Consumer proposal vs bankruptcy in Canada: key differences
If debt has outgrown your budget, these two options come up fast, and the differences are easy to blur. The Office of the Superintendent of Bankruptcy (OSB), the federal regulator, publishes a side-by-side comparison, and this guide walks through it in plain language. It is general information, not legal advice, and a Licensed Insolvency Trustee can tell you what applies to your situation, often with a free initial consultation.
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Consumer proposal vs bankruptcy: side by side
The OSB says both options are legal processes for honest but unfortunate debtors, and that both legally require creditors to stop collection actions, including lawsuits and wage garnishment. Beyond that they differ a lot:
| Factor | Consumer proposal | Bankruptcy |
|---|---|---|
| How it works | You offer creditors a repayment of part of your debt, as periodic or lump-sum payments to the trustee | Non-exempt assets go to the trustee for sale, and you may pay monthly surplus income |
| Duration | Up to a maximum of 5 years | 9 months (first, no surplus income); 21 months (first, with surplus income); 24 months (second, no surplus income); 36 months (second, with surplus income); third or later set by the court |
| Assets | Not addressed on the OSB comparison page | Certain RRSPs, RRIFs, pension plans, disability savings plans, insurance contracts and reasonable household furnishings and clothing are exempt; exemptions vary by province |
| Credit report | Equifax removes it 3 years after completion; TransUnion removes it 3 years after completion or 6 years after signing, whichever is sooner | 6 or 7 years after discharge for a first bankruptcy (depends on province); 14 years after discharge for a second or later |
| If you default | Annulled after three missed monthly payments | Discharge may be delayed or denied, or additional payments required |
| Counselling | Two financial counselling sessions | Two financial counselling sessions |
Fees are regulated by the Bankruptcy and Insolvency Act and are paid from your payments in a proposal, or from asset proceeds and additional payments in a bankruptcy.
How a consumer proposal works
The OSB says a Licensed Insolvency Trustee administers the proposal, and your payments go to the trustee, who distributes them to creditors. As a general guide, individuals whose total debts do not exceed $250,000, not counting debts such as a mortgage secured by your principal residence, can file one. The OSB describes that figure as a guide, not a formal eligibility test.
Once the proposal is filed, you stop paying unsecured creditors directly, and wage garnishments and lawsuits against you are stopped. The term cannot exceed five years.
- Creditor vote. Creditors have 45 days after filing to accept or reject. Acceptance requires a simple majority of the dollar value of proven claims, which is 50% plus one.
- Deemed acceptance. A meeting is held only if creditors owed at least 25% of total proven claims request one within the 45 days. If none is requested, the proposal is deemed accepted, regardless of objections.
- Court review. After acceptance, the OSB or another interested party has 15 days to ask the trustee to apply to court for review. If no one does, the court is deemed to have approved it.
- Missed payments. Missing three monthly payments annuls the proposal, and creditors may then pursue collection unless the court orders otherwise or an amendment is filed.
The OSB says you are generally assigned the lowest possible credit score. For how rebuilding works afterwards, read your credit after a consumer proposal.
How bankruptcy works
In bankruptcy, the trustee realizes your non-exempt assets, assesses your surplus income and guides you through the process. Surplus income is calculated under an OSB directive formula based on your income and expenses, and it depends on household size. Whether you pay surplus income is what separates the 9-month and 21-month first-bankruptcy timelines.
The OSB lists what is generally exempt: certain RRSPs, RRIFs, pension plans, disability savings plans, insurance contracts, and reasonable household furnishings and clothing. Exemptions vary by province, so ask a trustee how yours apply. Payment is based on asset value and any surplus income payments, and fees are set by the Bankruptcy and Insolvency Act.
A first bankruptcy stays on your credit report 6 or 7 years after discharge, depending on province, and 14 years after discharge for a second or later one.
