Consumer Proposal vs Debt Consolidation vs Bankruptcy Canada (2026)

Compare All Debt Relief Options in Canada (2026)

When debt becomes unmanageable, Canadians have five primary options: consumer proposals, debt consolidation, bankruptcy, debt settlement, and credit counselling debt management plans. In 2024, 137,295 Canadians filed consumer insolvencies—78.6% chose consumer proposals over bankruptcy because proposals reduce debt by 60-80% while keeping assets and providing immediate legal protection from garnishment.

The right solution depends on your debt amount, income, credit score, and whether you need legal protection from creditors. Consumer proposals and bankruptcy are the only options that trigger a stay of proceedings (stopping lawsuits and wage garnishment immediately), but each impacts your credit differently: proposals report as R7 for 3-6 years, bankruptcy as R9 for 6-7 years.

This guide compares all five debt relief methods across eligibility, cost, timeline, legal protection, and credit impact—so you can choose the fastest, most affordable path to financial recovery in 2026.

How Each Debt Relief Option Works

Understanding the mechanics, legal framework, and requirements of each debt relief option helps you identify which solution fits your financial situation.

Consumer Proposal (BIA Section 66.12)

A consumer proposal is a legally binding agreement filed by a Licensed Insolvency Trustee with the Office of the Superintendent of Bankruptcy. Filing immediately stops garnishment, collection calls, and lawsuits through the stay of proceedings. You offer to pay creditors a percentage of what you owe (typically 20-40%) over 3-5 years in fixed monthly payments that never increase even if your income rises.

Creditors vote on your proposal; if a majority by dollar value accept, or if no meeting is requested within 45 days, the proposal is deemed accepted. Industry data shows approximately 99% of consumer proposals are accepted. You keep all assets including your home, car, and RRSPs as long as you maintain secured loan payments. Maximum debt limit is $250,000 in unsecured debt (excluding mortgage on principal residence). The proposal reports as R7 on your credit report and is removed from Equifax 3 years after completion or 6 years from filing, whichever comes first.

Only Licensed Insolvency Trustees can file consumer proposals; they are regulated by the federal Office of the Superintendent of Bankruptcy, not by creditors or banks.

Debt Consolidation

Debt consolidation involves taking out a new loan from a bank, credit union, or online lender that pays off all existing creditors in full. You then make one monthly payment at (ideally) a lower interest rate than your combined existing debts. This is not a Bankruptcy and Insolvency Act proceeding—it is a private loan arrangement with no debt reduction and no legal protection.

Approval requires good credit, typically a minimum score of 650 though some lenders may approve scores as low as 600 with higher rates. There is no stay of proceedings, meaning creditors not included in the consolidation can still sue or garnish wages. Terms typically range from 1-7 years. Homeowners can access debt consolidation through home equity loans or refinancing, which typically offer lower rates but secure previously unsecured debt against the home.

If you make payments on time, debt consolidation has minimal credit impact and reports as a regular installment loan. However, missing payments severely damages your credit score.

Bankruptcy (BIA Section 49)

Bankruptcy is a legal proceeding in which a Licensed Insolvency Trustee files a declaration that you are insolvent and cannot pay your debts as they become due. All unsecured debts are discharged (eliminated) after 9-21 months depending on your income and whether you must make surplus income payments. The legal stay of proceedings stops garnishment and lawsuits immediately upon filing.

You must surrender non-exempt assets; exemption amounts vary by province (Alberta allows $40,000 home equity, Ontario approximately $10,783, Quebec $0). If your income exceeds federal thresholds (approximately $2,543/month for a single person in 2025), you must pay 50% of income above the threshold to the bankruptcy estate as surplus income. Two mandatory financial counselling sessions are required.

Bankruptcy reports as R9 on your credit report and remains on Equifax for 6 years after discharge for a first-time bankruptcy (7 years if not discharged). There is no debt cap—you can file bankruptcy for any debt amount including amounts over $250,000 that would disqualify you from a consumer proposal.

Debt Settlement

Debt settlement involves private negotiation with creditors (often through a for-profit company) to accept lump-sum payments for less than the full balance owed, typically 40-60% of the original debt. This is not a BIA proceeding and provides no legal protection—creditors can continue to sue, garnish wages, and pursue collections during the settlement process.

The Financial Consumer Agency of Canada warns that creditors are not obligated to accept settlement offers and companies cannot guarantee specific reduction percentages. Fees typically range from 15-25% of enrolled debt and may be charged even if no settlement is reached. Forgiven debt amounts may be considered taxable income under the Income Tax Act sections 80-80.04, with CRA issuing a T4A slip for the forgiven amount.

Credit damage is severe; settled accounts report as R9 (same as bankruptcy) and remain on credit reports for 6 years from last activity. Settlement is rarely recommended unless you have immediate access to lump-sum cash and can withstand lawsuits during the negotiation period.

Credit Counselling Debt Management Plan

A debt management plan is administered by non-profit credit counselling agencies. The counsellor contacts your creditors and negotiates reduced or zero interest rates; you repay 100% of the principal amount over 3-5 years through a single monthly payment to the agency. Not all creditors participate in DMPs, and creditors can withdraw at any time.

