Bankruptcy vs consumer proposal in Canada

Bankruptcy and a consumer proposal are the two legal insolvency processes in Canada, and both are filed through a Licensed Insolvency Trustee. A proposal lets you repay a portion of your debts over up to five years while keeping your assets; bankruptcy wipes out most debts faster, but can require you to give up certain assets and marks your credit report more heavily. The right choice depends on your income, your assets and what you can realistically repay.

Two processes governed by the same law

Both options fall under the Bankruptcy and Insolvency Act and must go through a Licensed Insolvency Trustee — a licensed professional regulated by the Office of the Superintendent of Bankruptcy Canada. From the day you file, either one triggers a stay of proceedings: collection calls stop, wage garnishments end and interest on most unsecured debts is frozen. Some debts survive both processes, however, such as child and spousal support, most fines and, in many cases, student loans less than seven years old.

How a consumer proposal works

A consumer proposal is a legal agreement: you offer your creditors to repay a portion of your unsecured debts — for example, as an illustration, 30 to 50 cents per dollar owed — in fixed monthly payments spread over a maximum of five years. It is available if your unsecured debts do not exceed $250,000, excluding the mortgage on your principal residence. If creditors holding the majority of the debt’s value accept, the proposal binds all creditors. You keep your assets, your payments do not change with your income, and the trustee’s fees are built into the payments rather than charged on top.

How a bankruptcy works

In a bankruptcy, you turn your non-exempt assets over to the trustee, and they are used to repay creditors. Each province sets its own exemptions: a portion of a vehicle’s value, tools of your trade, essential furniture and sometimes a share of home equity are protected, with thresholds that vary. A first bankruptcy typically leads to a discharge after nine months, or twenty-one months if your income exceeds the federal thresholds and you must make “surplus income” payments. The higher your income, the more a bankruptcy can cost and the longer it can last — which often makes a proposal more attractive for people with stable employment.

The impact on your credit and your assets

Both processes are reported to Equifax and TransUnion, but not with the same severity. A consumer proposal typically stays on your report for three years after your last payment. A first bankruptcy typically remains six to seven years after discharge, and much longer if you file again. In both cases, your credit score drops sharply at first; the difference lies in how long the record lasts and how lenders perceive it afterward. On the asset side, a proposal protects everything you own as long as you pay; a bankruptcy exposes non-exempt assets, including a tax refund for the current year.

Which one fits your situation?

A consumer proposal generally suits you if you have stable income, assets worth protecting and the ability to make a fixed monthly payment for a few years. Bankruptcy is often the better fit if your income is low or irregular, you have few non-exempt assets and you need a fast fresh start. Before going that far, check whether a debt consolidation loan or a lower-rate personal loan could be enough — those options do require repaying your debts in full, however. There is no shame in getting advice: the trustee will assess all your options for free, including ones that involve no insolvency process at all.

Next steps

Book a free first consultation with a Licensed Insolvency Trustee: bring a list of your debts, your income and an overview of your assets. If your debts are still manageable, compare offers from several lenders instead — rate, term, total cost — before choosing. And whichever path you take, plan to rebuild your credit file as soon as the process ends: on-time payments, low credit utilization and patience will do the rest.