Consumer Proposal vs Bankruptcy: Comparing Debt Relief Options in 2026

The answer depends on your income, assets, debt level, household budget, and long-term goals. Both options are formal legal processes under Canada’s Bankruptcy and Insolvency Act. Both are administered by Licensed Insolvency Trustees. But they work very differently, and the right choice varies from person to person.

It shouldn't be thought of as a consumer proposal vs bankruptcy. It should be what debt relief option suits my situation best. This guide explains the differences in plain language, who each option typically suits, and what to consider before making a decision.

Quick Answer

A consumer proposal is a legal offer to repay part of your unsecured debt over a fixed period, up to five years, while keeping your assets. Bankruptcy is a separate legal process that may discharge most unsecured debts but can involve surrendering non-exempt assets and additional duties. Both are administered by a Licensed Insolvency Trustee. The right option depends on your full financial picture, not just the amount you owe.

Key Takeaways

• A consumer proposal is not bankruptcy. It is a legal settlement offer to creditors that allows structured repayment.

• Bankruptcy is a separate legal process that may be considered when other repayment options are not realistic.

• Both must be administered by a Licensed Insolvency Trustee in Canada.

• A consumer proposal must be completed within five years under the Bankruptcy and Insolvency Act.

• Filing a consumer proposal generally creates a stay of proceedings that stops most unsecured creditor collection action, subject to exceptions.

• The best choice depends on your complete financial picture, not just the total amount you owe.

• To qualify for a consumer proposal, your total unsecured debt must not exceed $250,000, excluding any mortgage on your principal residence.

Consumer Proposal vs Bankruptcy in Ontario (2026 Guide)

The table below summarizes the key differences between a consumer proposal and personal bankruptcy in Canada.

Factor	Consumer Proposal	Bankruptcy
Monthly Payments	Fixed amount throughout the proposal	May vary based on income and family size
Home Ownership	Often retained if mortgage payments continue	Depends on equity and provincial exemptions
Vehicle Ownership	Often retained depending on value and equity	Depends on value, equity, and exemptions
Creditor Approval	Required (majority by dollar value of claims)	Not required
Debt Limit	Up to $250,000 unsecured (excluding principal residence mortgage)	No debt limit
Credit Impact	Significant; R7 rating while in proposal	Typically greater long-term impact
Maximum Duration	Up to 5 years	Varies; 9 to 21 months for a first bankruptcy depending on income
Collection Calls	Stops after filing	Stops on filing
Wage Garnishment	Stops after filing	Stops after filing
Surplus Income	Only for determining offer to creditors	May apply if income exceeds the threshold

What Is a Consumer Proposal?

A consumer proposal is a formal legal offer made to creditors to repay part of what you owe. It is filed under Division II of Canada’s Bankruptcy and Insolvency Act and administered by a Licensed Insolvency Trustee.

To be eligible, your total unsecured debt must not exceed $250,000, excluding any mortgage on your principal residence. Individuals above that limit must file a Division I proposal instead.

Once filed, the consumer proposal creates a stay of proceedings. This generally means unsecured creditors included in the process cannot continue collection action for claims covered by the filing, subject to legal exceptions.

Creditors vote on the proposal. Under the BIA, the proposal must be accepted by creditors representing more than 50% of the total dollar value of proven claims. If accepted, you make a fixed monthly payment to your trustee, who distributes funds to creditors.

A consumer proposal may include many unsecured debts:

•        Credit cards

•        Lines of credit

•        Payday loans

•        Personal loans

•        Overdrafts

•        Some tax debts

As part of the process, you are also required to complete two mandatory financial counselling sessions with your Licensed Insolvency Trustee, as required under the BIA.

When a consumer proposal may be worth reviewing: You have steady income and can afford a monthly payment, but cannot realistically repay the full balance with interest. You want to make a structured offer to creditors and, if possible, retain your assets. You are receiving collection calls, facing legal action, or dealing with a growing debt load you cannot manage through budgeting alone.

