Guide

Consumer proposal vs bankruptcy in Canada

By Mike Mulik · Published July 26, 2026 · Updated July 26, 2026

I design digital products and build free tools. Not a financial advisor, what that means.

If you're reading this, things are probably not going great. So let me skip the encouraging preamble and get to what these two things actually are, because the difference is simpler than the internet makes it sound.

Both are legal processes. Both stop collection calls and wage garnishments the day you file. Both freeze the interest on your debt. Both are run under the same federal law. And both go through the same professional, someone called a Licensed Insolvency Trustee, usually shortened to LIT.

The difference in one line:

• A consumer proposal means you pay back part of what you owe, over up to five years, and keep your stuff.
• Bankruptcy means you give up certain assets and pay based on your income, and it's usually over faster.

That's the whole shape of it. The rest of this page is the detail.

The most important thing on this page

Only a Licensed Insolvency Trustee can file either one. Not a debt relief company, not a credit repair service, not a company advertising “government debt programs” on the radio.

An LIT is federally licensed and regulated by the Office of the Superintendent of Bankruptcy. The first consultation is free, and it doesn't commit you to anything.

This matters because there's a whole industry of companies that will charge you thousands of dollars in fees, then walk you down the hall to an LIT who charges their own fee for the actual work. You can just go to the LIT directly. The government keeps a public list of every licensed trustee in the country, and you can search it by where you live.

If a company asks you for money up front to arrange a proposal, that's your signal to leave.

What a consumer proposal actually is

A consumer proposal is a formal offer to your unsecured creditors. Unsecured means debt that isn't attached to a specific thing, so credit cards, personal loans, payday loans, lines of credit, and yes, money you owe the Canada Revenue Agency, or CRA.

Your LIT works out what you can realistically afford, and offers your creditors that amount instead of the full debt. Your creditors vote on it. If enough of them accept, the proposal becomes legally binding on all of them, including any who voted no.

Then you make one fixed monthly payment, with no interest, for up to five years. When you make the last payment, whatever is left of the included debt is legally gone.

To qualify you need to owe between $1,000 and $250,000 in unsecured debt, not counting a mortgage on your home, and you need enough steady income to make the payments.

Worth knowing: you can pay it off early. The five years is a maximum, not a sentence. If your situation improves, finishing early both saves you time and starts the credit clock sooner.

What bankruptcy actually is

Bankruptcy is a different mechanism. Instead of negotiating a repayment amount, you hand over certain assets and make payments based on what you earn, and at the end most of your eligible unsecured debt is wiped out.

For a first bankruptcy, the timeline is:

• 9 months, if your income is below a government threshold.
• 21 months, if your income is above it.

That threshold is the part people don't understand, so let's do it properly, because it's the single biggest factor in what bankruptcy costs you.

Surplus income, explained with the real numbers

The government sets a monthly income level for each household size that it considers reasonable to live on. It's called the Superintendent's Standard. Earn above it while you're bankrupt and you pay half the difference to your creditors. That extra amount is called surplus income.

Here are the thresholds for 2026:

Source: Office of the Superintendent of Bankruptcy, Directive No. 11R2-2026, Appendix A, issued 27 March 2026. These are based on Statistics Canada's Low Income Cut-offs. They are updated every year, so check the current figures before relying on them. Current as of July 2026.

Here's how it works. Say you live alone and your household income after tax and deductions works out to $3,500 a month.

Two important details:

• If your surplus income is under $200 a month, you pay nothing. That's a hard cut-off in the rules.
• If you have any surplus income payment at all, your bankruptcy stretches from 9 months to 21 months. So earning a bit over the line costs you both money and time.

That second point is why a proposal often suits people with decent incomes better. In a proposal your payment is fixed at the start, and there's no surplus income calculation at all. Earn a raise halfway through and your payment doesn't move. In bankruptcy, it does.

The calculation is a bit more involved in real life. Certain things get subtracted before they compare your income to the threshold, including child support, spousal support, child care costs, and expenses tied to a medical condition. Your trustee works this out with you.