DMPs provide no legal protection; creditors not enrolled can still sue or garnish wages. Plans report as R7 on credit reports and are typically removed 2-3 years after completion. Services are free or low-cost (some agencies charge $0-100/month administration fees). DMPs work best for debts under $25,000 when you can afford to repay the full principal amount but need help coordinating multiple creditors and securing lower interest rates.

Two mandatory financial counselling sessions provide budgeting education and money management skills.

Calculate which option saves you the most money using the debt relief calculator

Who Qualifies for Each Debt Relief Option

Eligibility requirements vary significantly across debt relief options. Understanding qualification criteria helps you narrow your choices quickly.

Consumer proposals require that you be a Canadian resident, legally insolvent, and owe between $5,000 and $250,000 in unsecured debt excluding your mortgage on a principal residence. You must have sufficient income to fund monthly payments over 3-5 years; creditors assess whether your offer exceeds what they would receive if you filed bankruptcy instead. There is no credit score requirement—proposals are designed for individuals who cannot pay debts in full but have income to make partial repayment.

Debt consolidation loans require good credit, with most lenders setting a minimum score of 650 and offering the best rates at 700 or higher. Some lenders approve scores as low as 600 but charge significantly higher interest rates that often eliminate consolidation benefits. You must demonstrate stable income and maintain a debt-to-income ratio under 40-44%. Homeowners have easier access to consolidation through home equity loans or refinancing regardless of credit score, but this secures previously unsecured debt against the home and creates foreclosure risk if payments are missed.

Bankruptcy has no debt limit, asset limit, or credit score requirement. You must be insolvent, meaning your liabilities exceed your assets or you are unable to pay debts as they become due, and you must be a Canadian resident. Even high-income earners can file bankruptcy, though surplus income rules apply. Bankruptcy is most appropriate for individuals with no assets, no income, or debts exceeding $250,000 who cannot fund a consumer proposal.

Debt settlement companies typically target debts of $10,000 or more. There is no credit score requirement, but you need access to lump-sum cash representing 40-60% of total debt to fund settlements as they are negotiated. Because settlement provides no stay of proceedings, creditors can sue and obtain judgments during the process—many consumers cannot complete settlement programs due to garnishment or lawsuits that occur before settlements are reached.

Credit counselling debt management plans require fair credit because creditors must agree to participate in the plan. You must demonstrate ability to repay 100% of principal at reduced or zero interest over 3-5 years. DMPs work best for debts under $25,000 where budgeting assistance and interest reduction solve the problem without requiring debt reduction.

Check your consumer proposal eligibility in 2 minutes

Consumer Proposal vs All Alternatives: Full Comparison

Direct comparisons across debt reduction, cost, legal protection, timeline, and credit impact reveal which option delivers the best outcome for your specific situation.

Debt Reduction and Cost Comparison

Consumer proposals reduce unsecured debt by 60-80% on average, meaning you pay 20-40 cents per dollar owed, spread over 3-5 years. Licensed Insolvency Trustee fees are federally regulated and paid from your proposal payments, never upfront: $750 plus tax for filing, $750 plus tax upon approval, $85 plus tax per counselling session (2 required), and 20% of funds distributed to creditors. For a $50,000 debt settled at 30% ($15,000 paid over 4 years), typical fees total approximately $3,000-4,000, leaving approximately $11,000 for creditors.

Debt consolidation costs 100% of principal plus interest because there is no debt reduction. If you consolidate $30,000 at 8% interest over 5 years, total cost is approximately $36,600. Origination fees of 1-5% may apply depending on the lender. While the interest rate may be lower than credit card rates, you still repay the full amount owed.

Bankruptcy discharges 100% of unsecured debt but requires surplus income payments if your income exceeds federal thresholds. The threshold for a single person is approximately $2,543 per month in 2025; you must pay 50% of income above this threshold to the bankruptcy estate. First-time bankruptcies with no surplus income discharge in 9 months; with surplus income, discharge occurs in 21 months. Trustee fees are similar to consumer proposal fees. You must also surrender non-exempt assets, though exemption amounts vary by province.

Debt settlement achieves 40-60% reduction when successful, but fees of 15-25% of enrolled debt significantly increase total cost. For $40,000 in debt, fees range from $6,000-10,000. If settlements average 50%, total cost equals $20,000 in debt payments plus $6,000-10,000 in fees, for a total of $26,000-30,000. Forgiven amounts may trigger taxable income, further increasing costs.

Credit counselling debt management plans cost 100% of principal at zero interest over 3-5 years, plus administrative fees of $0-100 per month depending on the agency. For $40,000 in debt, total cost is $40,000 plus $0-6,000 in administrative fees over 5 years.

Compare proposal vs bankruptcy vs consolidation monthly payments for your debt

Legal Protection and Credit Impact Comparison

Only consumer proposals and bankruptcy provide a stay of proceedings under the Bankruptcy and Insolvency Act, immediately stopping wage garnishment, collection calls, and lawsuits upon filing. The stay remains in effect throughout your proposal term (up to 5 years) or bankruptcy period (9-21 months). For Canadians facing imminent wage garnishment, proposals and bankruptcy are the only immediate solutions.

Provincial wage garnishment rules allow creditors to seize significant portions of your paycheck: 20% in Ontario, 30% in British Columbia and Quebec, with varying rules in other provinces. Family support and maintenance garnishments are higher (up to 50% in Ontario). Filing a consumer proposal or bankruptcy stops garnishment within 24-48 hours.

