Consumer Proposal vs Bankruptcy in Ontario
Learn how to decide which one is best for you
Consumer Proposal: keep assets, flexible payments, R7 credit rating for 3 years post-completion. Bankruptcy: may surrender assets, payments based on income, R9 rating for 6+ years post-discharge.
If you are overwhelmed by debt, you may be wondering whether a consumer proposal or personal bankruptcy is right for you. Both are formal solutions under the Bankruptcy and Insolvency Act, but they work differently, have different costs, and affect your credit differently.
This guide explains the key differences, benefits, and considerations of each option so you can decide with confidence what fits your situation.
How a Consumer Proposal Works in Ontario
A consumer proposal is a legally binding offer to your creditors to repay a portion of your unsecured debt over time. It is filed through a Licensed Insolvency Trustee and gives you immediate protection from creditors.
Key Features of a Consumer Proposal
- You make one monthly payment based on what you can afford
- Interest and collection actions stop immediately once filed
- Creditors vote to accept the proposal
- It can last up to 60 months
Consumer proposals are often chosen by people who have reliable income and want to keep assets like vehicles or RRSPs while reducing what they owe.
How Personal Bankruptcy Works in Ontario
Bankruptcy is a legal process that discharges most of your unsecured debts when you can no longer pay them. It is also filed through a Licensed Insolvency Trustee and grants immediate protection from creditors.
Key Features of Bankruptcy
- Most unsecured debt is eliminated when you receive a discharge
- Monthly obligations are based on your income
- Mandatory financial counselling sessions
- Bankruptcy usually lasts 9 to 21 months, depending on your income
Bankruptcy is often chosen by people with little ability to repay through a proposal or when a consumer proposal would not be accepted by creditors.
7 Key Differences You Need to Know
- When declaring bankruptcy, your creditors may require you to surrender some of your personal assets.
- When you declare personal bankruptcy, the amount you pay will go up if your income increases.
- With a consumer proposal, your repayment amount will not change if your income increases. For this reason, many of our clients choose to file a consumer proposal because there are no surprises.
- You have the option to pay off your consumer proposal early and begin the road to financial recovery sooner.
- In a bankruptcy you don't have the option to pay it off early.
- There are fewer requirements and duties involved with a consumer proposal than with a bankruptcy.
- When you file a consumer proposal, it does not appear as a personal bankruptcy on your credit report. In some cases, your career can be negatively impacted by a personal bankruptcy.
In this video, Richard Sklar, Licensed Insolvency Trustee at David Sklar & Associates, breaks down the 7 key differences between a consumer proposal and bankruptcy in simple, easy-to-understand terms.
Take a moment to learn the difference between a Consumer Proposal and a Bankruptcy and make a decision your future self will thank you for.
Consumer Proposal vs. Bankruptcy
An overview of the key differences
Filing a consumer proposal or declaring personal bankruptcy will help you to clear your debts and protect you from creditors but there are some important differences to be aware of.
One major advantage of a consumer proposal is that you will not lose any of your assets and you are not required to surrender anything.
Consumer Proposal
Bankruptcy
Your total unsecured debts cannot exceed $250,000. For debts greater than $250,000 a Division One Proposal is available.
No limit on the amount of unsecured debt you can discharge
Only available to individuals. For business, a Division One Proposal is available.
Available to individuals & businesses
You keep your Assets: Home, Car, RRSP’s, RESP’s, & Investments
You must surrender your assets or buy them back (with some Exemptions)
Keep Your Tax refund
You must surrender your tax refund
Payments are based on what you can afford to pay
Payments are based on your average monthly income, the size of your family, and the value of your non-exempt assets
Payments are flexible – you can pay the entire balance immediately in a lump sum or stretch your payments over a maximum of 5 years
Payments are NOT flexible – first bankruptcy can last 9 – 21 months; second bankruptcy can last 24 – 36 months
Remains on your credit report for 3 years after completion or 6 years from the time of filing, whichever comes first
Remains on your credit report for 6 – 7 years after your discharge
No monthly reporting required
Monthly reporting required
Who Should Consider a Consumer Proposal?
A consumer proposal may be the better option if:
- You can afford regular monthly payments
- You want to avoid bankruptcy
- You want to keep certain assets
- Your creditors are likely to accept a proposal
A consumer proposal can provide peace of mind by consolidating multiple debts into one manageable payment and stopping interest immediately.
Who Should Choose Bankruptcy?
Bankruptcy may be a better choice if:
- You have little income available for monthly payments
- You owe more than you can reasonably pay back
- A consumer proposal would not be accepted by your creditors
- You want to eliminate most unsecured debt as quickly as possible
Your Licensed Insolvency Trustee will help assess which path aligns with your financial reality.
How to Qualify for a Consumer Proposal
Qualification requirements
To qualify for a consumer proposal, you must be a Canadian resident and legally insolvent. You must have the financial means to repay at least a portion of your debts, as a consumer proposal doesn’t eliminate them entirely. These debts must be no greater than $250,000. In addition, your creditors must accept the terms of your proposal for it to be legally binding.
