A complete guide to bankruptcy and consumer proposals: what they are, how they work, and which option is right for you. Understand the process, costs, and impact on your credit.
When debt becomes unmanageable, many Canadians start looking at formal debt relief tools like bankruptcy and consumer proposals. These legal options can provide protection from creditors, stop collection calls and wage garnishments, and create a structured path to becoming debt-free. However, they also come with serious consequences for your credit and financial future, so it’s important to understand how each option works before making a decision.
Bankruptcy is a legal process under the Bankruptcy and Insolvency Act that allows an honest but insolvent person to eliminate most unsecured debts in exchange for surrendering certain assets and following strict conditions. It is usually considered a last resort for individuals who cannot reasonably repay their debts through other means. Bankruptcy must be filed with the help of a Licensed Insolvency Trustee (LIT), the only professional in Canada authorized to administer bankruptcies.
When you declare bankruptcy, most collection actions against you are stopped by an automatic stay of proceedings. This means creditors and collection agencies must cease calls, lawsuits, and wage garnishments. In return, you may be required to make monthly surplus income payments based on your earnings, attend credit counselling sessions, and provide proof of income and expenses to your trustee.
Not all debts are discharged in bankruptcy. Common unsecured debts such as credit cards, personal loans, payday loans, and tax debts are usually included. However, obligations like court fines, alimony and child support, some student loans, and debts arising from fraud may survive bankruptcy. Your trustee will review your situation and explain which of your debts can be eliminated.
Bankruptcy has a significant impact on your credit report, typically remaining for six to seven years after discharge for a first-time bankruptcy, and longer for subsequent filings. During this time, access to new credit may be limited or come with higher interest rates. Despite this, for many people facing overwhelming debt, bankruptcy can provide a necessary reset and the opportunity to rebuild their financial life.
A consumer proposal is a formal agreement between you and your unsecured creditors to repay a portion of your debt over a period of up to five years. Like bankruptcy, it is governed by the Bankruptcy and Insolvency Act and must be administered by a Licensed Insolvency Trustee. Unlike bankruptcy, you keep your assets while making an affordable monthly payment based on what you can reasonably afford.
In a consumer proposal, your trustee reviews your income, expenses, and debts, then drafts an offer to your creditors. This offer typically involves paying back a percentage of what you owe, consolidating your unsecured debts into a single fixed payment with no additional interest. If creditors representing at least 50% of the dollar value of your debt vote to accept the proposal, it becomes legally binding on all unsecured creditors included.
Once filed, a consumer proposal also triggers a stay of proceedings, stopping collection calls, wage garnishments, and legal actions. As long as you make your agreed payments and comply with the terms, your creditors cannot pursue you for the remaining balance. If you complete all payments, the remaining unsecured debt included in the proposal is legally forgiven.
A consumer proposal appears on your credit report as an R7 rating and typically remains for three years after completion or six years from the filing date, whichever comes first. While it does negatively affect your credit, the impact is generally less severe and shorter than bankruptcy. For many Canadians, a consumer proposal can be a middle ground that avoids bankruptcy while still providing meaningful debt relief.
Choosing between bankruptcy and a consumer proposal depends on your income, assets, types of debt, and long-term goals. If you have little to no surplus income and few assets, bankruptcy may result in a faster and more complete discharge of your debts. However, if you have stable income, want to protect assets such as a home, car, or investments, and can afford a reasonable monthly payment, a consumer proposal may be a better fit.
It’s also important to consider the psychological and practical impact of each option. Both processes require you to be transparent about your finances and commit to a structured repayment or discharge plan. A Licensed Insolvency Trustee can review your full financial picture, explain all available options—including debt consolidation, informal negotiations, or credit counselling—and help you compare the costs, timelines, and credit impact of bankruptcy versus a consumer proposal.
Before making any decision, gather all your financial documents, including credit card statements, loan agreements, tax notices, and pay stubs. This will allow the trustee to give you accurate advice tailored to your situation. Remember that an initial consultation with an LIT is typically free and does not obligate you to proceed with any specific option.
Bankruptcy and consumer proposals are serious steps, but for many Canadians they provide a much-needed fresh start after years of financial stress. By understanding how each process works and getting professional advice, you can choose the path that best aligns with your needs and start rebuilding your financial future with confidence.
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