Debt consolidation, debt settlement, and credit counselling provide no legal protection. Creditors not included in a consolidation loan can continue collection actions. During debt settlement negotiations, creditors frequently sue and obtain judgments, then garnish wages—making it difficult or impossible to accumulate the lump-sum cash needed to fund settlements. Credit counselling creditors can withdraw from the plan at any time and resume collection activities.

Consumer proposals report as R7 (debt settlement arrangement under the BIA) on Equifax and TransUnion. Equifax removes consumer proposals 3 years after completion or 6 years from filing date, whichever comes first. Because most proposals are completed in 3-5 years, total credit impact ranges from 6-8 years. Individual accounts included in the proposal show an “included in consumer proposal” notation. Once you complete your proposal, send your certificate of full performance to both credit bureaus to ensure your file is updated promptly.

Bankruptcy reports as R9 (bad debt, written off), the most severe credit rating. Equifax keeps first bankruptcies on file for 6 years after discharge; if not discharged, or for second/subsequent bankruptcies, the notation remains for 7-14 years. Total credit impact typically spans 6-7+ years from filing.

Debt consolidation has no direct credit impact if you make payments on time; it reports as a regular installment loan (R1 if current). Hard credit inquiries at application cause a 5-10 point temporary drop. Closing paid-off credit cards after consolidation may reduce available credit and increase utilization, temporarily lowering your score. However, missed payments on a consolidation loan severely damage credit (R2-R5 depending on delinquency level).

Debt settlement results in R9 ratings on all settled accounts (“settled for less than owed”). These notations remain on credit reports for 6 years from last activity. Multiple R9 ratings devastate credit scores, often dropping them to the 400-500 range. Rebuilding requires 6-7 years minimum.

Learn how to rebuild credit after a consumer proposal

Timeline and Process Comparison

Consumer proposals require 1-2 meetings with a Licensed Insolvency Trustee to gather financial information including income, expenses, assets, and complete list of debts. The LIT files the proposal with the Office of the Superintendent of Bankruptcy within 1-2 weeks. Upon filing, the stay of proceedings takes effect immediately. Creditors have 45 days to vote on the proposal; if no meeting is requested, the proposal is deemed accepted. If creditors request a meeting (requires requests from creditors representing at least 25% of proven claims), the meeting must be held within 21 days of the request. Total process length is 3-5 years of fixed monthly payments. You must complete two mandatory financial counselling sessions at $85 each.

Debt consolidation loans are approved within 1-7 days for qualified borrowers with good credit. Some online lenders provide instant pre-approval with funding in 24-48 hours. Term length depends on the amount borrowed and typically ranges from 1-7 years. The process is straightforward: apply, provide income verification, receive approval, and begin making monthly payments.

Bankruptcy discharges in 9 months for first-time bankruptcies with no surplus income, or 21 months with surplus income. You must report income monthly to the trustee, who recalculates surplus income obligations. Two mandatory financial counselling sessions are required. Asset surrender occurs early in the process; the trustee liquidates non-exempt assets and distributes proceeds to creditors. Discharge releases you from all dischargeable debts.

Debt settlement timelines vary widely and depend on negotiation success. Most programs estimate 2-4 years, but many consumers quit before completion due to lawsuits, garnishment, or inability to save the required lump-sum amounts. Unlike consumer proposals, there is no guarantee of completion or success.

Credit counselling debt management plans can be established within 1-2 weeks. The counsellor contacts creditors to request participation and reduced interest rates. Once creditors agree, you begin making monthly payments to the agency, which distributes funds to creditors. Plans typically run 3-5 years depending on debt amount and payment capacity.

Find out if you need a consumer proposal

When to Choose Each Option

Selecting the optimal debt relief strategy depends on your debt amount, income stability, credit score, asset situation, and whether you face immediate collection pressure.

Choose a Consumer Proposal When:

• You owe $10,000-$250,000 in unsecured debt
• You have steady income to fund monthly payments over 3-5 years
• You own assets you want to keep (home, car, RRSPs)
• You face or fear wage garnishment or lawsuits
• You want shorter credit impact than bankruptcy (R7 vs R9)
• You expect income increases during repayment (proposal payments are fixed and never increase)

Consumer proposals offer the best combination of debt reduction, asset protection, and legal protection for Canadians with moderate to high unsecured debt and stable income.

Choose Debt Consolidation When:

• You owe less than $25,000 in unsecured debt
• Your credit score is 650 or higher
• You can afford to repay 100% of principal at lower interest
• You are not facing garnishment or lawsuits
• You want to minimize credit impact

Debt consolidation preserves credit and simplifies payments but provides no debt reduction or legal protection. It works best for smaller debts when interest reduction alone solves the problem.

Choose Bankruptcy When:

• You owe more than $250,000 in unsecured debt (exceeds proposal limit)
• You have little to no income or assets
• You cannot afford consumer proposal payments
• You want the fastest debt discharge (9-21 months)
• Non-exempt assets are minimal or already claimed by secured creditors

Bankruptcy discharges 100% of unsecured debt faster than any other option but carries the most severe credit consequences (R9 for 6-7+ years) and requires asset surrender. It is typically considered a “last resort” but is the only option for debts exceeding $250,000.

