Consumer Proposal vs Bankruptcy Canada 2026: Full Guide

Key Summary: In Canada, both a consumer proposal and bankruptcy are formal insolvency processes under the federal Bankruptcy and Insolvency Act, administered by a Licensed Insolvency Trustee. A consumer proposal is an offer to pay creditors part of what you owe over up to five years, and is for individuals with debts of $250,000 or less (excluding a mortgage on your home). Bankruptcy is described as a last resort and can end in automatic discharge in as little as 9 months. Neither erases every debt, and neither is universally "better." This guide compares cost, timelines, credit impact, and assets, but only a trustee can recommend what fits your situation.

This article is general information for people comparing options. It is not legal, financial, tax, credit, insolvency, or immigration advice. Speak with a Licensed Insolvency Trustee, and where relevant a lawyer, tax adviser, or regulated immigration professional, before acting.

If you are deep in debt and getting collection calls, two formal options come up often: the consumer proposal and bankruptcy. Both are legal, both stop most creditor action, and both leave a mark on your credit. They are not the same, and the right choice depends entirely on your debts, income, assets, family, and province. This guide explains how each works, side by side, using only official sources. It does not tell you which to choose, and it does not replace a sit-down with a Licensed Insolvency Trustee.

What is insolvency in Canada, and who runs the process?

In Canada, the rules for both consumer proposals and bankruptcy come from one federal law, the Bankruptcy and Insolvency Act (BIA) ^[6]. It is overseen by the Office of the Superintendent of Bankruptcy (OSB), which administers the Act, licenses and regulates the insolvency profession, supervises the process, and keeps public insolvency records and statistics ^[1].

Being "insolvent" is a legal status, not just a feeling of having too much debt. The BIA describes an insolvent person as someone who owes at least $1,000 in provable claims, lives or does business in Canada, and is generally unable to pay debts as they come due ^[6]. The legal gateway is insolvency, not a single debt number.

The professional at the centre of both options is the Licensed Insolvency Trustee (LIT). The OSB says an LIT is the only professional authorized to administer government-regulated insolvency proceedings that allow discharge from debt, including consumer proposals and bankruptcies ^[2]. A trustee is an officer of the court who balances the interests of debtors and creditors, and the OSB says trustees typically do not charge for the first consultation ^[1][2].

For context, the OSB reported 13,014 insolvencies in April 2026, made up of 3,204 bankruptcies and 9,810 proposals. Over the year ending April 30, 2026, consumer proposals were about 78.4% of consumer insolvencies, so proposals are now the more common path. The OSB cautions against reading too much into one month ^[13].

What is a consumer proposal?

A consumer proposal is a formal, legally binding offer that your trustee builds with you and presents to your creditors. It can ask creditors to accept a percentage of what you owe, more time to pay, or both ^[3]. You make one regular payment to the trustee, who distributes the funds to creditors after prescribed fees ^[3][6].

The key features:

• It is for a "consumer debtor": an individual who is insolvent with debts of not more than $250,000, excluding any mortgage on a principal residence ^[6].
• It must provide for completion within five years ^[6].
• Once filed, you stop paying unsecured creditors directly, and their wage garnishments and lawsuits are stopped ^[3].
• Creditors get a package and have 45 days to accept or reject. A meeting is held if creditors holding at least 25% of proven claims request one ^[6].
• It is accepted by a simple majority by dollar value, "50% plus 1." If proven claims total $150,000, creditors voting yes must hold at least $75,001 ^[3].
• When you finish, the trustee issues a certificate of full performance ^[6].

A proposal can be deemed annulled if you fall behind by about three monthly payments, or three months for less frequent payments, unless a court order or amendment applies ^[6]. If your debts are over $250,000, a different Division I proposal may apply, but the OSB warns that if creditors reject a Division I proposal, you become bankrupt automatically ^[1].

What is bankruptcy?

Bankruptcy is a legal process, accessed through a trustee, that the OSB frames as a last resort for when you cannot meet your obligations and cannot solve the problem another way ^[1][4]. When forms are filed and the Official Receiver accepts them, you are formally declared bankrupt, and the trustee deals with creditors from then on ^[1][4].

The OSB says that after filing, unsecured creditor payments stop, garnishments and lawsuits stop, and creditors are notified ^[4]. In return, you have duties: disclose your assets and liabilities, surrender credit cards, attend two counselling sessions, hand over non-exempt assets, and keep the trustee informed until discharge ^[4].

The final step is discharge, which releases you from the legal obligation to repay most debts you owed when you went bankrupt. Some debts are not forgiven, which we cover below ^[1][7]. Discharge is often automatic, but depends on whether anyone opposes, whether surplus-income payments apply, whether you completed counselling, and whether this is your first or second bankruptcy ^[4].

