Updated: April 2025  |  bremo.io financial guides

Consumer Proposal vs Bankruptcy in Canada

When debt becomes unmanageable, two legal options under Canada's Bankruptcy and Insolvency Act (BIA) can provide structured relief: a consumer proposal and personal bankruptcy. Both stop creditor collection action immediately, both are administered by a Licensed Insolvency Trustee, and both ultimately eliminate eligible debt. But they work very differently.

This guide breaks down every major difference so you can understand which option may fit your situation.

Side-by-Side Comparison

How a Consumer Proposal Works

In a consumer proposal, you and your LIT craft an offer to creditors: pay back a negotiated percentage of your debt over up to five years. Once filed, the automatic stay kicks in — garnishments stop, calls stop, legal actions freeze. Creditors vote; if the majority (by dollar value) accept, all creditors are bound.

You make one monthly payment to the LIT for the duration of the proposal. Interest stops completely. At the end, the remaining eligible debt is discharged.

How Personal Bankruptcy Works

Bankruptcy under the BIA is a legal process where you surrender non-exempt assets in exchange for elimination of eligible debts. A LIT is appointed as your trustee. Most first-time bankruptcies are discharged in 9 months if you have no surplus income. If your income is above the government threshold (based on family size), you pay surplus income for 21 months.

During bankruptcy, any tax refunds for the year you file (and prior years if not yet received) go to creditors. RRSP contributions made within the 12 months before filing are not protected.

Asset Protection

This is often the deciding factor. In a consumer proposal, you keep everything — home equity, RRSP, vehicle, tax refund. In bankruptcy, provincial exemptions determine what you keep. Each province sets different exemption amounts for a primary vehicle, household goods, tools of the trade, and sometimes home equity.

Surplus Income in Bankruptcy

Canada's surplus income rules require bankrupts with income above the government threshold to contribute 50% of the excess to creditors. This means a higher-income person can end up paying more in bankruptcy than they would have in a consumer proposal — and paying for longer (21 months vs. the standard 9).

A LIT can calculate your expected surplus income payments and compare them to a proposal offer to identify the more cost-effective path.

Credit Impact Compared

Both options damage your credit, but to different degrees and for different periods:

• Consumer proposal: R7 rating. Removed 3 years after completion or 6 years from filing date, whichever is earlier.
• Bankruptcy (first time): R9 rating. Removed 6 years after discharge.
• Bankruptcy (second time): R9 rating. Removed 14 years after discharge.

For someone who completes a 5-year proposal, total credit impact is about 8 years from filing. For a 9-month bankruptcy, it's about 7 years from filing. The difference narrows for shorter proposals.

When Bankruptcy Makes More Sense

Bankruptcy may be a better fit when:

• You have very little income and no assets to protect
• Your debt is so high that any meaningful repayment is impossible
• You cannot maintain a payment plan
• You need the fastest possible resolution

When a Consumer Proposal Makes More Sense

A consumer proposal tends to be preferable when:

• You have assets you want to protect (home equity, RRSP, car)
• You have regular income and can manage a fixed monthly payment
• Your income is high enough to trigger significant surplus income in bankruptcy
• You want a shorter credit impact period

Getting Professional Advice

Only a Licensed Insolvency Trustee can legally file a consumer proposal or bankruptcy on your behalf. Initial consultations are free. The LIT will review your full financial picture — income, assets, debts — and explain clearly which option is more advantageous for your circumstances. There is no obligation after a consultation.