What each does to your credit and how long
Both are serious marks, and the clocks differ. Using the OSB's timelines, here is an illustrative comparison. The dates are made up, and the arithmetic is ours.
| Illustrative case | Proposal | First bankruptcy |
|---|---|---|
| Filed in January 2027, no surplus income | Runs up to January 2032; Equifax removes it 3 years after completion, about 2035 | Discharge about October 2027 (9 months); report clears 6 or 7 years after discharge, about 2033 to 2034 |
| Filed in January 2027, with surplus income | Same as above | Discharge about October 2028 (21 months); clears about 2034 to 2035 |
TransUnion's rule can be shorter for a proposal: 3 years after completion or 6 years after signing, whichever is sooner. The right comparison depends on your payment amount, assets and province, so treat this as a map and not a forecast. Once you are through it, how to build credit and secured credit cards are the usual next reads.
Questions to ask before you choose
- How much do I owe, and which debts count? Secured debts such as a home mortgage are handled differently from unsecured debts like credit cards.
- What assets do I own, and are they exempt where I live? Exemptions vary by province.
- What could I realistically pay each month? Build a baseline with our budget guide.
- Is this my first time? Durations and surplus income rules differ for second and third bankruptcies.
- What is the fee and who pays it? Fees are regulated and paid from your payments or asset proceeds.
The OSB says trustees may offer a free initial consultation and that it can help if you cannot find an affordable trustee. Ask a trustee to explain both options before you decide.
Options to try or compare first
These routes can be worth exploring before you decide, but a trustee can tell you whether they fit:
- Pay it down on your own. Our guides on the debt snowball vs avalanche and paying off credit card debt show how.
- Find the leak in your budget. See how to find money leaks and why the minimum payment is a trap.
- Talk to your lender early. Our guide to rate increases after a missed payment explains what can happen when you fall behind.
Run your numbers with the free calculators on our tools page.
Questions people ask
What is the difference between a consumer proposal and bankruptcy?
A consumer proposal is an offer to repay part of your debts over up to five years that creditors vote on. Bankruptcy hands non-exempt assets to a trustee and usually lasts 9 to 36 months. Both stop collection actions, and only a Licensed Insolvency Trustee can offer either one.
How long does a consumer proposal last?
The OSB says the term of a consumer proposal cannot exceed five years.
How long does a first bankruptcy last?
The OSB lists 9 months for a first bankruptcy with no surplus income obligations and 21 months with surplus income. Second bankruptcies are 24 or 36 months, and third or later ones are set by the court.
Do I keep my RRSP and house in bankruptcy?
The OSB says certain RRSPs, RRIFs, pension plans, disability savings plans, insurance contracts and reasonable household furnishings and clothing are exempt, while non-exempt assets go to the trustee. Exemptions vary by province, so ask a Licensed Insolvency Trustee.
How long does each stay on my credit report?
Per the OSB, a consumer proposal is removed by Equifax 3 years after completion and by TransUnion 3 years after completion or 6 years after signing, whichever is sooner. A first bankruptcy stays 6 or 7 years after discharge depending on province, and 14 years after discharge for a second or later one.
Who can file a consumer proposal?
As a general guide from the OSB, individuals whose total debts do not exceed $250,000, not counting debts such as a mortgage secured by their principal residence. It must be filed through a Licensed Insolvency Trustee.
What happens if I miss payments on a proposal?
For monthly payments, missing three payments annuls the proposal, and creditors may then pursue collection unless the court orders otherwise or an amendment is filed. An annulled proposal may be revived under certain conditions.
Does it cost money to talk to a trustee?
The OSB says trustees may offer a free initial consultation, and that it can help if you cannot find an affordable trustee.
Looni reads your statements and flags interest charges, fees and subscriptions, so you can free up cash sooner. Read-only, no advice, and Looni is not a lender or a trustee.
Sources
Office of the Superintendent of Bankruptcy, Compare debt solutions (both are legal processes administered only by a Licensed Insolvency Trustee; durations; exempt assets; credit report timelines; default consequences; two counselling sessions; free initial consultation) and Consumer proposals ($250,000 debt guide excluding a mortgage on your principal residence; maximum five-year term; 45-day creditor vote and simple majority by dollar value; stay of proceedings; annulment after three missed monthly payments; lowest credit score assigned). Eligibility and outcomes depend on your province and circumstances. The example timeline is illustrative; the arithmetic is ours.