Consumer proposal or bankruptcy? How Canada's two formal debt options actually differ

When debt stops being manageable, Canadians have two formal options under the Bankruptcy and Insolvency Act: a consumer proposal or a bankruptcy. Both are administered by a Licensed Insolvency Trustee, both stop most collection activity, and both can end with you legally released from debt. But they work very differently. The right one depends on your income, what you own and what you can realistically pay.

Proposals are by far the more common choice. In the 12 months to August 2026, they made up about 78% of consumer filings in Canada (see our August numbers story).¹ Here is how the two compare.

What’s the difference between a consumer proposal and bankruptcy?

In short: a proposal is a negotiated repayment deal; bankruptcy is a legal reset in exchange for giving up certain assets and, for some people, part of their income for a period.

Source: Office of the Superintendent of Bankruptcy.²³

How a consumer proposal works

Working with a trustee, you offer your unsecured creditors either part of what you owe, more time to pay, or both. The term can’t run longer than five years, and you make your payments to the trustee, who pays the creditors.

Once the proposal is filed, you stop paying those creditors directly, and wage garnishments and creditor lawsuits are halted. Creditors then have 45 days to respond. If creditors holding at least a quarter of the proven claims ask for a meeting, the proposal goes to a vote decided by dollar value. If no one requests a meeting in that window, the proposal is treated as accepted.²

The trade-off is commitment. If you pay monthly and fall three payments behind, the proposal is automatically annulled, which lets creditors resume collection. You also attend two financial counselling sessions.

How bankruptcy works

In a bankruptcy, the trustee takes over dealing with your creditors and sells assets that aren’t protected by provincial and federal exemption laws. Garnishments and lawsuits stop, and you attend two counselling sessions.

Income matters. Each year the OSB sets a standard for what a household needs to live on. If your monthly income is more than $200 above that standard, the OSB says you contribute 50% of the excess, and a first bankruptcy stretches from 9 months to 21.³ A second bankruptcy runs longer: 24 months, or 36 with surplus income.

Some debts survive a bankruptcy, including support payments, court-ordered fines, debts from fraud, and student loans if you were in school within the last seven years.³

Which one hurts your credit more?

Both cost you. The OSB notes that people who file either one are generally assigned the lowest credit score. The difference is how long the record lasts. A proposal generally stays on your report for its term plus a few years, depending on your province. A first bankruptcy generally stays for six or seven years, and a second for 14.³

Rebuilding is possible after either one, but lenders decide case by case. As the OSB puts it, “there are no guarantees—no one is required to give you credit.”³ When a proposal is complete, you receive a certificate of full performance. Send it to the credit bureaus so your file is updated.

What this means for you

1. Look at your income and assets first. If you have steady income and something worth protecting, such as equity in a home, a proposal is often the better fit. If your income is low and you have few non-exempt assets, bankruptcy may cost less overall.
2. Count the total cost, not the monthly payment. A longer proposal can sometimes cost more in total than a short bankruptcy, and sometimes the reverse. A trustee can run both scenarios for you.
3. Talk to a Licensed Insolvency Trustee early. Many offer a free, confidential first consultation. If you want to read more before you call, Harris & Partners lays out proposals, bankruptcy and the alternatives side by side. For a look at who usually files and why, see what the OSB’s debtor profile shows.