Consumer Proposal vs Bankruptcy in Canada: How Each Works, Costs and Affects Credit

A consumer proposal and a bankruptcy are the two legal processes for individuals in Canada who can’t pay their debts. Both are filed through a Licensed Insolvency Trustee (LIT), both stop most collection action the day they’re filed, and both end with a legal release from the debts they cover. They differ in what you pay, what you keep, how long they take and how long they stay on your credit report. This page compares them side by side, then covers each process, surplus income, exempt assets, the debts neither one clears, tax effects and credit.

Other ways out of debt, such as non-profit credit counselling or a consolidation loan, are compared in the debt relief options guide, and the debt strategies hub lists every guide.

Side-by-side comparison

Sources: Office of the Superintendent of Bankruptcy (OSB), Consumer proposals and Compare debt solutions.

Consumer proposal: how it works

A consumer proposal is a formal offer to your unsecured creditors, drafted with an LIT, to pay them a percentage of what you owe, to extend the time to pay, or both. The term can’t be longer than five years.

1. Meet an LIT. The trustee reviews your income, assets and debts. An LIT has an obligation to review all your options with you, including ones that don’t involve a proposal.
2. The proposal is drafted and filed with the OSB. From filing, you stop paying the included creditors directly, and lawsuits and wage garnishments by those creditors stop.
3. Creditors have 45 days to respond. Creditors owed at least 25% of the proven claims can ask for a meeting. If no meeting is requested within 45 days, the proposal is deemed accepted. At a meeting, the vote is decided by a simple majority of the dollar value of the claims voting, and an accepted proposal binds every unsecured creditor it covers.
4. You make the payments to the trustee, who pays the creditors, and attend the counselling sessions.
5. Completion. When the terms are met, you receive a certificate of full performance and are legally released from the debts in the proposal.

If you pay monthly and miss three payments, the proposal is deemed annulled and creditors can start collecting again. It can be revived in some cases.

How much a proposal offers

There’s no set percentage. The trustee builds the offer from what creditors would likely receive if you went bankrupt instead (the value of non-exempt assets and the surplus income payments you’d make), because creditors compare the two. What you can afford over the term and what the creditors will accept set the final figure, so two people with the same debt can end up with very different offers.

Bankruptcy: how it works

1. Meet an LIT. The trustee confirms you’re insolvent and goes through the alternatives.
2. Sign the assignment. The trustee files it with the OSB, and collection action against you by unsecured creditors stops.
3. Hand over non-exempt assets. What’s exempt depends on federal law and your province (see below).
4. Carry out your duties: report income and expenses to the trustee each month, pay any surplus income, attend the 2 counselling sessions, and file tax returns.
5. Discharge. If the duties are done and nobody opposes it, the discharge is automatic:

A creditor, the trustee or the OSB can oppose a discharge, in which case a court decides.

Surplus income

Surplus income is the part of your monthly household income above a standard set each year by the Superintendent of Bankruptcy. For 2026, the standard for one person is $2,716 a month, with higher amounts for larger families. You pay 50% of the surplus to the estate, and nothing if the surplus is under $200 a month. Having surplus income also lengthens a first bankruptcy from 9 to 21 months.

The standard and its family-size table are in the OSB’s surplus income directive.

Exempt assets: what you keep in a bankruptcy

The Bankruptcy and Insolvency Act exempts some property everywhere in Canada, and provincial law adds more:

• Registered plans: RRSPs, RRIFs and RDSPs are exempt, except contributions made in the 12 months before the bankruptcy. TFSAs aren’t covered by that exemption.
• Pensions and certain insurance contracts are generally protected.
• Provincial exemptions cover items such as household furnishings, clothing, tools of a trade, a vehicle up to a set value and, in some provinces, some home equity. The amounts differ by province and change over time, so the trustee confirms what applies.

In a consumer proposal you keep your assets, but what they’re worth still matters: the offer has to give creditors at least as much as they’d expect from a bankruptcy, so equity in a home or vehicle beyond the exemptions raises the amount a proposal needs to offer. In practice, many people who file own few assets beyond the exemptions.

Debts neither process clears

A bankruptcy discharge doesn’t release:

• support payments to a former spouse or to children;
• fines or penalties imposed by a court;
• debts arising from fraud;
• student loans, if fewer than 7 years have passed since you stopped being a full- or part-time student (student loans you can’t pay covers the options before then).

A consumer proposal covers unsecured debts too. Secured debts are different in both: a lender with security, such as a mortgage or car loan, can still take the property if payments stop, which is why both processes assume those payments continue if you want to keep the asset. Secured loans explains how security works.

Tax effects

• Tax debts: income tax owed to the CRA is an unsecured debt that a proposal or bankruptcy can include. Amounts the CRA treats as held in trust, such as payroll deductions an employer didn’t remit, are handled differently; the trustee can explain which tax debts are covered. What happens if you don’t pay the CRA covers CRA collections outside insolvency.
• Refunds in a bankruptcy: any income tax refund for the year you file belongs to the bankruptcy estate, and the trustee files returns for the period.
• Filing: both processes require you to file any outstanding tax returns.

Cost

Trustee fees for both processes are regulated by the Bankruptcy and Insolvency Act. In a proposal they come out of the payments you make to the trustee; in a bankruptcy, out of the money raised from your assets and any surplus income or other payments. First consultations are often free; ask for the fees in writing up front. If you can’t find an LIT at a rate you can afford, the OSB says to contact it for help.

Which one fits which situation

The trustee’s review decides this, but these are the factors that usually tip it:

Some people choose a proposal to avoid the effects of bankruptcy on certain professional licences or positions of trust; the trustee can say whether that applies.

As a rough guide by size of debt: balances that could be repaid in a few years with a budget are usually handled without either process, through a payoff plan, a lower rate or a debt management plan with a credit counsellor. The legal processes come in when the debt can’t be repaid in full within about five years.

Your credit report after insolvency

The OSB reports every proposal and bankruptcy to Equifax and TransUnion, along with completion or discharge:

• Consumer proposal: Equifax and TransUnion both remove it 3 years after you’ve paid off all the debts in the proposal or 6 years after you signed it, whichever comes first (FCAC).
• First bankruptcy: shown for 6 or 7 years after discharge, depending on your province (6 to 7 years).
• Second or later bankruptcy: shown for 14 years after discharge.

Credit can be rebuilt during that time with on-time payments and low balances. Finances after bankruptcy and rebuilding credit after bankruptcy cover the steps.

Finding a Licensed Insolvency Trustee

LITs are federally licensed and supervised by the OSB, and they’re the only professionals who can administer a consumer proposal or a bankruptcy. The OSB keeps a directory of Licensed Insolvency Trustees. Companies that charge to “refer” you to a trustee, or that promise to settle your debts for an upfront fee, aren’t trustees; the debt relief options guide covers how to spot them.

Before filing

Other routes may work if the debt is smaller or income is steady: a debt payoff plan, a debt consolidation loan, a debt management plan through a non-profit credit counsellor, or negotiating directly with creditors.