Managing debt is one of the most significant financial challenges Canadians face. Whether you're dealing with credit card balances, personal loans, or tax debt, understanding your options under Canadian law can mean the difference between years of financial stress and a clear path forward. This guide covers everything you need to know about debt management in Canada in 2025.
Canadian household debt has remained among the highest in the developed world, with the average Canadian carrying significant balances across multiple credit products. The good news is that Canada has a sophisticated legal framework — primarily the Bankruptcy and Insolvency Act (BIA) — that provides real protections and options for people in financial difficulty.
There are several categories of debt you may be dealing with:
Before you can address debt, you need a clear picture of your situation. Pull together:
Warning signs that your debt has become unmanageable include: only being able to make minimum payments, using credit to cover daily expenses, receiving calls from collectors, or lying awake worrying about money.
If your debt-to-income ratio is manageable and you have some breathing room, two popular approaches are the debt avalanche (pay highest interest first to minimize total cost) and the debt snowball (pay smallest balances first for psychological wins). These work best when you have stable income and less than $20,000 in unsecured debt.
Consolidating means combining multiple debts into a single loan, ideally at a lower interest rate. Options include personal consolidation loans, home equity lines of credit (HELOC), and balance transfer credit cards. This works well if you have decent credit and the discipline to avoid re-accumulating debt on cleared cards.
Non-profit credit counselling agencies can negotiate with creditors to reduce or eliminate interest and set up a Debt Management Plan (DMP). You pay 100% of principal, but interest may be reduced or waived. This typically takes 3–5 years and is noted on your credit report but does not require court involvement.
A consumer proposal is a formal, legally binding agreement administered by a Licensed Insolvency Trustee under the BIA. You offer to repay a portion of what you owe — typically 20 to 70 cents on the dollar — over up to 5 years. Creditors vote on the proposal, and if the majority (by dollar value) accept, all unsecured creditors are bound. A consumer proposal triggers a stay of proceedings that stops most collection actions immediately, including wage garnishments.
Consumer proposals show as R7 on your credit report and remain for 3 years after you complete the proposal (or 6 years from the filing date, whichever comes first).
Bankruptcy under the BIA is a legal process that eliminates most unsecured debts. A first bankruptcy typically lasts 9 months (21 months if surplus income applies). You must surrender non-exempt assets, attend two credit counselling sessions, and report monthly income. Bankruptcy shows as R9 on your credit report and remains for 6 years after discharge (14 years for a second bankruptcy).
Surplus income rules: if your monthly income exceeds the threshold set by the Office of the Superintendent of Bankruptcy — approximately $2,700/month for a single person, higher for families — you must pay 50% of the excess to your trustee, extending your bankruptcy to 21 months.
In Canada, only a Licensed Insolvency Trustee (LIT) — licensed by the federal government under the BIA — can administer consumer proposals and bankruptcies. LIT fees are regulated; you do not pay them out of pocket for consumer proposals (they are paid from your proposal payments to creditors).
An initial consultation with an LIT is free. Use it. They can objectively assess your situation and recommend the best option, whether that's bankruptcy, a consumer proposal, or simply a budget adjustment.
Both consumer proposals and bankruptcy can eliminate most unsecured debts, including credit cards, personal loans, payday loans, lines of credit, and many CRA debts. However, certain debts survive bankruptcy:
Each province has exemptions — assets you get to keep in bankruptcy. Common exemptions include:
In a consumer proposal, you keep all your assets — this is one of the key advantages over bankruptcy.
Understanding how each option affects your credit score helps you plan your recovery:
While bankruptcy and consumer proposals are federal, some aspects vary by province:
The best first step is a free consultation with a Licensed Insolvency Trustee. You can find LITs through the Government of Canada's official directory at the Office of the Superintendent of Bankruptcy (OSB) website. Many LITs offer video and phone consultations, so geography is not a barrier.
During the consultation, the LIT will review your income, debts, and assets and give you an honest recommendation. There is no pressure to proceed with any particular option. Use the consultation to get clarity and then make an informed decision.
Regardless of your credit history, KOHO is available to all Canadians. No monthly fees, no minimum balance, no credit check to open. Use code 45ET55JSYA for a bonus when you sign up.
Open KOHO Free — Code 45ET55JSYA