Bankruptcy vs Consumer Proposal for Non-Dischargeable Debts in Canada (2026)

Most Section 178(1) debts survive bankruptcy — but many of those same debts can be included in a consumer proposal. That single distinction changes the math on mixed-debt files by thousands of dollars. If you owe child support arrears alongside credit card debt, or carry a fraud judgment next to a line of credit, the insolvency path you choose determines which debts you eliminate and which follow you for years. Here is exactly how bankruptcy and consumer proposals treat every non-dischargeable category differently.

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Not All Debts Are Treated the Same in Insolvency

Bankruptcy and consumer proposals are both governed by the Bankruptcy and Insolvency Act (BIA). They use the same federal legislation. But they handle non-dischargeable debts in completely different ways.

Bankruptcy gives you an automatic discharge after 9 or 21 months. That discharge wipes out most unsecured debt. But Section 178(1) carves out 11 categories that survive. You walk out of bankruptcy still owing those debts in full, with interest still accruing.

A consumer proposal works differently. It is a negotiated deal. You offer creditors a fixed amount paid over up to 60 months. If creditors holding a majority of your debt by dollar value vote to accept, the proposal binds everyone — including creditors who voted against it. The proposal terms override the Section 178(1) categories for most debt types.

Only two categories of non-dischargeable debt automatically survive a consumer proposal: court-ordered fines and restitution, and support obligations. Everything else is on the table if the creditor agrees.

Section 178(1) Categories: Bankruptcy vs Consumer Proposal Treatment

Here is how each major category plays out under both proceedings:

This table shows the core strategic difference. Bankruptcy locks you into a fixed set of outcomes. A consumer proposal opens the door to settling debts that bankruptcy cannot touch.

Tamara in Kitchener owes $18,000 on a credit card obtained through income misrepresentation, plus $31,000 in regular credit card debt. In bankruptcy, the $18,000 fraud debt survives discharge — the credit card company files a Section 178(1)(e) claim and the debt follows her. In a consumer proposal offering 35 cents on the dollar, the creditor accepts the deal and the fraud debt is settled for $6,300 as part of the total proposal. She saves $11,700 on that debt alone.

Debts That Survive Bankruptcy but Can Be Included in a Proposal

Three categories make the strongest case for choosing a proposal over bankruptcy in mixed-debt files.

Fraud and misrepresentation debts. Under Section 178(1)(e), any debt obtained through fraud, embezzlement, or misrepresentation survives bankruptcy. The creditor must prove fraud — it is not automatic. But once proven, the debt is permanent after discharge. In a consumer proposal, the creditor can accept reduced payment and settle the claim entirely.

Student loans under 7 years. Section 178(1)(g) keeps student loans non-dischargeable if you ceased being a student less than 7 years before filing. Bankruptcy leaves the full balance intact. A consumer proposal can include the student loan if the National Student Loans Service Centre accepts the proposal terms. They often do when the alternative is getting nothing.

CRA trust debts. Employer-remitted payroll deductions and GST/HST held in trust survive bankruptcy under Section 178(1)(a). These debts can be included in a consumer proposal because CRA participates as a creditor and votes on the terms. CRA accepts proposals regularly — they recover more than they would in a bankruptcy dividend.

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Debts That Survive Both Proceedings

Two categories survive regardless of which path you take. No strategy changes the outcome for these debts.

Court-ordered fines, penalties, and restitution. A $4,500 fine from a provincial offence conviction stays on the books through bankruptcy and through a consumer proposal. Section 178(1)(a) and Section 66.28 of the BIA make this absolute. Installment payment plans through the issuing court are the only option for managing these debts.

Child support and spousal support obligations. Section 178(1)(b) and (c) cover both ongoing support and arrears. Support arrears survive every insolvency proceeding. The Family Responsibility Office in Ontario or equivalent enforcement agencies in other provinces continue collecting regardless of your bankruptcy or proposal status. If you owe $22,000 in child support arrears, you owe $22,000 after discharge.

Marcus in Thunder Bay filed bankruptcy with $37,000 in credit card debt and $14,000 in child support arrears. Bankruptcy eliminated the credit cards. The $14,000 in support arrears remained. His LIT helped him build a post-discharge budget directing $600 per month to the arrears — money that previously went to minimum payments on credit cards.

Strategic Sequencing for Mixed-Debt Files

Strategic sequencing is the approach Licensed Insolvency Trustees use for files that contain both dischargeable and non-dischargeable debts. The idea is simple: eliminate the debts you can through insolvency, then redirect freed cash flow to the debts you cannot.

