When debt becomes unmanageable, Canadians have two formal legal options under the Bankruptcy and Insolvency Act: a consumer proposal or a personal bankruptcy. Both are administered by a Licensed Insolvency Trustee (LIT), both stop most collection activity, and both have a significant impact on your credit. But they work very differently.
What Is a Consumer Proposal?
A consumer proposal is a legally binding agreement with your unsecured creditors to repay a portion of what you owe, usually through monthly payments over up to five years. The rest of the debt is forgiven once you complete the proposal.
- Available if your unsecured debts (excluding a mortgage on your principal residence) are under the legal limit, currently $250,000.
- You generally keep your assets, such as your home and car, as long as you continue to make secured payments.
- Creditors vote on the proposal; it is accepted if creditors holding a majority of the debt approve.
What Is Bankruptcy?
Bankruptcy is a legal process that eliminates most unsecured debts. In exchange, you may have to give up certain non-exempt assets and make payments based on your income during the bankruptcy period.
- A first bankruptcy typically lasts 9 to 21 months, depending on your income.
- Some assets are protected by provincial exemptions; others may be sold to pay creditors.
- If your income is above a set threshold, you must make additional “surplus income” payments.
Key Differences
| Consumer Proposal | Bankruptcy | |
|---|---|---|
| Debt repaid | A negotiated portion | Based on income and assets |
| Keep assets | Usually yes | Non-exempt assets may be lost |
| Length | Up to 5 years | Often 9–21 months for a first bankruptcy |
| Creditor approval | Required | Not required |
| Credit impact | Significant, usually shorter record | Significant, usually longer record |
Debts That Usually Aren’t Eliminated
Certain debts typically survive both processes, such as child or spousal support, court fines, and in some cases student loans if you left school less than seven years ago. Secured debts like mortgages and car loans must continue to be paid if you want to keep the asset.
Alternatives to Try First
- Creating a strict budget and contacting creditors directly
- A debt consolidation loan, if you qualify for a lower rate
- A debt management plan through a non-profit credit counselling agency
How to Choose
A consumer proposal often suits people with steady income and assets they want to keep. Bankruptcy may make sense when income is low, assets are minimal, and a proposal is not affordable. The only way to know for sure is to talk with a Licensed Insolvency Trustee — initial consultations are typically free.
Beware of Unlicensed “Debt Consultants”
Only Licensed Insolvency Trustees can file consumer proposals and bankruptcies. Some companies charge fees just to refer you to a trustee. You can find licensed trustees directly through the Office of the Superintendent of Bankruptcy.
The Bottom Line
Both options provide legal protection and a fresh start, but at a cost to your credit and, in bankruptcy, possibly your assets. Get professional advice from a Licensed Insolvency Trustee before deciding.
Rules and limits can change. This article is for general information only and is not financial or legal advice.
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