Choose Debt Settlement When:

• You have immediate access to lump-sum cash (40-60% of total debt)
• You can withstand lawsuits and garnishment during negotiations
• You understand forgiven amounts may be taxable income
• You have explored and been declined for consumer proposals

Debt settlement is rarely the optimal choice for Canadians because consumer proposals provide similar or better debt reduction with full legal protection, lower fees, and no tax consequences on forgiven amounts.

Choose Credit Counselling (DMP) When:

• You owe less than $25,000 in unsecured debt
• You have fair credit and creditors willing to participate
• You can afford to repay 100% of principal at 0% interest
• You need budgeting assistance and financial education
• You want to avoid BIA filings entirely

Credit counselling is best for smaller debts where interest reduction and payment coordination solve the problem without requiring debt reduction.

Take the debt relief quiz to see which option fits your situation

What Each Debt Relief Option Costs

Understanding the complete fee structure and total cost helps you compare true affordability across options.

Consumer proposal fees are set by federal tariff under the Bankruptcy and Insolvency Act and are paid entirely from your proposal payments, never as separate upfront or out-of-pocket costs. The tariff includes $750 plus tax for filing the proposal, $750 plus tax upon creditor approval, $85 plus tax per mandatory counselling session (2 required for a total of $170), and 20% of all funds distributed to creditors.

For example, if you owe $40,000 and your proposal is accepted at 30% ($12,000 paid over 4 years at $250/month), total fees are approximately $1,500 (filing and approval) + $170 (counselling) + $2,400 (20% of $12,000 distributed) = $4,070. This leaves approximately $7,930 going to creditors. Your $250 monthly payment covers all fees and creditor payments—you never write separate checks for trustee fees.

All Licensed Insolvency Trustees must charge the same tariff; shopping around for lower fees is not possible. The first consultation with any LIT is always free and confidential.

Debt consolidation charges interest only; there is no debt reduction. For $40,000 consolidated at 8% annual interest over 5 years, total cost is approximately $48,480 (principal $40,000 plus interest $8,480). Some lenders charge origination fees of 1-5% ($400-2,000 on $40,000), increasing total cost. While the interest rate is typically lower than credit card rates, you still repay the full principal amount.

Bankruptcy trustee fees for a first-time bankruptcy with no assets and no surplus income start at approximately $1,800. Surplus income payments are added if your income exceeds federal thresholds; you must pay 50% of income above approximately $2,543/month for a single person. For example, if your monthly income is $3,543, you pay 50% of the $1,000 excess = $500/month for 21 months = $10,500 in surplus income payments. Total bankruptcy cost in this scenario would be $1,800 trustee fees + $10,500 surplus income = $12,300.

Debt settlement companies charge 15-25% of enrolled debt as fees, often charged regardless of whether settlements are successful. For $40,000 in enrolled debt, fees range from $6,000-10,000. If settlements average 50% of balances, you pay approximately $20,000 to creditors plus $6,000-10,000 in fees, for a total cost of $26,000-30,000. Additionally, forgiven amounts may be reported to CRA as taxable income (T4A slip), creating tax liability that further increases cost.

Credit counselling debt management plans are free or low-cost. Non-profit agencies charge $0-100 per month in administrative fees, totaling $0-6,000 over a 5-year plan. You repay 100% of principal at 0% or reduced interest. For $40,000 in debt, total cost is $40,000 plus administrative fees.

Calculate your consumer proposal fees and monthly payment

Pros and Cons of Each Debt Relief Option

Every debt relief method involves trade-offs between debt reduction, legal protection, credit impact, cost, and timeline.

Consumer Proposal

Pros:

• Reduces unsecured debt by 60-80% on average
• Fixed monthly payments that never increase even if income rises
• Legal stay of proceedings stops garnishment and lawsuits immediately
• Keep all assets including home, car, and RRSPs
• R7 credit rating is less severe than bankruptcy’s R9
• Removed from credit report 3 years after completion or 6 years from filing, whichever is first (typically 6-8 years total impact)
• 99% acceptance rate by creditors
• Federal regulation ensures consistent, transparent fees

Cons:

• R7 credit notation impacts borrowing ability for 6-8 years
• Creditors must vote to accept (though rejection is rare)
• Missing 3 payments causes annulment and returns you to pre-proposal status
• Only Licensed Insolvency Trustees can file proposals; no DIY option
• Debt must be between $5,000-$250,000 unsecured
• Requires steady income to fund payments over 3-5 years

Debt Consolidation

Pros:

• No debt reduction but significantly lower interest than credit cards
• No credit impact if payments are made on time (reports as regular loan)
• One monthly payment simplifies budgeting and tracking
• Homeowners can access low rates through home equity loans or refinancing
• No BIA filing means no public record with OSB
• Keeps all credit accounts open (can maintain credit card access)

Cons:

• Requires good credit score (minimum 650, ideally 700+)
• No legal protection; creditors can sue and garnish wages for non-consolidated debts
• No debt reduction; you pay 100% of principal plus interest
• Home equity consolidation secures previously unsecured debt against your home, creating foreclosure risk
• Longer terms may result in paying more total interest despite lower rate
• Does not address overspending habits without behavioral change

Bankruptcy

Pros:

