The short version: A Consumer Proposal lets you pay back a reduced amount of your debt while keeping your assets, stopping collections, and avoiding bankruptcy entirely. Bankruptcy eliminates your debt faster but requires surrendering certain assets, reporting your income monthly, and accepting a longer-lasting credit impact.
How a Consumer Proposal and Bankruptcy Compare
The table below covers the most important differences. Read through it carefully. The right choice depends on your specific situation, but the comparison usually makes the better path clear.
| Factor | Consumer Proposal | Bankruptcy (First Time) |
|---|---|---|
| Debt limit | $10,000 to $250,000 in unsecured debt | No upper limit; minimum $1,000 |
| Your assets | Protected. You keep your home, car, tax refunds, RRSPs, and all other assets. | Some assets surrendered. Non-exempt property, RRSPs contributed in the last 12 months, and tax refunds may be taken. |
| Debt reduction | You pay back a negotiated portion. The rest is legally forgiven at the end. | Most unsecured debt is eliminated, but asset surrender is required in exchange. |
| Monthly income reporting | Not required. | Required monthly. If income exceeds a threshold, surplus income payments increase your costs. |
| Fixed payments | Yes. Payments are set from day one and never change, regardless of income changes. | Variable. Payments may increase if your income increases during the process. |
| Tax refunds | You keep them. | Surrendered to the trustee during the bankruptcy period. |
| Collections and garnishments | Stop immediately upon filing (Stay of Proceedings). | Stop immediately upon filing. |
| Credit rating | R7 rating on your credit report. | R9 rating on your credit report. |
| How long it stays on your credit | 3 years after the proposal is completed (or 6 years from filing, whichever comes first). | 6 years after discharge for a first bankruptcy. 14 years for a second. |
| Length of process | Up to 60 months (5 years). Can be paid off early. | Minimum 9 months. Extends to 21 months if you have surplus income. |
| Professional licences | Generally no impact. | Some professional designations and licences are affected by a bankruptcy filing. |
| Public record | Filed with the government but not publicly announced. | May be listed in a public insolvency database. Larger bankruptcies can be published. |
Who Qualifies for Each Option?
Both options are available to Canadian residents who cannot repay their debts in full. But there are different criteria for each.
| Qualification Factor | Consumer Proposal | Bankruptcy |
|---|---|---|
| Residency | Must be a Canadian resident | Must be a Canadian resident |
| Minimum debt | $10,000 in unsecured debt | $1,000 in debt |
| Maximum unsecured debt | $250,000 (excluding mortgage on primary residence) | No maximum |
| Income requirement | Enough income to make monthly proposal payments | No income requirement; can file with no income |
| Incorporated businesses | Not available; individuals and sole proprietors only | Available to individuals; corporations have a separate process |
If your unsecured debt exceeds $250,000, a Consumer Proposal is no longer an option under the standard rules. A Division 1 Proposal may be the right path in that case. It operates under the same federal legislation but has no upper debt limit.
What Happens to Your Assets?
This is often the most important question. People want to know if they will lose their home or their car. The answer depends heavily on which path you take.
Your Home
In a Consumer Proposal, your home is not at risk. Your mortgage is a secured debt and is not part of the proposal. You keep making your mortgage payments as normal. As long as you stay current, nothing about the Consumer Proposal threatens your home.
In bankruptcy, your home may be at risk if you have significant equity above the provincial exemption limit. In Ontario, there is a $10,000 exemption on home equity. If your equity exceeds that amount, the trustee may require you to pay the difference or sell the property.
Your Vehicle
In a Consumer Proposal, your car loan is a secured debt and is not affected. You keep your vehicle as long as you keep making payments.
In bankruptcy, Ontario allows you to keep a vehicle worth up to $7,117. If your car is worth more and is paid off, the trustee may require you to surrender it or pay the difference into the estate.
Your Tax Refunds
In a Consumer Proposal, any tax refund you receive while the proposal is active belongs to you. In bankruptcy, any refund owed for the years you are bankrupt goes to the trustee.
Your RRSPs
In a Consumer Proposal, your RRSPs are fully protected. In bankruptcy, contributions made to your RRSP within the 12 months before filing are not protected and may be seized. Contributions made before that window are generally protected under Ontario law.
How Each Option Affects Your Credit
Both a Consumer Proposal and bankruptcy will affect your credit. The question is how much and for how long.
| Credit Factor | Consumer Proposal | Bankruptcy (First) |
|---|---|---|
| Credit bureau rating | R7 | R9 |
| Stays on Equifax | 3 years after completion or 6 years from filing | 6 years after discharge |
| Stays on TransUnion | 3 years after completion | 6 years after discharge |
| Can you rebuild during the process? | Yes. Secured credit cards and credit-builder products are available. | Limited. Fewer credit options are available while bankrupt. |
| Impact on second filing | A second Consumer Proposal is possible if you meet the criteria. | A second bankruptcy results in a 14-year notation on your credit file. |
For most people, the Consumer Proposal leaves a smaller and shorter-lasting mark on their credit. And because collections stop the moment you file, the ongoing damage from missed payments and collection accounts also stops.