What Is Bankruptcy?

Bankruptcy is a separate legal process under the Bankruptcy and Insolvency Act. It may be considered when someone cannot repay their debts and no other realistic option is available.

In bankruptcy, a Licensed Insolvency Trustee is appointed to manage the process. Non-exempt assets may need to be surrendered to the trustee. Provincial exemption rules vary, so asset treatment should be reviewed carefully based on where you live.

Bankruptcy can address many unsecured debts.

However, it may involve:

• Required duties, including monthly income reporting

• Possible surplus income payments if your earnings exceed a federal threshold

• Effects on non-exempt assets such as investments or home equity

• Credit reporting consequences that vary depending on whether it is a first or subsequent bankruptcy

• Completion of two mandatory financial counselling sessions

• Certain debts that cannot be discharged, including support obligations, some student loans, and debts connected to fraud

A first bankruptcy may take from 9 to 21 months depending on income and whether surplus income applies. A second or third bankruptcy typically takes longer.

When bankruptcy may be worth reviewing: There is no realistic way to make proposal payments. Income is very limited or unstable. The debt load is too large compared with available income. A consumer proposal is not affordable based on the full financial picture.

Which Option Do Homeowners Typically Review?

For homeowners, the decision often comes down to equity and affordability.

In a consumer proposal, many homeowners explore this option specifically because they want to keep their home. Secured mortgage payments generally need to continue if you want to retain the property. The proposal covers unsecured debts only. If you have significant home equity, creditors may expect a proposal that reflects the value of your assets relative to what they would receive in bankruptcy.

In bankruptcy, home equity above provincial exemption limits may need to be surrendered or paid out to the trustee. If equity is low or the mortgage is underwater, this concern may be less significant. However, it is still important to understand how bankruptcy affects secured debts and whether the mortgage lender will continue the mortgage.

Factors homeowners should review:

• Current home equity and how it compares to provincial exemptions

• Ability to maintain mortgage payments throughout the process

• Whether creditors would expect a higher proposal based on equity

• The impact of each option on the ability to stay in the home long-term

Which Option Do Renters Typically Review?

Renters generally have fewer assets to protect, which changes the decision framework.

Without home equity in the picture, renters tend to focus more on income, affordability, and the length of credit impact. A consumer proposal may still be the preferred option for renters who have steady income and want a structured repayment plan. It can also avoid the additional duties and potential surplus income requirements that come with bankruptcy.

However, for renters with very limited income, significant unsecured debt, or no ability to sustain a monthly payment, bankruptcy may provide a faster path to a fresh start.

Factors renters should review:

• Monthly income and stability

• Total unsecured debt and whether a proposal payment is affordable

• Whether any assets such as a vehicle or investments could be affected

• Length of each process and credit impact

• Whether surplus income requirements would apply in bankruptcy

Consumer Proposal vs Bankruptcy for CRA Debt

Tax debt is one of the most common types of unsecured debt that people carry into a consumer proposal or bankruptcy. Some CRA debt can be included in both processes, but the details matter.

In a consumer proposal, some CRA debts may be included in the proposal offer. This can include personal income tax arrears and HST balances in certain situations. CRA is a creditor and has the right to vote on the proposal. In some cases, CRA may be the majority creditor, which means their vote carries significant weight.

In bankruptcy, CRA debts may also be addressed, subject to certain exceptions. Some debts owed to the government, including penalties connected to specific provisions, may not be dischargeable.

CRA debt can become more complex in situations involving:

• Director liabilities from a corporation

• Source deductions (payroll remittances owed by an employer)

• Tax liens registered against property

• Trust claims

CRA is also known to take collection action aggressively, including wage garnishment and bank freezes. If CRA is involved in your debt situation, a professional review with a Licensed Insolvency Trustee is especially important before deciding on a course of action.