• Discharges 100% of unsecured debt in 9-21 months (fastest discharge of any option)
• Legal stay of proceedings stops garnishment and lawsuits immediately
• No debt limit; can discharge amounts over $250,000
• No credit score requirement; no income requirement
• Two mandatory counselling sessions provide financial education
• Best option when consumer proposal payments are unaffordable

Cons:

• R9 credit rating (most severe) remains on report for 6 years after discharge (7 if not discharged), total 6-7+ years impact
• Must surrender non-exempt assets; exemptions vary by province
• Surplus income payments required if income exceeds thresholds; recalculated monthly
• Social stigma; often called “last resort”
• Public record searchable on OSB database
• May impact professional licenses in some regulated professions

Debt Settlement

Pros:

• Potential 40-60% debt reduction when negotiations succeed
• No BIA filing or public OSB record
• Can sometimes negotiate faster than 3-5 year proposal timelines
• No impact on secured debts or credit accounts not enrolled

Cons:

• No legal protection; creditors can sue and garnish wages during negotiations
• Forgiven amounts may be taxable income (CRA T4A slip)
• High fees of 15-25% of enrolled debt, often charged even if settlement fails
• R9 credit rating on all settled accounts (same severity as bankruptcy)
• Financial Consumer Agency of Canada warns creditors are not obligated to settle
• Unregulated industry with inconsistent practices and consumer complaints
• Many consumers quit before completion due to lawsuits and garnishment

Credit Counselling (DMP)

Pros:

• Reduces or eliminates interest on enrolled debts (often to 0%)
• Free or very low cost (typically $0-100/month administrative fee)
• Provides budgeting help and financial education
• No BIA filing or public record
• One monthly payment to agency simplifies coordination
• Non-profit agencies prioritize consumer education over profit

Cons:

• No debt reduction; must repay 100% of principal
• No legal protection; creditors can withdraw and resume collection
• Not all creditors participate in DMPs
• R7 credit notation for 2-3 years after completion
• Requires fair credit and creditor agreement to participate
• Best only for smaller debts (typically under $25,000)

Compare consumer proposal vs bankruptcy

How Each Option Affects Your Credit Score

Credit impact varies dramatically across debt relief options in both severity (rating type) and duration (years on report).

Consumer Proposal Credit Impact

Consumer proposals report as R7 (debt settlement arrangement under the Bankruptcy and Insolvency Act) on both Equifax and TransUnion credit reports. Equifax removes consumer proposal notations 3 years after you complete the proposal or 6 years from the filing date, whichever occurs first. TransUnion follows similar timing rules.

Because most consumer proposals are completed in 3-5 years, the typical total credit impact spans 6-8 years from filing. For example, if you file a 4-year proposal in January 2026, you complete it in January 2030, and the R7 notation is removed from Equifax in January 2033 (3 years after completion). However, if you file a 6-year proposal (less common), Equifax would remove the notation in January 2032 (6 years from filing) rather than waiting until 3 years after completion in January 2035.

Individual accounts included in the proposal display an “included in consumer proposal” notation alongside the R7. Once you receive your certificate of full performance from your Licensed Insolvency Trustee, send copies to both Equifax and TransUnion immediately to ensure your credit file is updated. Some consumers report that individual creditor notations remain on file after the proposal is removed; if this occurs past the 3-year or 6-year mark, file a dispute with the credit bureau.

R7 is less severe than R9 (bankruptcy/bad debt). Some lenders, particularly credit unions and alternative mortgage lenders, may approve applications 1-2 years into a proposal if you are making payments on time and have begun rebuilding credit with secured credit cards or small installment loans.

Bankruptcy Credit Impact

Bankruptcy reports as R9 (bad debt, written off), the most severe credit rating in Canada. Equifax keeps first-time bankruptcy notations on file for 6 years after discharge. If you are not discharged, or if you file a second or subsequent bankruptcy, the notation remains for 7-14 years. Total credit impact typically spans 6-7+ years from the filing date.

For example, if you file bankruptcy in January 2026 and are discharged in October 2026 (9 months, first-time, no surplus income), the R9 notation remains on your Equifax report until October 2032 (6 years after discharge). If you file bankruptcy and are not discharged due to opposition from creditors or the OSB, the notation remains for 7 years from filing.

R9 is the most severe rating; most traditional lenders will not approve credit during the notation period. Credit rebuilding begins after discharge with secured credit cards, builder loans, or credit-builder programs. Many bankruptcies require 5-7 years after discharge before qualifying for prime-rate mortgages with A-lenders.

Debt Consolidation Credit Impact

Debt consolidation has no direct negative credit impact if you make payments on time. The consolidation loan reports as a regular installment loan with an R1 rating when current. A hard credit inquiry at application causes a temporary 5-10 point drop that recovers within a few months.

However, closing multiple paid-off credit card accounts after consolidation may reduce your total available credit, increasing your credit utilization ratio on remaining accounts. High utilization (above 30%) lowers credit scores. To mitigate this, keep paid-off credit card accounts open with zero balances rather than closing them immediately after consolidation.

Missed payments on a consolidation loan severely damage credit, with ratings declining to R2 (30 days late), R3 (60 days late), and higher as delinquency continues. If the consolidation loan enters collections or is written off, it receives an R9 rating identical to bankruptcy.

