A consumer proposal and a bankruptcy are both formal insolvency processes in Canada, but they work in very different ways. A consumer proposal is an offer you make to your creditors, through a licensed insolvency trustee, to pay back part of what you owe over a set period, usually up to five years. A bankruptcy is a legal process that wipes out most unsecured debts in exchange for giving up assets that are not protected by law. A consumer proposal is generally less damaging to your credit and lets you keep more of what you own.
What a Consumer Proposal Involves
You work with a licensed insolvency trustee, who assesses your finances and helps you draft an offer. You might propose to pay a percentage of your unsecured debt, or a fixed monthly amount for a fixed term. If enough creditors accept and the court approves, the proposal is binding on everyone it covers. You keep your assets, you make the agreed payments, and the rest of the debt is forgiven when you finish. Payments are interest-free.
What Bankruptcy Involves
In a bankruptcy, a trustee takes control of your non-exempt assets, sells them, and distributes the proceeds to creditors. You are usually discharged after a set period, which can be shorter or longer depending on your situation and whether you have surplus income. Some assets are protected by provincial law, and the rules differ across the country. Bankruptcy is generally used when a proposal is not feasible, or when the debts are large and the assets are minimal.
How They Compare
| Factor | Consumer proposal | Bankruptcy |
|---|---|---|
| Control of assets | You keep them | Non-exempt assets can be sold |
| Debt forgiven | The unpaid balance after payments | Most unsecured debts |
| Duration | Up to five years | Typically shorter, but discharge can be delayed |
| Credit impact | Noted on your file for a set period | Noted on your file for a set period |
| Cost | Payments plus trustee fees | Trustee fees plus possible asset loss |
The exact credit reporting periods and the list of protected assets depend on your province and your circumstances, so confirm the details with a licensed insolvency trustee before you decide.
Which One Fits
A consumer proposal tends to suit people with steady income, some assets worth keeping, and a realistic ability to make monthly payments. Bankruptcy tends to suit people whose debts are overwhelming, whose income is low or unstable, or who own little that is not protected. Neither is a quick fix, and both should come after a hard look at whether the debt is manageable at all.
What to Do First
- List every debt, the balance, the rate, and the payment.
- Add up your income and essential expenses.
- Speak to a non-profit credit counsellor for a free assessment.
- Meet a licensed insolvency trustee, who must explain both options.
- Ask what happens to your home, car, and bank accounts under each route.
Avoid anyone who charges a fee before explaining your options, or who promises to wipe out debt outside a formal process. Only a licensed insolvency trustee can administer a consumer proposal or a bankruptcy in Canada.
What Happens to Your Credit
Both processes are noted on your credit report, and both make borrowing harder and more expensive for a period afterward. A consumer proposal can stay on your file for longer than a first bankruptcy in some provinces, yet it is generally viewed as less severe, because you repaid part of the debt rather than being discharged. Lenders differ in how they weigh the two. After either process, rebuilding takes time and consistent on-time payments. Some lenders offer secured or credit-builder products to people in recovery, usually at higher rates. Check your report afterward and make sure the completion is recorded correctly, because an error can hold you back longer than necessary.
The reporting period and the way each process is described on your file depend on the province and the credit bureau, so confirm the specifics with a licensed insolvency trustee and by reviewing your own report. Do not rely on a general rule of thumb, because the details vary.
Sources and further reading
- Financial Consumer Agency of Canada, for consumer information on debt, insolvency, and credit reports.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.