Comparing a consumer proposal vs bankruptcy in Canada means comparing two different legal answers to the same problem: debt you can no longer manage on your own. Both are formal processes under the Bankruptcy and Insolvency Act, both stop collection calls and wage garnishments the day you file, and both can only be filed by a Licensed Insolvency Trustee (LIT), the only professional in Canada permitted to administer either one.
Neither option is a last resort, and neither is automatically the harder or “worse” path. They solve different financial pictures. This guide compares them directly: who each is actually for, what you keep and give up, what each costs, how long each takes, and what disqualifies you from one or the other. If your debt hasn’t reached the point where a formal legal process is necessary, free credit counselling is worth ruling out first.
What a Consumer Proposal and Bankruptcy Actually Are
A consumer proposal is a legally binding offer to your creditors, negotiated through an LIT, to repay a portion of what you owe (or extend how long you have to pay it, or both) over a term of up to five years. Complete every payment and you’re legally released from the debts included in the proposal. What those five years look like month by month, including the credit-report rating it applies to each affected account, is covered in full in our walkthrough of the consumer proposal timeline.
Bankruptcy works differently. Instead of negotiating a repayment percentage, you turn over your non-exempt assets to your LIT, and depending on your income, may make additional “surplus income” payments for a set period. In exchange, you’re released from most debts you had on the day you filed, aside from a short list the law excludes outright.
Who Qualifies for Each Option
The two processes split on a hard number. Under the Bankruptcy and Insolvency Act‘s definition of a “consumer debtor,” your total unsecured debts, not counting a mortgage on your principal residence, cannot exceed $250,000 to qualify for a consumer proposal. Go above that, and you’d need a Division I proposal instead, a related but separate process built for larger debt loads.
Bankruptcy carries no such ceiling. It applies whether you owe $5,000 or $400,000, provided you’re legally insolvent. The Act defines that as owing at least $1,000 and being unable to meet your obligations as they generally come due. Above the consumer proposal’s $250,000 ceiling, bankruptcy or a Division I proposal become the applicable routes instead, though most Canadians weighing a consumer proposal against bankruptcy specifically are well under that limit either way.
What You Keep and What You Lose
This is where the two processes diverge most in practice. In a consumer proposal, you keep every asset you own, your car, your home equity, your savings, as long as you stay current on any secured debts, like a mortgage or car loan, tied to them.
In bankruptcy, your Licensed Insolvency Trustee sells your non-exempt assets and distributes the proceeds to creditors. What counts as “exempt” is set by your province, not by a single national list. Because exemption rules and dollar limits genuinely differ from one province to the next, your LIT is the one who can tell you exactly what you’d keep where you live. A national comparison like this one shouldn’t guess at a specific dollar figure that Alberta, Ontario, and every other province don’t share.
What Each Option Costs You
Cost here isn’t only a dollar figure. It’s also what you give up to get there. In both processes, LIT fees are regulated under the Bankruptcy and Insolvency Act rather than freely set, and most LITs offer a free initial consultation before you commit to either one.
For a consumer proposal, your LIT negotiates an offer your creditors are likely to accept, based on your income, your assets, and what creditors could otherwise expect to recover if you went bankrupt instead. There’s no published formula for the exact percentage, since it ultimately depends on what your specific creditors agree to.
Bankruptcy calculates what you owe differently: through your non-exempt assets, plus a formal “surplus income” test that consumer proposals don’t use. Each month, your LIT compares your family unit’s available income against a threshold the Office of the Superintendent of Bankruptcy (OSB) sets annually, based on family size. For 2026, that threshold is:
- One person: $2,716 a month
- Two people: $3,381 a month
- Four people: $5,047 a month
Clear the threshold by more than $200 a month, and you pay 50% of the excess into your estate for creditors. Stay under it, and you owe nothing extra.
How Long Each Process Takes
A consumer proposal can run up to five years, whatever term you and your creditors agree to.
