Consumer Proposal vs Bankruptcy Canada 2026 - Which is Better?

Consumer proposals reduce debt by 60-80% while keeping all assets and imposing R7 credit ratings that clear in 6-8 years, whereas bankruptcy discharges 100% of debt in 9-21 months but may require surrendering non-exempt assets and results in R9 credit ratings lasting 6-7 years—78.9% of Canadians filing insolvency in Q3 2025 chose proposals over bankruptcy.

Both options provide immediate stay of proceedings stopping collections, but the asset protection and income flexibility of consumer proposals make them preferable for most Canadians with steady income and property to protect.

Consumer Proposal vs Bankruptcy: Key Differences

Consumer proposals and bankruptcy are both formal insolvency proceedings under the Bankruptcy and Insolvency Act administered by Licensed Insolvency Trustees. Both trigger immediate stay of proceedings stopping wage garnishment, collection calls, lawsuits, and interest accumulation. Both eliminate unsecured debts and provide legal discharge from creditor claims.

The fundamental difference is that consumer proposals are negotiated debt settlements where you pay a portion of what you owe, while bankruptcy is a court-ordered debt discharge eliminating 100% of unsecured debt in exchange for asset surrender and specific obligations. Proposals keep you in control of your assets and income, while bankruptcy transfers control to the trustee.

Consumer proposals require you to have between $10,000 and $250,000 in unsecured debt excluding your mortgage, be legally insolvent, and have sufficient income to fund monthly payments over 3-5 years. Bankruptcy has no debt maximum, no income requirement, and works for individuals with zero income or extremely high debt levels that exceed proposal limits.

Learn comprehensive details about what consumer proposals are and how they work under federal law.

Debt Elimination: 60-80% vs 100%

Consumer proposals reduce unsecured debt by 60-80% on average through negotiated agreements with creditors. You pay 20-40% of what you owe over a maximum of 60 months in fixed monthly payments. The exact percentage depends on what creditors would receive if you filed bankruptcy instead—your proposal must exceed bankruptcy recovery by 10-30% to gain creditor acceptance.

For example, if you owe $50,000 in unsecured debt and bankruptcy would provide creditors with $5,000 from asset surrender and surplus income, your proposal might offer $6,500-$8,000 (13-16% of total debt). Creditors vote on your offer; if a majority by dollar value accepts, the remaining $42,000-$43,500 is permanently forgiven.

The 97-99% acceptance rate means most properly structured proposals are approved by creditors. Upon completing all payments and two mandatory counselling sessions, you receive a Certificate of Full Performance confirming permanent debt elimination.

Bankruptcy discharges 100% of unsecured debt in 9-21 months. First-time bankruptcies with no surplus income discharge in 9 months. Bankruptcies with surplus income discharge in 21 months. You must complete duties including monthly income reporting, attending two counselling sessions, and surrendering non-exempt assets. Once discharged, all included debts are legally eliminated.

Some debts are not dischargeable in either proposals or bankruptcy. Student loans less than 7 years old from end of study, court fines, criminal restitution, child support, spousal support, and debts arising from fraud cannot be eliminated. Student loans 7 or more years old are dischargeable.

While bankruptcy eliminates more debt percentage-wise, consumer proposals achieve substantial debt reduction while keeping assets and avoiding R9 credit ratings. For most Canadians, the 60-80% reduction through proposals provides sufficient relief without the consequences of bankruptcy.

Asset Protection: Keep Everything vs Provincial Exemptions

Consumer proposals allow you to keep all assets regardless of value as long as you maintain payments on secured loans. Your home, vehicle, RRSPs, TFSAs, household goods, and personal property remain in your possession. Provincial bankruptcy exemption limits do not apply to consumer proposals.

If you own a home with $100,000 in equity and a vehicle worth $25,000 fully paid, you keep both in a consumer proposal. If you have $150,000 in RRSPs and $50,000 in TFSAs, you keep all retirement savings. The only requirement is continuing to make mortgage and car loan payments if you want to keep secured assets.

