Consumer Proposal vs Bankruptcy Canada

What is the Difference Between

a Consumer Proposal and Bankruptcy?

When faced with overwhelming debt, it’s important to explore the available options for financial recovery. Two common solutions in Canada are consumer proposals and bankruptcy. While both aim to provide debt relief and protect individuals from creditors, there are significant differences between the two. In this article, we will delve into the disparities between consumer proposals and bankruptcy, helping you understand which option may be better suited to your specific circumstances.


What is a Consumer Proposal?

A consumer proposal is a legal settlement agreement between an individual and their creditors. It allows debtors to negotiate new payment terms and potentially reduce their overall debt. Unlike bankruptcy, a consumer proposal enables individuals to retain their assets while providing a structured plan for debt repayment.


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Key Elements of a Consumer Proposal

  1. Repayment Plan: In a consumer proposal, debtors work with a Licensed Insolvency Trustee (LIT) to create a repayment plan. This plan outlines the amount to be repaid, typically a percentage of the total debt, and the duration of the repayment period, which can be up to five years.
  2. Asset Retention: One of the major advantages of a consumer proposal is that it allows individuals to keep their assets, including their home, vehicle, investments, and tax refunds. This is particularly beneficial for those who have significant equity in their assets.
  3. Monthly Payments: Debtors in a consumer proposal make fixed monthly payments to their LIT, who distributes the funds to creditors according to the agreed-upon terms. The amount of these payments is determined by the debtor’s income and ability to repay the debt.
  4. Credit Rating Impact: While a consumer proposal does have an impact on credit ratings, it is generally less severe than bankruptcy. The proposal will be reflected on the debtor’s credit report for a minimum of three years after completion.

What is Bankruptcy?

Bankruptcy is a legal process designed to help individuals or businesses who are unable to repay their debts. It provides a fresh start by eliminating most unsecured debts and allowing individuals to rebuild their financial lives.

Key Elements of Bankruptcy

  1. Discharge of Debts: Bankruptcy provides a discharge of most unsecured debts, relieving individuals of the obligation to repay them. However, certain debts, such as child and spousal support, fines, penalties, and student loans in certain circumstances, may not be discharged.
  2. Asset Liquidation: In bankruptcy, assets may be liquidated to repay creditors. However, there are exemptions that allow individuals to retain necessary assets, such as a primary residence and a vehicle within specific value limits.
  3. Length of Bankruptcy: The duration of bankruptcy depends on various factors, including income levels, previous bankruptcies, and compliance with the bankruptcy process. The minimum term for a first-time bankruptcy is typically nine months, but it can extend up to 36 months depending on the specific circumstances.
  4. Credit Rating Impact: Bankruptcy has a significant impact on credit ratings. It will be reflected on the debtor’s credit report for a minimum of six years after discharge, making it more challenging to obtain credit during that period.

Comparing Consumer Proposal and Bankruptcy

Now that we have outlined the basic concepts of consumer proposals and bankruptcy, let’s delve deeper into their key differences and understand which option may be more suitable for specific situations.

Asset Retention

One of the most significant advantages of a consumer proposal is the ability to retain assets. Debtors can keep their home, vehicle, investments, and other valuable possessions. This is particularly beneficial for individuals who have substantial equity in their assets and wish to protect them from liquidation. In contrast, bankruptcy may require the surrender of certain assets, although exemptions exist for primary residences and vehicles within specific value limits.

Debt Repayment

In a consumer proposal, debtors negotiate new payment terms with creditors through their LIT. The amount to be repaid is typically a percentage of the total debt, and the repayment period can extend up to five years. This allows debtors to make manageable monthly payments based on their income and financial capacity.

On the other hand, bankruptcy relies on the liquidation of assets to repay creditors. The debtor’s income and assets are assessed to determine the amount to be repaid during the bankruptcy period, which can range from nine to 36 months, depending on various factors. Bankruptcy may be a better option for individuals who are unable to make any significant payments towards their debts.

Impact on Credit Rating

Both consumer proposals and bankruptcy have an impact on credit ratings. However, a consumer proposal generally has a less severe effect on credit scores compared to bankruptcy. A consumer proposal remains on the debtor’s credit report for a minimum of three years after completion, while bankruptcy remains for a minimum of six years after discharge.

It’s important to note that creditworthiness can be rebuilt over time by making timely payments, using credit responsibly, and seeking professional guidance to improve financial management.

Eligibility and Process

To file a consumer proposal, debtors must meet specific criteria, including having total debts of less than $250,000 (excluding mortgage debt) and a stable income to support the repayment plan. Consulting with an LIT is essential to assess eligibility and create a viable proposal.

In contrast, bankruptcy is available to individuals who are insolvent and owe at least $1,000 in debt. While creditors cannot stop someone from filing for bankruptcy, they may object to the discharge if they believe the debtor has been dishonest or has misused credit.

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Which Option is Right for You?

Determining whether a consumer proposal or bankruptcy is the best solution depends on several factors unique to each individual’s financial situation. Consulting with a Licensed Insolvency Trustee is crucial to assess eligibility, understand the implications of each option, and determine the most suitable path forward.

The decision between a consumer proposal and bankruptcy should consider factors such as the amount of debt, the ability to make monthly payments, the desire to retain assets, and the long-term impact on creditworthiness. It’s important to weigh the advantages and disadvantages of each option and seek professional advice to make an informed decision.