Consumer proposal vs bankruptcy: side-by-side comparison

This table summarizes the main differences. It is a starting point for a conversation with a trustee, not a recommendation. The right path depends on your full circumstances.

Topic	Consumer proposal	Bankruptcy
Eligibility	Individual who is insolvent with debts of $250,000 or less, excluding a mortgage on a principal residence [6]	Based on BIA insolvency rules: at least $1,000 in provable debt plus inability to pay, and a Canada connection [6]
Cost	Proposal payment is case-specific; fees include $750 on filing, $750 on approval, 20% of money distributed, $100 filing fee, counselling, and taxes [8]	Case-specific; surplus-income payments under Directive 11R2-2026 are 50% of surplus income if it is $200/month or more [9]
Duration	Must complete within 5 years [6]	First bankruptcy 9 or 21 months; second 24 or 36 months, subject to conditions [4][9]
Credit impact	Removed 3 years after proposal debts paid, or 6 years after signing, whichever is sooner; OSB says term plus 3 years; wording varies [5][10]	Typically removed 6 years after discharge, 7 years in some provinces; multiple bankruptcies 14 years [5][10]
Assets	Can keep assets if accepted and terms met, while paying secured creditors; secured rights remain [1][3]	Trustee sells non-exempt assets; exempt property depends on provincial law [1][4]
Debts not erased	BIA section 178 debts survive unless specially compromised and the creditor voted yes [6][7]	Discharge keeps BIA section 178 debts: support, fines, certain fraud, recent student loans, related interest [7]
Public record	Becomes part of public insolvency records; bureaus notified [1]	Becomes part of public insolvency records; bureaus notified [1]
Framing	Formal alternative to bankruptcy for eligible debtors who can make payments	Framed as a last resort by the OSB

Do not read this table as saying one option "wins." Assets, income, credit, prior insolvencies, protected debts, and personal goals can all change the outcome ^[1][4].

Who qualifies for each option?

For a consumer proposal, the BIA defines a consumer debtor as an individual who is insolvent with aggregate debts of not more than $250,000, excluding debts secured by their principal residence ^[6]. If your debts exceed that ceiling, a proposal may still be possible under different rules, but that is a separate path to discuss with a trustee ^[1].

For bankruptcy, the gateway is insolvency, not simply having debt. You need at least $1,000 in provable liabilities and to meet a statutory inability-to-pay test, plus residence, business, or property in Canada ^[6]. A debt number alone does not mean you qualify or that you should file. The OSB instructs people in serious financial difficulty to meet a trustee and bring full financial information so eligibility and suitability can be assessed ^[1][2].

How much does each option cost?

Insolvency fees are regulated, not freelanced by the trustee. For a consumer proposal, the prescribed administrator fees and expenses include $750 on filing the proposal, $750 on approval or deemed approval, 20% of the money distributed to creditors, a $100 filing fee, counselling costs, the registrar fee, and applicable taxes ^[8]. Counselling itself is set at $85 per individual session and $25 per person for group sessions ^[8]. These come out of your proposal payments, so there is no separate bill on top.

What you actually pay into a proposal depends on the deal accepted by your creditors, so no honest source can say "a proposal costs exactly X" for everyone ^[6][8].

For bankruptcy, costs are case-specific and shaped by surplus income. Under OSB Directive 11R2-2026, issued March 27, 2026, if your monthly surplus income is less than $200 you generally pay nothing extra, but if it is $200 or more you pay 50% of it into the estate, with family-size adjustments ^[9]. Surplus income is a defined calculation against monthly standards (1 person $2,716 up to $7,188 for 7 or more) and is not simply "pay minus rent" ^[9]. A free first consultation lets a trustee estimate your numbers ^[2].

How long does it last, and what happens to your credit?

Length and credit footprint are where the two paths differ most. A consumer proposal must complete within five years ^[6]. A first bankruptcy can end in automatic discharge after 9 months if there is no opposition and no surplus-income payments, or 21 months if surplus-income payments apply; a second bankruptcy is generally 24 or 36 months ^[4][9].

Credit retention wording varies by bureau and province, so treat any single date with caution. FCAC says a consumer proposal is removed by Equifax and TransUnion 3 years after the proposal debts are paid or 6 years after signing, whichever is sooner, while the OSB describes it as the proposal term plus another 3 years ^[5][10]. For bankruptcy, FCAC says it is typically removed 6 years after discharge, with TransUnion 7 years in Newfoundland and Labrador, Ontario, PEI, and Quebec, and multiple bankruptcies stay 14 years ^[10]. The OSB gives similar 6-or-7-year and 14-year figures ^[5].