This section is for general information only and does not constitute tax or legal advice. CRA debt situations vary significantly. Please speak with a Licensed Insolvency Trustee about your specific circumstances.

Consumer Proposal vs Bankruptcy: Real-World Examples

The following examples are illustrative only. They are not real cases and are not intended as financial or legal advice. Every situation is different.

Example 1: Homeowner with Equity

A homeowner in Mississauga has $68,000 in unsecured debt across credit cards, a line of credit, and a payday loan. They earn a stable income and have approximately $90,000 in home equity. Their mortgage payments are current.

In this situation, a consumer proposal may be worth reviewing because the person can afford a monthly payment and wants to keep their home. The equity level means creditors may expect a meaningful offer. A Licensed Insolvency Trustee would review the full picture to determine whether a proposal makes sense and what payment creditors might accept.

Example 2: Renter with Credit Card Debt

A renter in Hamilton has $34,000 in credit card and payday loan debt. Their income is limited and inconsistent. They have no significant assets. They have been making only minimum payments for over a year and the balances are not going down.

In this situation, both options may be worth reviewing. A consumer proposal would require an affordable monthly payment that creditors would accept. Bankruptcy may provide a faster resolution depending on income levels and whether surplus income applies. A trustee would review the income and debt picture before recommending either path.

Example 3: Self-Employed Contractor

A self-employed contractor in Toronto has $55,000 in unsecured debt including credit cards, a personal loan, and CRA income tax arrears. Income is variable month to month. They have a vehicle needed for work.

Self-employment adds complexity. Income fluctuates, which affects both proposal affordability and any surplus income calculation in bankruptcy. CRA as a creditor introduces additional considerations around voting and what debt may be included. A professional review is especially important in this situation before any formal steps are taken.

Example 4: Senior on Fixed Income

A retired individual in London, Ontario has $28,000 in credit card and line of credit debt. Their income is fixed pension income. They rent and have no significant assets.

With fixed income and no major assets, both options are worth reviewing.

A consumer proposal based on fixed pension income may be straightforward if the payment is affordable. Bankruptcy may also resolve the debt quickly if surplus income does not apply. The key question is affordability and which process better suits the person’s situation and long-term goals.

Trustee Insight

“Many people assume bankruptcy is their only option. In reality, many individuals qualify for a consumer proposal that allows them to settle debt while keeping their assets and maintaining a structured repayment plan. The right option depends on the complete financial picture, not just the amount owed.”

— Bryan Litvack, Litvack Group

Frequently Asked Questions

Is a consumer proposal the same as bankruptcy?

No. A consumer proposal is a legal offer to repay part of your unsecured debt through a formal process. Bankruptcy is a separate legal process that may discharge most unsecured debts when repayment is not realistic. Both are administered under the Bankruptcy and Insolvency Act by a Licensed Insolvency Trustee.

Is a consumer proposal better than bankruptcy?

Not always. A consumer proposal may suit someone who has income, wants to retain assets, and can afford a monthly payment. Bankruptcy may be more appropriate when no realistic repayment option exists. The better option depends on your specific income, assets, debt type, and household budget.

Which option affects my credit longer?

Both affect your credit report. A consumer proposal typically remains on your credit report for three years after it is fully paid, carrying an R7 rating. A first bankruptcy generally remains for six to seven years after discharge, depending on the credit bureau. A second bankruptcy may remain for up to 14 years.

Can I switch from a consumer proposal to bankruptcy?

In some circumstances, yes. If a consumer proposal is annulled or cannot be completed, bankruptcy may follow. A Licensed Insolvency Trustee can explain the implications of each outcome based on your situation.

Can CRA reject a consumer proposal?

CRA is a creditor and has the right to vote on a consumer proposal. If CRA represents more than 50% of the dollar value of proven claims, their vote alone could determine the outcome. CRA debt in a proposal should be reviewed carefully with a Licensed Insolvency Trustee.

What happens to my tax refund?

