Difference Between Bankruptcy and Consumer Proposal in Canada

When debt becomes unmanageable, two formal legal options exist in Canada: a consumer proposal and personal bankruptcy. Both provide legal protection from creditors. Both involve a Licensed Insolvency Trustee (LIT). The right option depends on your assets, income, debt level, and how quickly you need relief.

Side-by-side comparison

Consumer proposal: how it works

A consumer proposal is a legally binding offer to pay your unsecured creditors less than the full amount you owe, over a period of up to 5 years.

Step-by-step process

1. Meet with a Licensed Insolvency Trustee (LIT) — they review your finances and determine what you could realistically offer creditors
2. Proposal is drafted — the LIT calculates your offer (typically what creditors would receive in bankruptcy, plus a premium to make the proposal worthwhile for them to accept)
3. Filed with the government — automatic stay of proceedings begins immediately; all collection calls, wage garnishments, and legal actions against you must stop
4. Creditors vote (45 days) — if 51%+ by dollar value accept, the proposal is approved and binds all creditors
5. You make monthly payments to the LIT, who distributes funds to creditors
6. Completion — typically in 3–5 years, or faster if you can pay a lump sum earlier
7. Certificate of full performance issued — remaining unsecured debts are legally discharged

What you keep in a consumer proposal

• Your home (as long as you continue mortgage payments)
• Your vehicle (continue car loan payments)
• All your RRSP/TFSA/pension savings
• Your furniture, household goods, tools of trade, and other exempt assets

How much do you offer creditors?

The proposal must offer at least what creditors would receive if you filed bankruptcy instead. Typically, this is a calculation based on:

• Value of non-exempt assets you would have surrendered
• Surplus income contributions you would have made in bankruptcy
• A small premium to make the proposal more attractive than bankruptcy

Most proposals settle debts for 20–60 cents on the dollar, paid over years.

Personal bankruptcy: how it works

Bankruptcy is a legal process where you formally declare that you cannot pay your debts. A Licensed Insolvency Trustee administers the process.

Step-by-step process

1. Meet with an LIT — they assess whether bankruptcy is appropriate
2. Sign the bankruptcy assignment — LIT files it with the Office of the Superintendent of Bankruptcy
3. Automatic stay — all collection actions stop immediately
4. Non-exempt assets surrendered — the LIT identifies what must be handed over (differs by province)
5. Monthly surplus income payments — if your income exceeds a threshold, you must remit a portion monthly
6. Duties performed — attend two mandatory financial counselling sessions, file tax returns, report income changes
7. Discharge — 9 months (no surplus income, first bankruptcy), 21 months (with surplus income), or longer if creditors object

Provincial asset exemptions (selected)

In practice, most Canadians who file bankruptcy own few non-exempt assets. The trustee’s fee and administration costs often exceed whatever can be recovered, which means many creditors receive little or nothing.

Surplus income threshold (2026 approximate)

If your monthly take-home income exceeds the government threshold (approximately $2,400–$4,500/month depending on family size), you must pay 50% of the excess to the trustee monthly. This extends your bankruptcy from 9 months to 21 months.

Which is better for your situation?

Consumer proposal is typically better if:

• You have significant home equity or assets you want to keep
• Your income is stable enough to make manageable monthly payments for 3–5 years
• You want to minimize credit score damage (shorter bureau reporting)
• You are in a profession where bankruptcy could affect your licence (some financial, legal, insolvency roles)
• Your debt is $30,000–$250,000 and you can make a credible offer

Bankruptcy is typically better if:

• You have no assets worth keeping
• Your income is at or below the surplus income threshold
• You need the fastest possible resolution (9 months to discharge)
• Your unsecured debt exceeds $250,000 (consumer proposal limit)
• You cannot sustain even reduced monthly payments for 3–5 years

Impact on taxes

Consumer proposal

• The proposal does not create a deemed disposition of assets — no tax triggered on surrendered investments
• CRA is a creditor and will be bound by the proposal — their claims (tax arrears) are settled along with other unsecured creditors
• You still must file all outstanding tax returns as part of completing the proposal

Bankruptcy

• Tax refunds for the year of bankruptcy and any prior unfiled years are seized by the trustee and paid to creditors
• Any capital gains from deemed dispositions in the year of bankruptcy may be taxed — the trustee manages this
• RRSP/RRIF contributions in the 12 months before bankruptcy are not protected

Both processes: what to expect from creditors

Upon filing either: An automatic stay of proceedings kicks in immediately. This means:

• Creditor calls must stop
• Wage garnishments cease
• Pending lawsuits are frozen
• Bank account freezes by creditors are reversed (in most cases)

Finding a Licensed Insolvency Trustee in Canada

LITs are federally licensed professionals regulated by the Office of the Superintendent of Bankruptcy (OSB). Initial consultations are free.

• Find a LIT: osb-bsf.ic.gc.ca or search “Licensed Insolvency Trustee” + your city
• Avoid unlicensed “debt consultants” or “debt settlement companies” that charge upfront fees to negotiate with creditors — only LITs can legally administer proposals and bankruptcies
• Avoid companies that charge you to “refer” you to an LIT — the LIT’s fees are government-regulated; there should be no referral fee

Related pages

• Difference Between Secured and Unsecured Debt
• How to Get Out of Debt in Canada
• How Debt Consolidation Works in Canada
• What Happens If You Stop Paying a Credit Card in Canada