This asset protection is the primary reason most Canadians choose consumer proposals over bankruptcy. The ability to avoid losing home equity, vehicles, and retirement savings makes proposals attractive despite longer timelines and partial debt repayment.

Bankruptcy requires surrendering non-exempt assets to the Licensed Insolvency Trustee, who liquidates them and distributes proceeds to creditors. Provincial exemption limits determine what you keep. These limits vary significantly across provinces.

In Ontario, if you have $50,000 in home equity, you must either pay the trustee approximately $39,000 to keep your home or surrender it for sale. In Alberta with the same equity, you keep your home because $40,000 is exempt and only $10,000 would be paid to the estate.

RRSPs are protected in bankruptcy except for contributions made in the 12 months before filing, which are seized. TFSAs have no bankruptcy protection and are surrendered entirely. Life insurance policies with named beneficiaries are generally exempt.

Asset protection alone justifies consumer proposals for homeowners with equity, vehicle owners with paid-off or nearly paid-off vehicles, and individuals with substantial RRSPs or TFSAs. Losing $20,000-$50,000 in assets through bankruptcy exceeds the cost of most consumer proposals.

Compare provincial exemptions and asset protection rules across Ontario and Alberta to understand how your location affects bankruptcy outcomes.

Credit Impact: R7 vs R9 Rating

Consumer proposals result in R7 credit ratings on all included accounts. R7 indicates “debt settlement arrangement” under the Bankruptcy and Insolvency Act and shows you are making regular payments through a formal insolvency proceeding. The R7 remains on your Equifax credit report for 3 years after completing all payments or 6 years from filing date, whichever occurs first.

Most consumer proposals are completed in 4-5 years. For a proposal filed in February 2026 and completed in February 2031, the R7 is removed in February 2034 (3 years post-completion). Total credit impact is 8 years. For a 3-year proposal filed in February 2026 and completed in February 2029, the R7 is removed in February 2032 (6 years from filing), resulting in 6 years total impact.

Bankruptcy results in R9 credit ratings, the most severe rating possible. R9 means “bad debt, written off, or collection account” and indicates you did not repay the debt. First-time bankruptcies remain on Equifax for 6 years after discharge. If you filed bankruptcy in February 2026 and discharged in November 2026 (9 months), the R9 is removed in November 2032, resulting in approximately 6.75 years total impact.

Second and subsequent bankruptcies remain on credit reports for 14 years from discharge, making repeat bankruptcies extremely damaging to long-term credit.

The R7 from consumer proposals is considered less severe than R9 by most lenders. Some lenders view R7 as evidence you took responsibility through legal means and completed payments as agreed. R9 suggests debt was written off as uncollectible with no repayment.

During credit rebuilding, R7 notations allow approval for secured credit cards within 6-12 months of filing. R9 bankruptcy notations often require 12-24 months before secured products become available. B-lender mortgages may be accessible 1-2 years after completing a consumer proposal versus 2-3 years post-bankruptcy discharge.

Both options severely damage credit scores during the process. Scores typically drop to 500-600 range upon filing either consumer proposal or bankruptcy. Rebuilding to 650-700 takes 2-3 years of responsible credit use after completion regardless of option chosen.

Learn strategies for rebuilding credit after a consumer proposal with specific timelines and product recommendations.

Surplus Income: None vs 50% Above Threshold

Consumer proposals require no surplus income calculations or payments. Your monthly proposal payment is fixed for the entire term and never increases regardless of income changes. If you receive a raise, bonus, new job with higher salary, or other income increase during your proposal term, your payment remains unchanged.

This fixed payment structure provides predictability and allows you to benefit from income improvements during the 3-5 year proposal period. Many Canadians use raises or bonuses to pay off proposals early, shortening the R7 credit rating duration.

Bankruptcy requires 50% surplus income payments if your monthly income exceeds federal thresholds set by the Office of the Superintendent of Bankruptcy. For 2025, the threshold for a single person is approximately $2,543 per month. Income above this threshold is considered surplus, and you must pay 50% to the bankruptcy estate.