Step one: map every debt. Your LIT categorizes each obligation under the BIA. Credit cards, lines of credit, medical bills, and most CRA personal tax debt go in the dischargeable column. Support obligations, court fines, and student loans under 7 years go in the non-dischargeable column.

Step two: model both scenarios. The LIT runs your file through bankruptcy and consumer proposal calculations. They compare total cost, timeline, and which debts survive under each option. The model shows your monthly budget after filing — how much goes to the insolvency payment and how much is available for non-dischargeable debts.

Step three: file the right proceeding. If your non-dischargeable debts include fraud or student loans, a consumer proposal often wins because it can settle those debts. If your non-dischargeable debts are only support and fines, bankruptcy is cheaper and faster for the dischargeable portion.

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Total Cost Comparison on a Mixed-Debt File

Nadia in Moncton owes $44,000 in dischargeable debt (credit cards and a personal loan) and $19,000 in non-dischargeable debt ($12,000 student loans at 4 years post-study, $7,000 in provincial fines). Here is how each path compares:

Without insolvency, Nadia repays $63,000 plus interest. At an average 19% rate on the credit cards and minimum payments, she pays roughly $91,000 over 14 years.

In bankruptcy, the $44,000 in credit cards and personal loan are discharged. Bankruptcy costs $1,800–$9,500 depending on surplus income. But the $12,000 student loan survives (under 7 years). The $7,000 in fines survives. Total remaining: $19,000 plus bankruptcy cost. Grand total: $20,800–$28,500.

In a consumer proposal at 30 cents on the dollar, Nadia offers $18,900 over 60 months ($315/month). The student loan creditor accepts the proposal and is bound by it. The $7,000 in fines still survives. Total cost: $18,900 proposal plus $7,000 fines = $25,900. But the student loan is settled inside the proposal — saving $12,000 compared to bankruptcy.

The right answer depends on surplus income, assets, and the specific debts. That is why LIT modelling matters.

How a Licensed Insolvency Trustee Maps Your Debt

Your first appointment with a LIT runs 45–60 minutes. Bring every statement, court order, and CRA notice you have. The LIT creates a debt map that categorizes each obligation.

The LIT checks three things for each debt. First, what type is it? Credit card debt, student loan, support arrears, and CRA debt each have different BIA treatment. Second, what is its origin? A credit card used normally is dischargeable. A credit card obtained through income fraud is not. Third, what is the timing? Student loans have a 7-year clock from end of studies. CRA debts have different treatment for personal tax versus trust obligations.

After mapping, the LIT builds two models: one for bankruptcy and one for a consumer proposal. Each model shows monthly payment, total cost, timeline to completion, and which debts remain after the proceeding ends. You see the numbers side by side.

The LIT consultation is free. You pay nothing until you decide to file. There is no obligation to proceed.

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Decision Framework: Bankruptcy or Proposal for Your Mix

Use this framework to narrow your options before meeting a LIT.

Choose bankruptcy if your non-dischargeable debts are only support obligations and court fines. These survive both proceedings, so there is no advantage to a proposal for those specific debts. Bankruptcy is faster (9–21 months versus up to 60 months) and often cheaper for the dischargeable portion.

Choose a consumer proposal if your non-dischargeable debts include fraud judgments, student loans under 7 years, or CRA trust debts. A proposal can settle these debts. Bankruptcy cannot. The longer timeline and higher monthly payment are worth it if they eliminate $10,000–$25,000 in debts that would otherwise follow you for years.

Raj in Calgary owes $28,000 in credit card debt, $15,000 in student loans (3 years post-study), and $6,000 in child support arrears. His LIT models both options. Bankruptcy costs $2,100 and eliminates the credit cards in 9 months — but leaves $21,000 in student loans and support arrears. A consumer proposal at 35 cents on the dollar costs $15,050 over 48 months — and includes the student loans. Only the $6,000 in support arrears remains. Total cost with proposal: $21,050. Total cost with bankruptcy: $23,100. The proposal saves Raj $2,050 and eliminates his student loan debt permanently.

The decision is always about total cost and which debts disappear. A LIT runs the exact numbers for your situation. Start with a free consultation and bring every debt statement you have.

This article is educational only and does not constitute legal or financial advice. Consult a Licensed Insolvency Trustee for advice specific to your situation.