To declare bankruptcy, you must be a Canadian resident and demonstrate to creditors and the court that you’re insolvent. Unlike a consumer proposal, there’s no limit on how much debt you can discharge through bankruptcy.Legal procedure and reporting requirements
Unlike bankruptcy, a consumer proposal is a far less complex legal proceeding. There are fewer documents to fill out, fewer requirements to complete the process, and you generally don’t need to make any court appearances.
Bankruptcy proceedings can be tedious and drawn out. There’s extensive paperwork to complete, and you must go through the process of liquidating your non-exempt assets. In addition, you’ll need to report to your trustee your total income and living expenses each month.Asset protection
When you file a consumer proposal, all your assets are exempt from seizure by your creditors. This feature is the primary advantage that a consumer proposal has over bankruptcy. You’ll never need to surrender your home, vehicle, investments, tax refund, and other personal belongings.
Conversely, if you declare bankruptcy, you must surrender your assets to have your debts discharged. Still, the law allows you to retain some of your assets, primarily those deemed necessary for your well-being. You can even keep your home, provided you pay out the non-exempt home equity in your property. You may also need to pay out any increased value in the home equity from the time of the bankruptcy until your discharge.Learn more about which assets you get to keep under bankruptcy.
Costs
Under a consumer proposal, your trustee will base your monthly payment obligations on what you can afford.
Whatever amount you agree upon with your creditors never changes for the duration of your proposal. There are no other administrative fees and consulting fees to pay aside from your monthly payment. Under bankruptcy, your monthly payment is based on your income, expenses, assets, and the number of people in your household. Since your income can fluctuate, your payments may vary. If your income rises sharply, your payments can increase significantly due to you reaching the surplus income threshold.Time to complete
You may spread out your payments over five years when you file a consumer proposal. You also can pay off your balance early by making periodic lump sum payments.
On the other hand, you can complete bankruptcy in as little as nine months (or as long as 21 months if you earn a high income and must make extra payments). Should you file for bankruptcy a second time, you’ll be responsible for making payments anywhere from 24 to 36 months.
If you are 3rd or more times bankrupt, you may not get your discharge for much longer than 3 years, if at all. Conversely, there are no restrictions for filing a consumer proposal if you have previously been two or more times bankrupt.
Credit score impact
Both a consumer proposal and a bankruptcy will negatively impact your credit score, but the impact and recovery timeline are different.
A consumer proposal is typically reported as an R7 credit rating, which indicates that you are repaying your debts through a formal arrangement. This R7 rating appears on your credit report while the proposal is active and remains after completion until it is removed. Credit bureaus will remove a consumer proposal three years after you complete your last payment or six years from the date you file, whichever comes first.
A bankruptcy is reported as an R9 credit rating, the most severe credit rating in Canada. For a first time bankruptcy, the R9 rating generally remains on your credit report for six years after discharge, though this can vary slightly depending on the province and credit bureau. If you file bankruptcy a second time, the R9 rating can remain on your credit report for up to 14 years after discharge.
Why Professional Guidance Matters
Choosing between a consumer proposal and bankruptcy is a serious decision with long-term financial impact. The right choice depends on your income, debt level, assets, and personal goals.
Only a Licensed Insolvency Trustee can file a consumer proposal or bankruptcy in Ontario. Trustees are federally regulated professionals who are required to act in your best interest.
At David Sklar and Associates, we’ve helped thousands of people in Ontario significantly reduce their debt and rebuild a strong foundation for a new financial future. We’ve helped folks from all walks of life – we can help you, too!
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Frequently Asked Questions About
Consumer Proposal vs Bankruptcy
What's the difference between a consumer proposal and bankruptcy in Canada?
A consumer proposal is a legally binding offer to repay part of your debt over time while keeping your assets. Bankruptcy discharges most unsecured debts but may require surrendering non-exempt assets. Both stop creditor actions immediately.
Which is worse for credit: consumer proposal or bankruptcy?
Bankruptcy is worse for credit. It receives an R9 rating (the most severe) for 6-7 years after discharge. A consumer proposal receives an R7 rating and stays for 3 years after completion or 6 years from filing, whichever is sooner.
Can I do a consumer proposal if I'm bankrupt?
No — you cannot file a consumer proposal while already in bankruptcy. However, you may exit bankruptcy through an annulment or discharge, after which you could potentially file a proposal. A trustee can advise on your specific situation.
Are consumer proposal payments lower than bankruptcy payments?
Not always. Consumer proposal payments are based on what you can afford and don’t change with income. Bankruptcy payments are based on income and family size, with surplus income payments if you earn above OSB standards.
What's the maximum debt for a consumer proposal vs bankruptcy?
Consumer proposals are limited to unsecured debts of $250,000 or less (excluding mortgage). Bankruptcy has no maximum debt limit. For debts above $250,000, a Division I proposal is available.
Can creditors reject a consumer proposal?
Yes. Creditors vote based on dollar value, and a majority must accept for the proposal to be binding. If rejected, you can negotiate a revised proposal or consider bankruptcy as an alternative.
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