Surplus income calculations are performed monthly based on actual gross income from all sources including employment, self-employment, government benefits, rental income, and investment income. The trustee recalculates surplus income every month based on updated income reporting.

If you earn $4,000 monthly, your surplus income is $1,457 ($4,000 minus $2,543 threshold). You must pay 50% of $1,457 = $729 per month for 21 months if this is your first bankruptcy. Total surplus income payments would be $15,309 plus base trustee fees of approximately $1,800 for total bankruptcy cost of $17,109.

Income fluctuations significantly impact bankruptcy costs. A $500 monthly raise during bankruptcy increases surplus income by $250 monthly for the remaining bankruptcy term. Commission income, overtime pay, and bonuses all increase surplus payments, making bankruptcy costs unpredictable.

Consumer proposals eliminate this uncertainty with fixed payments. If your income situation is stable or improving, proposals provide cost certainty that bankruptcy cannot match.

Review the complete consumer proposal cost breakdown including how fixed payments compare to surplus income requirements.

Timeline: 3-5 Years vs 9-21 Months

Consumer proposal timelines range from 1-60 months with most completed in 3-5 years. You choose your payment term during proposal drafting based on affordability. Longer terms mean lower monthly payments but extend the R7 credit rating duration. Shorter terms mean higher monthly payments but faster completion.

The 60-75 day period from filing to creditor acceptance and court approval occurs while you are protected by the stay of proceedings but before you begin making payments. Once accepted, you make monthly payments to your Licensed Insolvency Trustee for the agreed term.

You can pay off consumer proposals early with no penalty by making lump sum payments from tax refunds, bonuses, salary increases, or other sources. Early completion shortens the R7 credit rating timeline, making it advantageous to accelerate payments when possible.

Bankruptcy timelines depend on surplus income status. First-time bankruptcies with no surplus income discharge in 9 months. First-time bankruptcies with surplus income discharge in 21 months. Second bankruptcies take 24-36 months depending on surplus income. Third and subsequent bankruptcies require court applications with no guaranteed timeline.

The 9-21 month bankruptcy timeline is faster than consumer proposals, making bankruptcy attractive when speed is the priority. However, the 9-month timeline only applies to individuals with no assets, no surplus income, and full compliance with all bankruptcy duties.

Missing income reporting, failing to attend counselling sessions, or other non-compliance can delay or prevent discharge. If the court refuses discharge due to non-compliance or misconduct, the bankruptcy can remain open indefinitely with the R9 notation persisting.

While bankruptcy is faster, consumer proposals offer asset protection and fixed payments that most Canadians with income and property prefer despite longer timelines.

Total Cost Comparison

Consumer proposal costs equal 20-40% of your original debt paid over 3-5 years plus Licensed Insolvency Trustee fees of $1,800-$2,500. For $50,000 in debt with a 30% offer totaling $15,000 over 5 years, total cost is approximately $15,000 with $3,000 to LIT and $12,000 to creditors. Your monthly payment is $250 covering both fees and creditor distributions.

Bankruptcy costs include base trustee fees of approximately $1,800 plus surplus income payments if applicable plus the value of surrendered assets. For someone with no surplus income and no non-exempt assets, total cost is $1,800. For someone with $20,000 in non-exempt home equity, cost is $1,800 plus $20,000 in asset surrender = $21,800.

For individuals with surplus income, bankruptcy becomes significantly more expensive. Using the earlier example of $4,000 monthly income resulting in $729 monthly surplus income payments for 21 months, total cost is $15,309 plus $1,800 base fees = $17,109. If this person also has $15,000 in non-exempt assets, total cost reaches $32,109.

The cost comparison becomes increasingly favorable for consumer proposals as income and assets increase. For individuals with home equity or vehicles worth more than provincial exemptions, proposals save tens of thousands of dollars compared to bankruptcy.

When to Choose Consumer Proposal Over Bankruptcy

Choose consumer proposals when you have assets to protect including home equity exceeding provincial exemptions, paid-off or nearly paid-off vehicles worth more than $5,000-$7,000, RRSPs with contributions in the last 12 months, TFSAs with any balance, or valuable personal property like jewelry, collections, or tools exceeding exemption limits.

