If you're struggling with unmanageable debt in Canada, two formal insolvency options can provide legal protection from creditors: a consumer proposal and personal bankruptcy. Both are administered by a Licensed Insolvency Trustee (LIT) and are governed by the Bankruptcy and Insolvency Act. But they work very differently — and choosing the wrong one can cost you significantly.
What Is a Consumer Proposal?
A consumer proposal is a legally binding agreement between you and your unsecured creditors. You offer to pay back a portion of what you owe — typically 20 to 50 cents on the dollar — in equal monthly payments over up to 60 months (5 years). Once creditors holding more than 50% of the dollar value of your debt accept the offer, it binds all unsecured creditors, even those who voted against it.
Consumer proposals are available to individuals with unsecured debts of $250,000 or less (not counting a mortgage on a principal residence). Joint proposals are also available for couples.
Use our Consumer Proposal Calculator to estimate your monthly payment and offer amount based on your total debt and budget.
What Is Personal Bankruptcy?
Personal bankruptcy is a legal process where you surrender non-exempt assets to your Licensed Insolvency Trustee, who liquidates them to pay creditors. In exchange, you are discharged from most eligible unsecured debts. A first-time bankruptcy with no surplus income is discharged in 9 months. With surplus income, it extends to 21 months.
Bankruptcy eliminates most unsecured debts but does not eliminate student loans less than 7 years old, child/spousal support arrears, court-ordered fines, or debts obtained by fraud.
Key Differences: Consumer Proposal vs Bankruptcy
| Factor | Consumer Proposal | Bankruptcy |
|---|---|---|
| Assets | You keep all assets | Non-exempt assets seized |
| Debt repayment | Pay portion (20–50%) | Assets liquidated; shortfall forgiven |
| Duration | Up to 60 months | 9 or 21 months (first time) |
| Credit rating | R7 (3 yrs after completion) | R9 (6 yrs after discharge) |
| Income impact | No surplus income payments | Surplus income paid to trustee |
| Self-employment | Can continue operating | Restrictions may apply |
| Eligibility | Unsecured debt ≤ $250,000 | No upper debt limit |
| Cost | Included in proposal payments | $1,800–$2,500 base fees + asset proceeds |
How Consumer Proposal Payments Are Calculated
Your Licensed Insolvency Trustee will help you structure an offer based on two factors:
- What creditors would receive in bankruptcy — your offer must exceed this amount, or creditors will reject it
- What you can realistically afford monthly — payments must fit your budget over the proposal term
Example: You owe $80,000 in unsecured debt. In bankruptcy, creditors would receive roughly $8,000 after trustee fees and your exempt assets are protected. A reasonable proposal might offer $28,000 (35 cents on the dollar) — paid as $467/month over 60 months. Creditors receive 3.5× more than bankruptcy, so the proposal is likely to be accepted.
Surplus Income in Bankruptcy
If your net monthly income exceeds the threshold set by the Office of the Superintendent of Bankruptcy (OSB) — which depends on family size — you must pay 50% of the surplus to your trustee each month. This is called surplus income, and it can significantly increase your bankruptcy payments and extend your discharge from 9 to 21 months.
For 2024, the surplus income threshold for a single person is approximately $2,355/month net. For a family of four, it's approximately $4,458/month net.
Use our Bankruptcy Means Test Calculator to see whether you would have surplus income obligations.
Credit Impact Comparison
Both options damage your credit, but a consumer proposal is less severe:
- Consumer proposal: Accounts included in the proposal receive an R7 rating. The proposal notation stays on your Equifax report for 3 years after completion (or 6 years from filing, whichever comes first). On TransUnion, it's 3 years after completion.
- Bankruptcy: Accounts receive an R9 rating. The notation stays for 6 years after discharge on Equifax (first bankruptcy) — or 14 years for a second bankruptcy. TransUnion: 6 years after discharge.
Both allow you to begin rebuilding credit immediately by obtaining a secured credit card and making all payments on time during the insolvency period.
Asset Protection: The Critical Difference
In a consumer proposal, you keep everything — your home, car, RRSP, investments, and tax refunds. This makes proposals far more attractive for anyone with significant equity in a home or substantial retirement savings.
In bankruptcy, the trustee may seize:
- Home equity above your provincial exemption (Ontario: $10,000; BC: $12,000; Alberta: $40,000)
- Non-registered investments and savings above exempt amounts
- Tax refunds for the year of bankruptcy and prior year
- Vehicles above your provincial exemption (typically $5,000–$6,600)
- RRSPs contributed in the 12 months before bankruptcy (contributions older than 12 months are protected)
Use our Bankruptcy Exemptions Calculator to see which assets would be protected in your province.
When Bankruptcy May Be the Better Option
Despite its harsher credit impact, bankruptcy may be preferable when:
- Your debt is so large relative to your income that you cannot make meaningful proposal payments
- You have no significant assets to protect
- You need debt relief faster (9-month discharge vs up to 5-year proposal)
- Your debt exceeds $250,000 (making a consumer proposal unavailable)
- You have already filed a consumer proposal that failed
The Role of a Licensed Insolvency Trustee
Only a Licensed Insolvency Trustee (LIT) can administer a consumer proposal or bankruptcy in Canada. LITs are federally regulated by the OSB and must pass rigorous licensing requirements. Initial consultations are free at most LIT firms. Avoid "debt consultants" or "credit counsellors" who charge upfront fees to refer you to a trustee — go directly to an LIT.
Related: Debt-to-Income Ratio Calculator · Wage Garnishment Calculator · All Bankruptcy Calculators — Canada
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Open Calculator →This article is for educational purposes only and does not constitute legal advice. Consult a qualified lawyer for advice specific to your situation.