Debt Settlement Credit Impact

Debt settlement results in R9 credit ratings on all settled accounts because creditors report them as “settled for less than owed” or “settled.” R9 notations remain on credit reports for 6 years from the date of last activity. Multiple R9 ratings devastate credit scores, often dropping them to the 400-500 range.

Rebuilding credit after debt settlement takes 6-7 years minimum. The R9 severity is identical to bankruptcy, but settlement provides no legal protection during the process, meaning you may accumulate additional negative notations from lawsuits, judgments, and garnishments that occur before settlements are reached.

Credit Counselling (DMP) Credit Impact

Debt management plans report as R7 (debt settlement/special arrangement). Credit bureaus typically remove DMP notations 2-3 years after plan completion, though timing varies by bureau. R7 is less severe than R9 but still impacts borrowing ability during the notation period.

Because DMPs involve repaying 100% of principal (unlike consumer proposals which reduce principal by 60-80%), some lenders view DMPs more favorably than proposals. However, the credit notation itself is identical (R7) for both options.

Credit Rebuilding Timelines

After Consumer Proposal:

• Month 1-12: Apply for secured credit card with low limit ($300-500); make small purchases and pay in full monthly
• Month 12-24: Add second secured card or small credit-builder loan; maintain utilization under 30%
• Month 24-36: May qualify for unsecured credit card with higher interest; auto loans from subprime lenders possible
• Year 3-4: B-lender mortgages possible 2 years after completion with 10-20% down payment
• Year 6-8: R7 removed; can rebuild to 700+ score with consistent on-time payments

After Bankruptcy:

• Discharge: Apply for secured credit card immediately
• Month 6-12 post-discharge: Add credit-builder loan or second secured card
• Year 2-3 post-discharge: Unsecured credit cards and auto loans (subprime rates) possible
• Year 3-4 post-discharge: B-lender mortgages possible with 15-20% down payment
• Year 6-7 post-discharge: R9 removed; rebuild to prime credit with consistent history

After Debt Consolidation:

• Maintain on-time payments on consolidation loan (R1 rating)
• Keep paid-off credit card accounts open with zero balances
• Add new credit sparingly; hard inquiries temporarily lower score
• Maintain utilization under 30% on all revolving accounts
• Credit score can improve immediately with consistent on-time payments

Learn how to rebuild credit after a consumer proposal

Myths About Debt Relief Options

Misinformation about debt relief options prevents many Canadians from accessing help that could solve their financial problems. Understanding the facts helps you make informed decisions.

”Consumer proposals ruin credit forever”

False. Consumer proposals report as R7 and are removed from Equifax 3 years after completion or 6 years from filing, whichever occurs first. Total credit impact spans 6-8 years. Bankruptcy reports as R9 and remains on file for 6-7 years after discharge. Both notations are time-limited and credit can be rebuilt during and after the process. Many Canadians achieve 700+ credit scores within 2-3 years of completing a proposal by using secured credit cards responsibly and maintaining on-time payments.

”I have to pay huge upfront fees for a consumer proposal”

False. Licensed Insolvency Trustees charge no upfront or out-of-pocket fees. All fees are set by federal tariff and paid from your proposal payments: $750 filing, $750 approval, $85 per counselling session (2 required), and 20% of funds distributed to creditors. These amounts are included in your monthly payment calculation. The first consultation with any LIT is always free and confidential.

Beware of unlicensed “debt consultants” or “proposal preparation” companies that charge upfront fees of $500-2,000 to prepare documents. Only Licensed Insolvency Trustees can legally file consumer proposals in Canada, and LITs prepare all documents as part of their federally regulated service. Paying a third party to prepare documents is unnecessary and expensive.

”Licensed Insolvency Trustees work for the banks”

False. Licensed Insolvency Trustees are licensed and regulated by the Office of the Superintendent of Bankruptcy, a federal agency under Innovation, Science and Economic Development Canada. LITs are not employed by banks or creditors. They are neutral officers of the court with a fiduciary duty to both debtors and creditors. The OSB conducts regular audits of LIT practices to ensure compliance with professional standards and ethical requirements.

LITs are required by law to explain all debt relief options including non-BIA alternatives like debt consolidation and credit counselling, and to recommend the option that best fits your situation even if it means not filing a proposal or bankruptcy.

”If my income increases during a consumer proposal, I have to pay more”

False for consumer proposals. Consumer proposal payments are fixed at the time of filing and never increase even if you receive raises, bonuses, or windfalls during the 3-5 year term. This is a significant advantage for Canadians who expect income growth.

In contrast, bankruptcy surplus income rules require monthly income reporting and payment adjustments. If your income increases during bankruptcy, your surplus income payments increase accordingly. This distinction makes consumer proposals more attractive for employed Canadians with growth potential.

”Everyone will find out if I file a proposal or bankruptcy”

Licensed Insolvency Trustees are bound by professional codes of ethics that require confidentiality except where disclosure is legally required. LITs do not contact employers, family members, or friends. Consumer proposals and bankruptcies are recorded in the OSB public database, which is searchable by creditors, trustees, and credit bureaus, but the database is not advertised or widely publicized.

Your employer will only learn of a proposal or bankruptcy if you tell them, if your wages were being garnished prior to filing (the garnishment stops and employer receives legal notice), or if you work in certain regulated professions where bankruptcy may impact licensing.