Rebuilding is not guaranteed, and no one has to give you credit after insolvency ^[1][3][4]. To understand how the bureaus work and how to recover, see our complete guide to credit scores in Canada, which covers Equifax versus TransUnion, hard inquiries, and on-time payments. FCAC suggests paying on time, using under 30% of available credit, limiting hard checks, and fixing report errors ^[10].

What debts are NOT erased?

This is the single most important thing to understand: neither option wipes out every debt. Bankruptcy discharge releases most debts, but section 178 of the BIA preserves several categories. These include court fines, penalties, and restitution; alimony and support; certain fraud or fiduciary debts; debts from false pretences or fraudulent misrepresentation; student and apprentice loans within the statutory seven-year period; and interest on those amounts ^[7].

A consumer proposal does not automatically release section 178 debts either. It only releases them if the proposal explicitly provides to compromise that debt and the relevant creditor voted to accept ^[6][7]. For student and apprentice loans, a court may, after five years from the day you stopped being a student, lift the non-release rule if you acted in good faith and still face hardship, but that is court-based, not automatic ^[7].

Tax debt deserves a separate caution. CRA debt is not listed as its own non-release category, but tax can involve priority claims, liens, and post-filing obligations, so do not assume "CRA debt is always erased." Get specific advice from a trustee or tax adviser before relying on any tax outcome.

What happens to your assets?

In a consumer proposal, the OSB says that if the proposal is accepted and you follow its terms, you can keep assets such as savings, investments, a car, or a house, while continuing to pay secured creditors ^[1][3]. That is not the same as "all assets are protected": secured-creditor rights, loan and lease terms, arrears, and equity still matter ^[6].

In bankruptcy, the trustee takes possession of assets beyond those exempt under provincial or territorial law, sells them, and pays creditors ^[1][4]. Exemptions vary widely by province, covering items like household goods, a vehicle, tools of the trade, and a capped amount of home equity. Because amounts differ and change, the safe rule is that non-exempt assets may be sold while exempt property is protected, and your trustee will tell you which exemptions apply where you live ^[4]. Avoid assuming you "keep everything" or "lose everything."

Alternatives before formal insolvency

A proposal and bankruptcy are not the only paths, but alternatives are not automatically safer. Options include direct creditor negotiation, debt consolidation, credit counselling, and a debt management plan (DMP).

• Debt consolidation: FCAC says combining debts can simplify payments and may save interest if the new rate is lower, but it can extend repayment and cost more over time, and applying to many lenders creates hard credit checks ^[10]. A balance-transfer promo usually lasts 6 to 18 months and you may lose it after a missed payment ^[10].
• Credit counselling: Talking to a counsellor does not affect your credit score. Both nonprofit and for-profit firms exist, so compare reputation, costs, and complaints.
• Debt management plan: A DMP is an informal arrangement that usually repays 100% of included debts and may reduce interest. It is not a consumer proposal: a counsellor can ask creditors to stop collections but cannot legally force them.

The key difference is legal protection. Only a consumer proposal or bankruptcy administered by an LIT triggers the statutory stay against most creditors ^[2][11]. Alternatives can be worth exploring, but should be weighed against a trustee's assessment.

Warning: debt-relief scams and "government programs"

Before you pay anyone for "debt relief," confirm whether you are dealing with a Licensed Insolvency Trustee. Consumer proposals and bankruptcies are formal legal processes that only an LIT can administer. Be cautious about upfront fees, guaranteed credit repair, "government program" language, and promises that creditors must stop without an actual LIT filing.

FCAC says it is illegal for a company to claim it can manage a consumer proposal or bankruptcy if it does not employ an LIT, and that debt settlement companies cannot guarantee large reductions, cannot force creditors to participate, and cannot provide legal protection from asset seizure ^[11]. The OSB confirms only an LIT can administer government-regulated proceedings that discharge debt ^[2]. If a service charges fees up front for a "guaranteed" fix, verify the trustee licence through the OSB before paying.

A note for newcomers, PRs, and sponsors

Immigration and sponsorship consequences can be fact-specific. This article does not assess PR, citizenship, sponsorship, inadmissibility, misrepresentation, or immigration-loan issues. Check current IRCC rules and get qualified advice for your situation.

Do not assume insolvency has no immigration impact. IRCC says you may be ineligible to sponsor a spouse, partner, or child if you have declared bankruptcy and are not yet discharged, though that bar does not apply when sponsoring a spouse, partner, or child in Quebec ^[12]. There is no clear official source saying a proposal or bankruptcy by itself cancels PR status or prevents citizenship, but the absence of a rule is not a guarantee. If you are sponsoring family, applying for citizenship, or have immigration loans, check current IRCC rules and get legal or regulated immigration advice before filing ^[12].