In bankruptcy, tax refunds for the year of filing and prior years may be directed to the trustee. In a consumer proposal, tax refund treatment can vary. A Licensed Insolvency Trustee can clarify how refunds may be handled in your specific situation.

Which option costs less?

The cost of each option depends on the specific situation. Consumer proposal fees are regulated and built into the payment structure. Bankruptcy fees are also regulated and vary based on income and the length of the bankruptcy. A trustee can explain the cost structure for each option based on your circumstances.

Can I file if I own a business?

Owning a business adds complexity to both processes. The type of business structure, outstanding liabilities, and assets all need to be reviewed. A Licensed Insolvency Trustee can assess how business ownership affects each option.

Can I keep my home in a consumer proposal?

Many people retain their home in a consumer proposal, provided they continue making secured mortgage payments and the proposal reflects the equity position. This should be reviewed carefully with a Licensed Insolvency Trustee.

Will filing stop collection calls?

In many cases, filing a consumer proposal or bankruptcy creates a stay of proceedings that stops most unsecured creditor collection action, subject to legal exceptions. Secured debts and certain other obligations may need to be addressed separately.

Related Reading

Ontario consumer insolvency filings increased significantly in 2026.

Read: Ontario’s Consumer Insolvency Surge in 2026

Canadian insolvency filings reached their highest level since 2009.

Read: Canadian Insolvency Filings Hit Their Highest Level Since 2009

What to do when credit card balances aren’t going down.

Read: What To Do When Your Credit Card Balances Still Haven’t Gone Down in 2026 

The Litvack Group Helps You Reduce Debt

If you're struggling with debt this is the right place to start. We’ll help you determine whether a consumer proposal, bankruptcy, debt consolidation, or another solution may be appropriate for your situation. Speaking with a Licensed Insolvency Trustee will help you better understand your options.

At Litvack Group, we provide confidential consultations and practical guidance to help Ontario residents make informed decisions about their financial future.

Contact our team today and submit our debt assessment to discover the options available to you.

 

Work with the Litvack Group

At Litvack Group, we help individuals and families across Ontario understand their debt relief options and make informed financial decisions. As Licensed Insolvency Trustees, we provide personalized, judgment-free guidance tailored to each person's unique circumstances.

Whether you're dealing with credit card debt, CRA arrears, collection pressure, or questions about consumer proposals and bankruptcy, our team is committed to helping you understand your options with clarity and confidence.

Our head office is located in Vaughan, Ontario, and we serve clients throughout Ontario, including Toronto, Mississauga, Brampton, Markham, Richmond Hill, Hamilton, Kitchener, London, Oshawa, Barrie, Windsor, and surrounding communities.

Content Reviewed By

This content was prepared and reviewed by the Licensed Insolvency Trustee team at Litvack Group. Litvack Group is federally regulated and authorized to administer consumer proposals and bankruptcies under Canada’s Bankruptcy and Insolvency Act.

Disclaimer: This article is for informational purposes only and should not be considered legal or financial advice. Insolvency solutions in Canada are governed by the Bankruptcy and Insolvency Act and should be formally discussed with a Licensed Insolvency Trustee.

Sources Referenced

• Office of the Superintendent of Bankruptcy Canada

• Equifax - Q1 2026 Consumer Credit Trends

• Better Dwelling

• Statistics Canada, Gross Domestic Product, Income and Expenditure

• “Insolvency volumes hit highest since 2009 amid strain among homeowners: Equifax”

About the Author

Bryan Litvack, Licensed Insolvency Trustee, CPA, CA, CIRP

Bryan is a Licensed Insolvency Trustee with the Litvack Group, helping individuals and families across Ontario navigate consumer proposals, bankruptcy, and other debt-relief options under the Bankruptcy and Insolvency Act with over 15 years of experience in the debt relief and insolvency sector.

Last reviewed: May 2026 · The Litvack Group is a Licensed Insolvency Trustee firm regulated by the Office of the Superintendent of Bankruptcy (OSB).