Bankruptcy vs Consumer Proposal: What’s the Difference?

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Published on: March 29, 2017 8:56 am

If you are struggling to get out of debt, there are two main courses of action: bankruptcy vs consumer proposal. Unfortunately, it’s not always clear which you should choose. A lot of contradictory opinions are out there, making it hard to know what the best option is.

That’s why we have created an overview of the pros and cons of each to help you with the decision of bankruptcy vs consumer proposal.

Consumer Proposal

A consumer proposal is an offer you make to all of your creditors. Like bankruptcy, it gives you legal protection from your creditors because it is filed with a Bankruptcy Trustee, making it covered under the Bankruptcy and Insolvency Act. To qualify, your debts cannot exceed $250,000.

In a nutshell, you are advising your creditors that new terms are needed for you to repay your debts, but that you do not want to declare bankruptcy. In order for your proposal to be successful, it needs to give creditors more than they would get if you declared bankruptcy.  If a majority of creditors accept your terms, then the proposal becomes legally binding for all.

There are a lot of substantial benefits to a consumer proposal:

  • You will not lose any assets.
  • There is no required monthly reporting or other tasks.
  • You can still benefit from tax refunds and credits.

The major downside is that if creditors do not accept your terms, all of the work you have done is in vain. In addition, a consumer proposal is reflected on your credit score as an R7 for the time it takes to complete the proposal plus three years. But that is still better than the rating you would receive from bankruptcy.


Bankruptcy is a more drastic option available to anyone who owes more than $1,000. In order to declare bankruptcy, you need to apply for legal debt forgiveness, a process that can last from 9 to 36 months.

It’s generally best for those who need rapid financial relief. Psychologically, it can feel like a clean break with your previous debts. Your monthly payments will likely be less than with a consumer protection.

However, there are a lot of downsides that can make bankruptcy an unattractive option for many:

  • You are required to surrender certain assets in order to be absolved of your debts, like your savings, RRSPs, home and other investments/assets.
  • You must submit a monthly budget and provide copies of pay stubs to your bankruptcy trustee
  • Your credit rating receives an R9, which is the lowest possible ranking.
  • You lose all tax credits or refunds which you are owed.

Bankruptcy vs. Consumer Proposal: Some Final Thoughts

While bankruptcy is a better known option, consumer proposals have a lot of significant upside. Bankruptcy should only be considered as a last resort and when you have few existing assets to lose. Otherwise, a consumer proposal is likely your best option.

Want more information? See our tips for improving your credit score.