Bankruptcy runs on a fixed schedule tied to whether you’re a first-time or repeat filer, and whether you owe surplus income payments:
| Situation | Automatic discharge |
|---|---|
| First bankruptcy, no surplus income owed | 9 months after filing |
| First bankruptcy, surplus income owed | 21 months after filing |
| Second bankruptcy, no surplus income owed | 24 months after filing |
| Second bankruptcy, surplus income owed | 36 months after filing |
A third or later bankruptcy has no automatic discharge; the court sets the terms directly instead.
What Happens to Your Credit File
Both show up on your credit report the moment you file, and both are reported to Equifax and TransUnion when the process starts and again once it’s complete. The clearance timelines differ by process and, for bankruptcy, by whether it’s a first or second filing. The specific bureau-by-bureau retention periods are covered in full in our breakdown of how long negative marks stay on a Canadian credit report, so they aren’t repeated here.
Debts and Cards: Practical Differences That Matter
A few day-to-day differences are easy to miss until they affect you directly.
- Credit cards. In a proposal, any card carrying a balance gets cancelled, but a card with a zero balance can usually stay open. In bankruptcy, you surrender every credit card to your LIT. A secured card with a small limit may be available under either process to keep building payment history.
- Debts that survive. Bankruptcy doesn’t erase everything. Alimony (spousal support) and child support, most student loans if you’ve been out of school less than seven years, court-ordered fines, and debts tied to fraud all survive a bankruptcy discharge.
- Missing payments. A consumer proposal is deemed annulled if you miss three monthly payments, or fall more than three months behind on a less frequent schedule. Once annulled, creditors can resume collection unless a court intervenes.
Who Each Option Is Actually Built For
A consumer proposal tends to fit when your income is stable enough to sustain a monthly payment, you have assets worth protecting, and your unsecured debt sits under the $250,000 threshold. Since you’re negotiating rather than surrendering property, it usually preserves more of what you own.
Bankruptcy tends to fit when your debt has outpaced what any repayment plan could realistically cover, when a consumer proposal was already rejected by your creditors, or when there’s little left to protect. It also moves faster for many first-time filers with no surplus income obligation: nine months, versus up to five years for a proposal, at the cost of turning over non-exempt property.
Only your LIT, after reviewing your full financial picture, can tell you which one actually fits. The version of this decision specific to proposals is covered in more depth on our page on consumer proposal eligibility, costs, and the filing process. Every LIT has an obligation to review all of your options with you, including a referral to credit counselling, before you commit to either one.
Rebuilding Once the Process Is Behind You
Everything above is about deciding what to file, not about borrowing right now. Once your proposal is complete, or you’ve received your discharge from bankruptcy, rebuilding usually starts the same way for both: a secured credit card, on-time payments, and low credit utilization.
If your budget has stabilized and you’re looking to rebuild through responsible borrowing once the process is fully behind you, Lend For All’s personal loans network connects post-proposal and post-bankruptcy borrowers with lenders who assess your current financial picture. You may qualify depending on lender review, and it’s a step worth considering later, not something to weigh while you’re still deciding which process to file.
Frequently Asked Questions
You’re committing to payments for up to five years, must attend two mandatory counselling sessions, and the proposal stays on your credit report for a set period after completion. Miss three payments, and it’s automatically annulled, restoring your creditors’ right to collect what you originally owed.
There’s no fixed percentage. Your Licensed Insolvency Trustee negotiates an offer based on your income, your assets, and what your specific creditors could otherwise expect to recover if you went bankrupt instead. Some proposals settle for a fraction of what’s owed; others repay most of it over a longer term.
Any card carrying a balance gets cancelled once you file, since that balance is one of the debts included in the proposal. A card sitting at a zero balance can usually stay open. A small secured card is often available under either process if you want to keep building payment history.
Owing more than $250,000 in unsecured debt, not counting a mortgage on your principal residence, disqualifies you; you’d need a Division I proposal instead. You also need to be insolvent under the Bankruptcy and Insolvency Act, meaning you owe at least $1,000 and can’t meet your obligations as they generally come due.
Neither is universally better; they solve different situations. A consumer proposal usually preserves more of what you own if your income can sustain the payments, while bankruptcy can resolve unmanageable debt faster when there’s little left to protect. An LIT can tell you which fits your specific numbers.
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