Remember, both consumer proposals and bankruptcy provide an opportunity for a fresh financial start and can help individuals regain control over their financial well-being. The key is to choose the option that aligns with your goals and provides the best path towards a debt-free future.

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Consumer proposals and bankruptcy are two debt relief options that offer individuals the opportunity to overcome financial difficulties and start anew. While both options provide a fresh start, they differ in terms of asset retention, debt repayment, credit rating impact, and eligibility criteria.

A consumer proposal allows individuals to retain their assets, negotiate repayment terms, and make monthly payments over a specified period. Bankruptcy, on the other hand, involves the liquidation of assets to repay creditors and provides a discharge of most unsecured debts.

It is essential to carefully consider the advantages and disadvantages of each option and seek professional advice to determine the best course of action based on individual circumstances. By making an informed decision and taking the necessary steps towards debt recovery, individuals can pave the way for a brighter financial future.

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During our initial meeting, they took the time to understand my debt and financial circumstances. They explained the various options available to me and helped create a personalized plan that would be most beneficial for my situation. With their assistance, I was able to avoid declaring bankruptcy by presenting a consumer proposal to my creditors. Fortunately, my proposal was accepted, and I am extremely relieved to finally be free of debt, all thanks to BankruptcyCanada. The burden on my shoulders feels significantly lighter now, and I truly believe that Bankruptcy Canada has the most skilled specialists in debt relief.



What’s The Difference Between a Consumer Proposal and Bankruptcy?

Many people struggle with debt repayment, and if things are starting to get out of control, it’s important to look at the available options and make sure you choose a solution that works for you.

While bankruptcy can feel like your only option, there is another legalised solution that exists to help you deal with your debt – a consumer proposal.

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What is a consumer proposal?

A consumer proposal is a suitable alternative to filing for bankruptcy.

It’s a form of debt consolidation that more and more people are starting to file for as a way of dealing with serious, unaffordable debt.

Consumer proposals involve set repayment plans that are designed to be more affordable for the individual, while also reducing the total amount of debt owed.

In some cases, as much as 80% of the debt can be written off.

Consumer proposals are flexible, and creditors can choose to accept various terms that will help an individual avoid bankruptcy.

By declaring bankruptcy, an individual can write off high volumes of debt, but with some long-term consequences.

It’s important to discuss all of your available options with a Licensed Insolvency Trustee to help you establish the right solution for you.

Consumer proposal vs bankruptcy

Understanding the differences between a consumer proposal and bankruptcy can help you find the most appropriate solution for your situation.

Debt repayment

A consumer proposal will help to free up around 70-80% of all debts owed.

By law, all of the interest for these debts is frozen.

Levels of income as well as family circumstances will be taken into account here.

With bankruptcy, in the majority of cases, no repayments are made to creditors.

The interest is frozen on these debts.

Some repayments may not be exempt, although typically these are mainly administration fees.

Administration costs

Administration costs are included in a consumer proposal, with no extra fees incurred.

There is a tariff regulated by the federal government to set these amounts.

With bankruptcy, administration costs typically amount to $200 a month, for a total of nine months.

This is also set according to a tariff regulated by the federal government.


A consumer proposal must be finalised within 60 months, although terms of 24-48 months are the most common.

Outstanding amounts can be repaid early without a penalty.

Bankruptcy repayments can last for 9 or 21 months.

This will depend on whether or not it’s a first-time bankruptcy or if there have been others in the past.

Affect on credit score

R7 ratings are applied to consumer proposals and are removed three years after completion, or six years from the date of filing – whichever is soonest.

With bankruptcy, an R9 rating will be given and will be noted for six years.

During this time, it can be possible to apply for credit through effective credit rebuilding methods.

Agreements and collections

Creditors must accept the terms and agree to share repayments if at least 50% of them accept the consumer proposal.

It is the only accepted method for reducing debts with the Canada Revenue Agency (CRA).

Once the proposal has been filed, no further contact from creditors is allowed.

Meanwhile, if you’re filing for bankruptcy, creditors can’t stop you from doing so.

Debts to the CRA can be cancelled.

A Licensed Insolvency Trustee can prevent collection actions such as wage garnishment and asset seizure.

Once the proposal has been filed, no further contact from creditors is allowed.

Advisor’s qualifications

A consumer proposal must be filed by a Licensed Insolvency Trustee, who is licensed by the federal government.

The Licensed Insolvency Trustee must adhere to a Code of Ethics, as well as maintain professional conduct.

A bankruptcy notice must be overseen by the Office of the Superintendent of Bankruptcy.

The Licensed Insolvency Trustee is licensed by the federal government, and must adhere to a Code of Ethics, as well as maintain professional conduct.

There are clear differences between a consumer proposal and bankruptcy, and seeking the right advice can help you choose the right solution based on your personal circumstances.

If you’re struggling with debt and are looking for the most appropriate solution to extinguish it, then a Licensed Insolvency Trustee can help.

We can provide you with no-obligation advice to help you assess your options and help you make the best decision based on your situation.

To arrange a free consultation with one of our team, get in touch today.

Information on Consumer Proposals

Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal

Canadian Bankruptcies

How to File for Bankruptcy
What is Bankruptcy?
Bankruptcy FAQs
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?