Consumer proposals make sense when you earn surplus income that would trigger mandatory payments in bankruptcy. If your monthly income exceeds approximately $2,543 as a single person or $3,178 as a couple, surplus income rules increase bankruptcy costs significantly. Proposals eliminate surplus requirements with fixed payments.

Choose proposals when you prefer R7 credit ratings over R9. The less severe notation and potentially shorter total credit impact make proposals preferable for individuals prioritizing credit rebuilding speed. B-lender mortgages and auto loans become available sooner after proposals than bankruptcy.

Consumer proposals allow you to keep tax refunds and continue making RRSP contributions during the 3-5 year term. Bankruptcy trustees seize tax refunds annually and RRSP contributions made during bankruptcy. For individuals receiving $2,000-$4,000 annual tax refunds, keeping these amounts over 3-5 years provides $6,000-$20,000 in additional value.

Choose proposals when you want greater control over your finances without monthly income reporting, trustee permission for purchases, or restrictions on financial activities. Consumer proposal payments are made directly to the LIT with no other trustee involvement in your financial life.

Understand warning signs that indicate you need a consumer proposal to assess if now is the right time to file.

When to Choose Bankruptcy Over Consumer Proposal

Choose bankruptcy when you have no assets or minimal assets below provincial exemption limits. If you rent housing, own no vehicle or a vehicle worth under $5,000, have no RRSPs or TFSAs, and own minimal personal property, bankruptcy asset surrender has little impact. The 9-month discharge for no-surplus-income bankruptcies provides fastest debt relief.

Bankruptcy is the only option when you owe more than $250,000 in unsecured debt. Consumer proposals are capped at $250,000 excluding your mortgage on principal residence. Debts exceeding this limit require Division I proposals or bankruptcy. For individuals with $300,000-$500,000 in unsecured debt, bankruptcy may be the most practical option.

Choose bankruptcy when you cannot afford consumer proposal payments. If your income is extremely low, unstable, or nonexistent, funding monthly proposal payments over 3-5 years is not feasible. Bankruptcy accommodates individuals with zero income through the 9-month no-surplus-income discharge process.

Bankruptcy makes sense when speed is the absolute priority and you can discharge within 9-21 months. If your employment situation is temporary or you anticipate major income increases in 1-2 years, completing bankruptcy quickly and rebuilding credit from a clean slate may be preferable to 3-5 years of proposal payments.

Choose bankruptcy when you have already been through one consumer proposal and it failed or was annulled. Filing another proposal after annulment requires waiting 5 years. Bankruptcy has no such restriction and may be your only immediate option after failed proposal.

Review options at the bankruptcy solution hub to understand when bankruptcy is the right choice for your situation.

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Bottom Line

The 78.9% of Canadians who chose consumer proposals over bankruptcy in Q3 2025 did so because proposals keep all assets regardless of value, eliminate surplus income payment requirements with fixed payments that never increase, result in less severe R7 credit ratings versus R9 removed in 6-8 years, allow you to keep tax refunds and make RRSP contributions, require no monthly income reporting or trustee permission for financial decisions, and provide greater control over your finances throughout the 3-5 year payment term. Bankruptcy discharges 100% of debt faster in 9-21 months but requires surrendering non-exempt assets based on provincial exemption limits, paying 50% of surplus income monthly if income exceeds thresholds, and accepting R9 credit ratings lasting 6-7 years. Consumer proposals are ideal for Canadians with steady income, assets to protect, and surplus income that would exceed proposal payments in bankruptcy, while bankruptcy suits those with no income, no assets, or debt exceeding $250,000 who need the fastest possible discharge. Calculate your consumer proposal payment to compare actual costs to bankruptcy outcomes for your specific debt and income levels.

This article provides general information and should not be considered legal or financial advice. Consult a Licensed Insolvency Trustee for advice specific to your situation.

Last updated: February 2, 2026