How to start

The first step is the same for both options: meet a Licensed Insolvency Trustee. Bring full details of your debts, income, assets, and family situation. The trustee reviews everything, explains the pros and cons of a proposal, bankruptcy, and alternatives, and the first meeting is usually free ^[1][2]. You can verify a trustee's licence and search public records through the OSB. Whatever you decide, the trustee handles the filing and deals with creditors on your behalf once the process begins ^[2][4].

Key Takeaways

• A consumer proposal and bankruptcy are both formal insolvency processes under the BIA, run by a Licensed Insolvency Trustee, not a debt consultant ^[2][6].
• A proposal is for debts of $250,000 or less and must finish within five years; a first bankruptcy can be discharged in 9 or 21 months ^[6][9].
• Neither erases every debt: section 178 keeps support, fines, certain fraud debts, and recent student loans ^[7].
• Credit removal is roughly 3 years after a paid proposal or 6 years after signing, and about 6 to 7 years after a first bankruptcy discharge, with wording that varies ^[5][10].
• Asset outcomes depend on acceptance, secured creditors, and provincial exemptions, so do not assume you keep or lose everything ^[1][4].
• Only an LIT-administered filing gives legal creditor protection; be wary of "government program" scams ^[2][11].
• Get advice before filing if you are a sponsor, PR, or citizenship applicant ^[12].

FAQ

Q: What is the main difference between a consumer proposal and bankruptcy?

A: A consumer proposal is an offer through a trustee to pay creditors part of what you owe, extend time, or both. Bankruptcy is a separate process where the trustee may sell non-exempt assets and discharge releases most debts except statutory exceptions. Which fits is case-specific ^[3][4][7].

Q: Who qualifies for a consumer proposal?

A: A consumer debtor who is insolvent with debts of not more than $250,000, excluding a mortgage on a principal residence. A trustee confirms eligibility and suitability ^[6].

Q: Does either option stop wage garnishment and lawsuits?

A: Filing can trigger a statutory stay for provable claims, subject to exceptions. The OSB says unsecured payments, garnishments, and lawsuits stop. Secured creditors may need separate analysis ^[1][3][4].

Q: How long does a consumer proposal last?

A: It must complete within five years. Falling about three payments behind, or three months for less frequent payments, can lead to deemed annulment unless a court order or amendment applies ^[6].

Q: How long does a first bankruptcy last?

A: Automatic discharge can be 9 months with no opposition and no surplus-income payments, or 21 months if surplus payments apply. A second bankruptcy is generally 24 or 36 months ^[4][9].

Q: Which is worse for my credit report?

A: There is no single ranking. FCAC says a proposal is removed 3 years after paid or 6 years after signing, whichever is sooner, and bankruptcy about 6 to 7 years after discharge, with 14 years for multiple. Wording varies ^[5][10].

Q: Will I lose my car, home, or savings?

A: In a proposal you can keep assets if accepted and terms are met while paying secured creditors. In bankruptcy, non-exempt assets may be sold, with exemptions set by provincial law. A trustee can review your case ^[1][3][4].

Q: Are student loans, taxes, support, and fines erased?

A: Not all debts go. Section 178 keeps support, fines and restitution, certain fraud debts, recent student loans, and interest. Proposals do not release those unless specially compromised. Tax needs separate review ^[6][7].

Q: What if creditors reject my proposal or I miss payments?

A: Creditors get 45 days, with meeting rules if those holding 25% in value request one. If not accepted or annulled, collection may resume. Default of about three payments can mean deemed annulment unless court rules apply ^[6].

Q: Will bankruptcy affect my PR, citizenship, or sponsoring family?

A: No simple yes or no. IRCC says an undischarged bankrupt may be unable to sponsor a spouse, partner, or child, with a Quebec exception. Check current IRCC rules and get advice before assuming there is no impact ^[12].

Q: Can a debt consultant file a proposal for me?

A: No. Only a Licensed Insolvency Trustee can administer proposals and bankruptcies. FCAC says it is illegal for a company to claim it can manage these without a trustee ^[2][11].

Q: Are consolidation or a DMP better alternatives?

A: They may be options, not universally better. Consolidation can save interest if rates drop but cost more if extended. A DMP usually repays 100% and cannot legally force creditors to stop ^[10][11].

Q: How much does a consumer proposal cost?

A: It depends on the accepted deal. Fees include $750 on filing, $750 on approval, 20% of money distributed, a $100 filing fee, counselling, and taxes, paid from your proposal payments ^[8].

Q: How do I start?

A: Meet a trustee, bring full financial details, and ask them to explain proposals, bankruptcy, and alternatives. The first meeting is usually free ^[1][2].