”Debt consolidation always saves money”

False. If the consolidation loan interest rate is only marginally lower than your current average rate, or if you extend the repayment term significantly, you may pay more total interest despite lower monthly payments. Always calculate total cost (principal plus all interest over the full term) rather than comparing monthly payments only.

For example, consolidating $30,000 at 10% over 7 years results in total cost of approximately $38,800. If your current average interest rate is 12% but you would pay off cards in 4 years, total cost might be approximately $36,400. The consolidation would cost $2,400 more despite the lower interest rate due to the extended term.

”Bankruptcy is the only way to stop wage garnishment”

False. Consumer proposals also trigger an immediate stay of proceedings under the Bankruptcy and Insolvency Act, stopping wage garnishment and lawsuits the moment the proposal is filed. Consumer proposals are often preferred over bankruptcy because they allow you to keep assets, result in R7 credit rating instead of R9, and have shorter credit report retention (3-6 years vs 6-7 years).

If you are facing wage garnishment, consult a Licensed Insolvency Trustee immediately to discuss both proposal and bankruptcy options. Filing can stop garnishment within 24-48 hours.

”Consumer proposals and bankruptcies are the same thing”

False. Consumer proposals and bankruptcies are distinct legal proceedings under different sections of the Bankruptcy and Insolvency Act with different outcomes.

Consumer proposals allow you to keep all assets, reduce debt by 60-80%, make fixed monthly payments over 3-5 years, and report as R7. Bankruptcy requires surrender of non-exempt assets, discharges 100% of debt in 9-21 months, may require surplus income payments that change monthly, and reports as R9. Proposals are often described as “negotiated settlements” while bankruptcy is “debt discharge.” Most Canadians with steady income and assets choose proposals; bankruptcy is typically reserved for those with no income, no assets, or debts exceeding $250,000.

”I can fix debt with settlement and keep my credit intact”

False. Debt settlement provides no legal protection during negotiations, meaning creditors can sue, obtain judgments, and garnish wages while you attempt to save money for settlement offers. Settled accounts report as R9 (identical to bankruptcy) and remain on credit reports for 6 years. Forgiven amounts may be taxable income, increasing total cost.

Consumer proposals provide immediate legal protection (stay of proceedings), similar or better debt reduction (60-80% vs 40-60%), federally regulated fees, and no tax consequences on forgiven amounts. For almost all Canadians, consumer proposals are superior to debt settlement.

Learn about your debt relief options

How to Choose the Right Debt Relief Option

Selecting the optimal debt relief strategy requires assessing your debt amount, income stability, credit score, asset situation, and urgency of collection actions.

Step 1: Assess Your Situation

Debt Amount:

• $5,000-$250,000 unsecured debt: Consumer proposal or debt consolidation are both options
• Over $250,000 unsecured debt: Bankruptcy (exceeds consumer proposal limit)
• Under $25,000: Consider debt consolidation or credit counselling first; lower-cost options may solve the problem

Income Stability:

• Steady employment or self-employment income: Consumer proposal or debt consolidation
• Little to no income: Bankruptcy (no income requirement; surplus income rules apply if income increases)
• Irregular income: Consumer proposal payments can be structured around income patterns

Credit Score:

• 650 or higher: Debt consolidation is viable and preserves credit if paid on time
• 600-649: Debt consolidation possible but with higher interest rates that may reduce benefits
• Under 600: Consumer proposal or bankruptcy (no credit score requirement)

Legal Urgency:

• Facing wage garnishment or lawsuit: Consumer proposal or bankruptcy provide immediate stay of proceedings
• Collection calls but no legal action: Any option; prioritize based on debt reduction and cost
• No current collection pressure: Debt consolidation or credit counselling may be sufficient

Assets:

• Own home, car, or RRSPs you want to keep: Consumer proposal (keep all assets)
• Few or no assets: Bankruptcy discharges debt faster (9-21 months) with no asset concerns
• Significant non-exempt equity: Consumer proposal avoids asset surrender

Step 2: Run the Numbers

Use the debt relief options calculator to compare monthly payments, total cost, and timeline for consumer proposal vs bankruptcy vs debt consolidation based on your specific debt amount, income, and province. Input your total unsecured debt, monthly gross income, and province to receive instant estimates.

Calculate total cost for each option including all fees and interest over the full repayment period. Compare:

• Consumer proposal: Typically 20-40% of total debt over 3-5 years
• Debt consolidation: 100% of principal plus interest over 1-7 years
• Bankruptcy: Trustee fees plus surplus income (if applicable) over 9-21 months
• Debt settlement: 40-60% of debt plus 15-25% fees, if successful
• Credit counselling: 100% of principal at 0% interest over 3-5 years plus admin fees

Step 3: Book Free Consultations

Consumer Proposal or Bankruptcy: Book a free consultation with a Licensed Insolvency Trustee. LITs are required by law to explain all debt relief options including non-BIA alternatives like debt consolidation and credit counselling, and to recommend the option that best fits your situation. The first meeting is always free, confidential, and carries no obligation. Bring recent pay stubs, a list of all debts with balances and interest rates, a summary of assets (home, car, RRSPs), and monthly living expenses.

Debt Consolidation: Apply with your bank, credit union, or online lender for a consolidation loan. Homeowners should consult a mortgage broker about refinancing or home equity line of credit options, which typically offer lower rates than unsecured loans. Obtain quotes from 2-3 lenders to compare rates and terms before accepting an offer.

