Consumer Proposal vs Bankruptcy in Canada: Cost, Credit Damage, and Which Fits
By Jordan Ellis · Published · Reviewed
Quick Answer
A consumer proposal is a legally binding deal, filed by a Licensed Insolvency Trustee, to repay part of your unsecured debt — commonly 20-40 cents on the dollar — in fixed payments over up to 5 years; you keep your assets and carry an R7 credit rating for 3 years after completion. Bankruptcy discharges most debts in 9 to 21 months but can seize non-exempt assets and surplus income, and leaves an R9 rating for 6 years after a first discharge. For stable earners with assets, the proposal usually wins; for low income and no assets, bankruptcy is often the faster reset.
If unsecured debt has outrun any realistic payoff plan — test that first with the debt payoff calculator — Canada has two legal reset buttons. Both must be filed by a Licensed Insolvency Trustee (LIT), both stop collections instantly, and both are very different tools.
Side by side
| Consumer proposal | Bankruptcy (first) | |
|---|---|---|
| What you pay | Negotiated % of debt, fixed, up to 5 years | ~$1,800–$2,000 base + 50% of surplus income |
| Typical debt repaid | 20–40 cents on the dollar | Little to none for most filers |
| Timeline | Up to 5 years (can finish early) | 9 months (no surplus) or 21 months (surplus) |
| Assets | You keep everything | Non-exempt assets seized; home equity at risk |
| RRSPs | Untouched | Protected except last 12 months of contributions |
| Credit rating | R7, 3 years after completion | R9, 6 years after discharge |
| Tax refunds | You keep them | Seized during the bankruptcy period |
| Rebuilding | Mortgage-possible ~2 years after completion | Slower; R9 weighs heavier |
When the proposal wins
- You have assets to protect — home equity, a paid-off vehicle, RESPs. Bankruptcy prices those in; a proposal doesn’t.
- Your income is stable. The proposal payment is fixed at the offer. If your income rises during bankruptcy, your surplus payments rise with it; in a proposal, nothing changes.
- You want a shorter credit penalty. Pay the proposal off in 2 years and the R7 is gone in 5 from filing — often faster than the bankruptcy path.
When bankruptcy wins
- Low income, no assets, no surplus. A 9-month, ~$2,000 total reset is faster and cheaper than 5 years of proposal payments.
- The debt is truly unpayable. If even 20 cents on the dollar isn’t feasible over 5 years, a proposal just delays the inevitable.
Before you file either
A proposal or bankruptcy is the right tool for maybe one borrower in ten who considers it. Exhaust the cheaper paths first: a debt consolidation loan if your credit still qualifies, the avalanche method from our how to pay off debt fast guide, or a non-profit credit counselling debt management plan (R7 too, but no trustee and no legal filing). And if payday loans are in the mix, read what payday loans actually cost before rolling one more over.
Either way, the LIT consultation is free and they are legally required to present every option — including telling you that you don’t need them.
Official sources
Rules and dollar limits change. Confirm current amounts with the official pages below before you act · Last reviewed .
- Consumed by debt? Information on the insolvency process (Office of the Superintendent of Bankruptcy)
- Credit Counselling Canada (non-profit agencies) (Credit Counselling Canada)