Side by side

What happens to your stuff

In a consumer proposal, you keep your assets. House, car, savings, all of it. That's usually the main reason people choose it.

In bankruptcy, some assets can be taken and sold to pay your creditors. But not everything. Each province has a list of exempt assets that you're allowed to keep, and the amounts vary quite a bit depending on where you live. Typically this covers basic household goods, clothing, tools you need for your work, and a vehicle up to a certain value.

One useful federal rule: your RRSP is generally protected, apart from any contributions you made in the 12 months before filing. RRSP stands for Registered Retirement Savings Plan.

If you have a mortgage or a car loan and you keep making the payments, those arrangements normally continue and you keep the house or car. Secured debts sit outside both processes.

Because exemptions differ so much by province, this is exactly the sort of thing to ask an LIT about rather than read about online. It's a specific question with a specific answer for your situation.

What each one does to your credit

Both hurt. There's no version of this where your credit is unaffected.

A consumer proposal is recorded as an R7 rating, which means you settled for less than the full amount. It generally stays on your credit report for three years after you finish paying, or six years from when you filed, whichever comes first.

A first bankruptcy is recorded as an R9, the worst rating there is. It generally stays for six or seven years after discharge, depending on the credit bureau and the province. A second bankruptcy stays far longer, up to fourteen years.

The exact rules differ slightly between Equifax and TransUnion, so if it matters to your plans, ask your trustee for the specifics.

One thing worth putting in perspective. If you're at the point of considering either of these, your credit is likely already in rough shape from missed payments and high balances. The choice is often between damaged credit that keeps getting worse and damaged credit with an end date on it. People do rebuild afterward, and it happens faster than most expect.

What neither one gets rid of

Some debts survive both processes:

• Secured debts on things you're keeping, like your mortgage or car loan
• Child support and spousal support
• Court-ordered fines and penalties
• Debts from fraud
• Student loans, if it's been less than seven years since you were last a student. There's a hardship provision that can apply after five years, but it needs a court application.

Tax debt is the one that surprises people. Money you owe the CRA can generally be included in both a proposal and a bankruptcy, which is not what most people assume.

How the process actually goes

Roughly the same for both:

1. Free consultation. You bring a list of what you owe, what you earn and what you own. The trustee explains your options, including the ones that aren't insolvency at all.
2. You decide. No pressure, no obligation.
3. You file. From that day, collection calls stop, wage garnishments stop, and interest stops.
4. Creditors respond. In a proposal they vote, which takes about 45 days. In bankruptcy there's no vote.
5. You make payments and attend two mandatory financial counselling sessions.
6. You finish. Proposal completed, or bankruptcy discharged. The included debt is gone.

The alternatives worth ruling out first

Neither of these is the first thing to try. Before you get here, it's worth checking whether something less serious would work:

• Calling your lenders and asking about hardship programs. There are more specifics in which debt to pay first.
• A debt management plan through a nonprofit credit counselling agency, where they negotiate lower interest and you repay the full amount
• A consolidation loan, if you can still get a decent rate
• Just paying it down, if the numbers actually work. Put your debts into the payoff calculator and see. Sometimes people are closer than they feel.

A good LIT will tell you if one of these suits you better. They're required to explain all your options, not just the ones they administer.

Where to go

The Office of the Superintendent of Bankruptcy maintains a public, searchable registry of every Licensed Insolvency Trustee in Canada. Search it by your city and call two or three. Consultations are free and you're allowed to shop around.

Credit Counselling Canada member agencies are nonprofit and also a reasonable place to start if you want to talk through the less drastic options first.

One last thing. Trustees consistently say the same thing about the people who walk into their office: almost everyone waited too long, and almost everyone had more options a year or two earlier than they did on the day they finally came in. If you're reading this page at two in the morning, the free consultation costs you nothing and you're allowed to walk away from it.

Frequently asked questions

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