Credit Counselling: Contact a non-profit credit counselling agency such as Credit Counselling Society or your local community agency for a free assessment. The counsellor will review your budget, contact creditors to determine willingness to participate in a debt management plan, and provide a recommendation.

Step 4: Avoid Red Flags

Unlicensed Debt Consultants: Avoid companies that charge upfront fees of $500-2,000 to “prepare” a consumer proposal. Only Licensed Insolvency Trustees can legally file consumer proposals in Canada, and LITs prepare all documents as part of their federally regulated service with no upfront cost. Paying a middleman is unnecessary and wastes money that could go toward your debt.

Debt Settlement Guarantees: Avoid debt settlement companies that promise guaranteed savings of 50% or more. The Financial Consumer Agency of Canada warns that creditors are not obligated to settle and companies cannot guarantee specific reduction percentages. Many consumers pay fees of 15-25% even when settlements fail, and creditors can sue and garnish wages during the process.

High-Interest Consolidation: Avoid consolidation loans with interest rates of 18% or higher (approaching credit card rates). Calculate whether the consolidation actually reduces total cost or simply extends payments over a longer term. If consolidation rates are similar to current rates, consumer proposals may provide better debt reduction.

Pressure Tactics: Avoid any company that pressures you to sign immediately without time to review options, compare alternatives, or seek second opinions. Legitimate Licensed Insolvency Trustees and credit counsellors provide information and recommendations but respect your right to consider options and consult with family or advisors.

Step 5: Act Quickly if Facing Garnishment

Provincial wage garnishment rules allow creditors to seize significant portions of your paycheck: 20% in Ontario, 30% in British Columbia and Quebec, and varying percentages in other provinces. Family support garnishments can reach 50% of wages. Once a creditor obtains a judgment and initiates garnishment, your employer is legally required to deduct the garnishment amount and send it directly to the creditor or court.

Filing a consumer proposal or bankruptcy stops wage garnishment within 24-48 hours because the stay of proceedings legally prohibits creditors from continuing collection actions. Do not wait until your paycheck is garnished—consult a Licensed Insolvency Trustee immediately upon receiving a Statement of Claim (lawsuit notice) or judgment notice.

If garnishment has already started, the LIT can file the proposal or bankruptcy, stop future garnishments, and in some cases recover amounts garnished within the previous 3 months (called a “preference payment” that must be returned to the bankruptcy estate or proposal for distribution to all creditors).

Find a Licensed Insolvency Trustee in your area

Related Debt Relief Resources

Consumer Proposal Guides

• What Is a Consumer Proposal?
• How to File a Consumer Proposal
• Consumer Proposal Cost in Canada
• Signs You Need a Consumer Proposal
• Consumer Proposal vs Bankruptcy
• Debt Settlement vs Consumer Proposal

Bankruptcy Resources

• How to File Bankruptcy in Canada
• What Happens When You File Bankruptcy
• Bankruptcy Cost in Canada
• Can You Keep Your House in Bankruptcy?
• Can You Keep Your Car in Bankruptcy?
• Bankruptcy and CRA Tax Debt

Debt Consolidation Resources

• Complete Guide to Debt Consolidation Loans
• Best Debt Consolidation Loans 2026
• HELOC for Debt Consolidation
• Balance Transfer Credit Cards
• Debt Consolidation Loan Types
• Debt Consolidation FAQ

Credit and Recovery

• Rebuild Credit After Consumer Proposal
• Collection Accounts on Credit Report
• How to Stop Wage Garnishment
• Statute of Limitations on Debt

Provincial Guides

• Ontario Debt Relief
• British Columbia Debt Relief
• Alberta Debt Relief
• Quebec Debt Relief

Tools and Calculators

• Consumer Proposal Calculator
• Wage Garnishment Calculator
• Statute of Limitations Calculator
• Debt Payoff Calculator
• CRA Debt Calculator
• DTI Ratio Calculator

Debt Relief Solutions

• Consumer Proposal
• Bankruptcy
• Debt Consolidation
• Credit Counselling
• Debt Settlement
• Find a Licensed Insolvency Trustee

Bottom Line

Consumer proposals reduced debt by 60-80% for 78.6% of the 137,295 Canadians who filed insolvency in 2024-2025, making proposals the most popular debt relief option. Proposals and bankruptcy are the only methods that provide immediate legal protection through a stay of proceedings, stopping wage garnishment and lawsuits within 24-48 hours of filing. Debt consolidation preserves credit but requires good credit scores (650+), provides no debt reduction or legal protection, and costs 100% of principal plus interest. Bankruptcy discharges 100% of debt fastest (9-21 months) but reports as R9 for 6-7 years and may require asset surrender. For most Canadians with $10,000-$250,000 in unsecured debt and steady income, consumer proposals offer the best combination of debt reduction, asset protection, legal protection, and shorter credit impact compared to bankruptcy.

Calculate your potential savings and monthly payments across all debt relief options using the consumer proposal calculator.

Disclaimer: This article provides general information about debt relief options in Canada and should not be considered legal or financial advice. Consult a Licensed Insolvency Trustee or financial professional for advice specific to your situation.

Last updated: February 1, 2026