign — whichever comes first.
- First (discharged) bankruptcy: removed about six years after discharge; TransUnion keeps it seven years after discharge in certain provinces.
- Multiple bankruptcies: can remain for fourteen years.
Before you file: is the debt really unpayable?
The honest gate before any insolvency filing is whether a cheaper loan would still work. If you can qualify for a rate below what your debt costs now, a consolidation loan repays everything and barely dents your credit — far less drastic than a proposal. Run your real numbers through the debt consolidation calculator; if even your minimum payments cannot keep up with the interest, that is the signal a loan can no longer help and a conversation with a Licensed Insolvency Trustee is the right next step. Note too that the federal criminal interest rate is capped at 35% APR (in force since January 1, 2025) — a useful line when a subprime lender pitches a "consolidation" loan that would cost more than the debt it replaces.
Frequently asked questions
What is the difference between a consumer proposal and bankruptcy?
Both are formal insolvency processes under the federal Bankruptcy and Insolvency Act, and both can only be filed through a Licensed Insolvency Trustee (LIT). In a consumer proposal you keep your assets and offer creditors a single, reduced amount paid over up to five years; in a bankruptcy you may have to surrender certain assets and (above an income threshold) make surplus-income payments, but it can resolve faster. A proposal is generally preferred by people who can pay something and want to keep their home or car; bankruptcy is for those who cannot.
Who can file a consumer proposal in Canada?
Only a Licensed Insolvency Trustee — the only professional authorized by the federal Office of the Superintendent of Bankruptcy to administer a consumer proposal or a bankruptcy. Companies that advertise "debt settlement" or "credit repair" are not LITs and cannot file one for you; they typically charge a fee to refer you to a trustee you could see directly for free. To file a consumer proposal, your debts (excluding any mortgage on your principal residence) must be $250,000 or less.
How much debt do you need for a consumer proposal?
There is no minimum set in law, but a consumer proposal has a maximum: your aggregate debts, excluding debts secured by your principal residence, must not exceed $250,000 (Bankruptcy and Insolvency Act, s. 66.11). Above that limit, the equivalent process is a Division I proposal. In practice a proposal makes sense when you have enough unsecured debt that you cannot realistically repay it in full, but enough income to offer creditors a meaningful portion.
How long does a consumer proposal stay on your credit report?
Per the Financial Consumer Agency of Canada, a consumer proposal is generally removed three years after you pay off all the debts included in it, or six years after you sign it — whichever comes first. A first bankruptcy is typically removed about six years after discharge (TransUnion keeps it seven years after discharge in some provinces), and multiple bankruptcies can stay for fourteen years. These are credit-bureau retention rules, not the legal duration of the process itself.
Should I try a debt consolidation loan before a consumer proposal?
Usually yes, if you qualify for a rate lower than your current debt. A consolidation loan repays 100% of what you owe and leaves only a small, temporary dent in your credit, whereas a proposal settles for less but stays on your report for years. The order to consider: (1) a lower-rate consolidation loan, (2) a non-profit credit-counselling debt-management plan, then (3) a consumer proposal or bankruptcy if the debt is genuinely unpayable. Use the debt consolidation calculator to see if a loan still works.
Sources
- Office of the Superintendent of Bankruptcy — Consumer proposals and Compare debt solutions
- Bankruptcy and Insolvency Act, s. 66.11 (consumer-debtor $250,000 limit) — laws-lois.justice.gc.ca
- Financial Consumer Agency of Canada — Information on your credit report
- Criminal Code, s. 347 and Criminal Interest Rate Regulations (35% APR cap) — laws-lois.justice.gc.ca
Educational information, not legal or financial advice. Insolvency outcomes depend on your specific circumstances and province; only a Licensed Insolvency Trustee can advise on and file a consumer proposal or bankruptcy. Legal figures were verified against their federal sources on June 13, 2026 and may change. Credit-report retention periods are set by the credit bureaus (Equifax, TransUnion) as summarized by FCAC.