When a Consumer Proposal Makes More Sense
For most people in Ontario carrying serious unsecured debt, a Consumer Proposal is the better option. Here is when it makes the most sense:
- You own a home with equity you want to protect
- You have a vehicle worth more than $7,117 that is fully paid off
- You receive regular tax refunds
- You have RRSPs you have been contributing to recently
- You have a stable income and can commit to monthly payments
- You hold a professional licence that could be affected by a bankruptcy
- You want fixed, predictable payments with no income reporting
- You want the shortest possible credit recovery window
When Bankruptcy Might Be the Right Call
Bankruptcy is not the right answer for most people with assets or income. But there are situations where it may make sense:
- You have no assets and no income, making proposal payments impossible
- Your debt is so large that even a reduced repayment amount is not realistic
- You need the fastest possible resolution and have nothing at risk
- A significant portion of your debt is non-dischargeable (in which case, get legal advice first)
Important: Bankruptcy should always be a last resort. We help clients avoid it wherever possible. If you are considering bankruptcy, speak with us first. There is almost always another path.
Why Working with a Law Firm Changes the Outcome
Most people file Consumer Proposals through a Licensed Insolvency Trustee (LIT). A trustee administers the process according to the rules. They are legally required to act as a neutral party. They do not exclusively represent you.
We are a law firm. Our lawyers are licensed by the Law Society of Ontario. When you hire us, our entire legal duty is to you. We negotiate on your behalf to get the best possible terms. We push for outcomes, not just process compliance.
That is a meaningful difference. When it comes to structuring a proposal, fighting back against aggressive creditor tactics, or navigating a complicated filing, having a lawyer in your corner matters. You can learn more about who we are on our About page, and see a full overview of how we handle Consumer Proposals.
Frequently Asked Questions
Can I file a Consumer Proposal if I have already been bankrupt before?
Yes. A previous bankruptcy does not disqualify you from filing a Consumer Proposal. You still need to meet the standard eligibility criteria: Canadian residency, between $10,000 and $250,000 in unsecured debt, and the financial ability to make the proposed payments. If you have been bankrupt before and are considering either option again, the credit impact of a second bankruptcy is far more severe than a Consumer Proposal, so the proposal is almost always worth exploring first.
What happens if my creditors reject my Consumer Proposal?
If creditors holding more than 50% of your debt by value vote against the proposal, it is rejected. At that point, a meeting of creditors can be called to negotiate revised terms. You may be able to increase the payment amount or adjust the timeline to win approval. If a revised proposal also fails, bankruptcy becomes the remaining option. This is rare when proposals are built thoughtfully with realistic terms.
Does a Consumer Proposal show up on a background check?
A Consumer Proposal is filed with the Office of the Superintendent of Bankruptcy (OSB) and appears in the publicly searchable federal insolvency database. Standard employment background checks do not typically search this database. Credit checks will show the R7 notation. For positions requiring security clearance or specific financial trustworthiness reviews, a proposal may come up. If this is a concern for your situation, we can talk it through.
Can I keep my business if I file a Consumer Proposal?
If you are a sole proprietor, a Consumer Proposal covers both your personal and business unsecured debts. You can continue operating your business. If your business is incorporated, the proposal covers your personal debts only. The corporation’s debts are separate. In that case, business debt restructuring may be a better fit. See our Business Debt Restructuring page for more information.
How long before my credit starts to recover?
Credit recovery starts while you are still in your proposal. Making regular, on-time payments is the first step. Many people apply for secured credit cards or credit-builder products within the first year of their proposal and use them to build a payment history. After the proposal is completed, the notation stays on your credit file for three years. Once it comes off, your score can recover substantially if you have been building credit during that period.
What happens to joint debts in a Consumer Proposal?
A Consumer Proposal covers only your personal share of the debt. If you have a joint debt with a spouse or co-signer, the creditor can still pursue the other person for the full balance. The proposal does not eliminate the debt from your co-signer’s perspective. If both of you carry significant joint debt, each of you may need to file separately, or you may be able to file a joint proposal. We review these situations case by case.
Can CRA debt be included in a Consumer Proposal?
Yes. Income tax arrears, HST or GST debt, and other amounts owed to the Canada Revenue Agency can be included in a Consumer Proposal. The CRA is treated as an unsecured creditor. This is one of the most valuable features of the Consumer Proposal process for people who have fallen behind on taxes, since the CRA can pursue collection aggressively, including wage garnishments and bank account freezes.
What is the difference between a Consumer Proposal and a Division 1 Proposal?
A Consumer Proposal is available to individuals with up to $250,000 in unsecured debt. A Division 1 Proposal is available when unsecured debt exceeds $250,000, or for corporations. The Division 1 process is more complex, involves court approval, and has a longer voting timeline for creditors. Both are governed by the Bankruptcy and Insolvency Act and both allow you to avoid bankruptcy by negotiating with creditors.
Not Sure Which Option Is Right for You?
We will review your full situation in a free, confidential consultation. We will tell you honestly whether a Consumer Proposal, bankruptcy, or another path makes the most sense for you. No pressure. No judgment. Just real answers.
