Navigating Financial Recovery: Comparing Bankruptcy and Proposal Options in Canada

In today’s economic climate, many Canadians find themselves facing overwhelming debt. Whether due to job loss, medical expenses, or unexpected life events, financial hardship can strike anyone. When it does, understanding your legal options for debt relief becomes essential. Two of the most common formal solutions available under Canadian law are bankruptcy and proposals.

These processes are governed by the Bankruptcy and Insolvency Act (BIA), a federal statute designed to provide fair and orderly debt resolution for both debtors and creditors. The BIA outlines several paths individuals can take depending on their financial situation, including Summary Bankruptcy, Ordinary Bankruptcy, Consumer Proposals, and Division I Proposals.

Each option has its own eligibility criteria, procedures, and consequences. Bankruptcy typically involves surrendering certain assets and making payments based on income, while proposals allow individuals to negotiate a repayment plan with creditors, often enabling them to retain their assets.

Choosing the right path can be complex, and it’s not just about numbers—it’s about your goals, your family, and your future. This article will walk you through the key differences between bankruptcy and proposal options in Canada, helping you understand which might be the best fit for your situation.

Whether you’re considering a fresh start through bankruptcy or looking to restructure your debt through a proposal, this guide will provide the clarity you need to take the next step toward financial recovery.

Eligibility Criteria: Who Can File and When?

When facing financial distress, one of the first questions individuals ask is: “Which debt relief option am I eligible for?” The answer depends on several factors, including the amount of debt you owe, the nature of your assets, and your income. Canada’s Bankruptcy and Insolvency Act (BIA) outlines specific eligibility criteria for each of the four main insolvency options available to individuals: Summary Bankruptcy, Ordinary Bankruptcy, Consumer Proposal, and Division I Proposal.

Summary Bankruptcy: This is the most streamlined form of bankruptcy and is available only if the realizable value of your non-exempt assets (those not protected by provincial laws) is less than $15,000. It’s designed for individuals with relatively simple financial situations and minimal assets. If you qualify, the process is quicker and less costly than other forms of bankruptcy.

Ordinary Bankruptcy: If the realizable value of your non-exempt assets exceed $15,000, you must file for Ordinary Bankruptcy. This process involves more administrative oversight, including a mandatory meeting of creditors. It’s suitable for individuals with more complex financial situations or higher-value assets.

Consumer Proposal: A Consumer Proposal is a popular alternative to bankruptcy. It allows you to negotiate a repayment plan with your creditors, often for a reduced amount. To qualify, your total debt must be less than $250,000, excluding the mortgage on your principal residence. This option is ideal for individuals who have a steady income and want to avoid the more severe consequences of bankruptcy.

Division I Proposal: If your debts exceed $250,000 or you don’t qualify for a Consumer Proposal, you may consider a Division I Proposal. This option is more formal and complex, often used by individuals with significant debt or business-related liabilities. Unlike a Consumer Proposal, if your Division I Proposal is rejected by creditors, you are automatically deemed bankrupt.

Why Eligibility Matters: Understanding which option you qualify for is crucial because it determines the structure of your debt relief, the level of creditor involvement, and the long-term impact on your financial future. A Licensed Insolvency Trustee (LIT) can assess your financial situation and guide you toward the most appropriate solution.

Creditor Involvement and Approval Requirements

One of the most important distinctions between bankruptcy and proposal processes in Canada is the level of creditor involvement. Depending on the option you choose, your creditors may have significant influence over the outcome—or none at all. Understanding how and when creditors participate can help you prepare for the process and manage expectations.

Bankruptcy: Minimal Creditor Involvement:

In both Summary and Ordinary Bankruptcy, creditor approval is not required to initiate the process. Once you file for bankruptcy through a Licensed Insolvency Trustee (LIT), the process begins automatically. However, creditors do have the right to request a meeting:

In Summary Bankruptcy, a meeting of creditors is only held if more than 25% of unsecured creditors (by dollar value) request it.

In Ordinary Bankruptcy, a meeting is mandatory, regardless of creditor requests.

These meetings allow creditors to ask questions, appoint inspectors, and review the trustee’s actions, but they do not have the power to block the bankruptcy itself.

Consumer Proposal: Creditor Approval by Ordinary resolution required:

A Consumer Proposal requires creditor approval to proceed. However, the process is designed to be efficient and fair:

If less than 25% of creditors request a meeting within 45 days, the proposal is automatically approved.

If a meeting is held, the proposal must receive a majority vote—more than 50% of creditors by dollar value—to be accepted.

This structure encourages cooperation and often results in a faster resolution than bankruptcy, especially when creditors see a better return through a proposal.

Division I Proposal: Creditor Approval by Special Resolution required:

A Division I Proposal involves a more rigorous approval process. A meeting of creditors is always required, and the proposal must be accepted by:

At least two-thirds of creditors by dollar value, and

More than 50% by headcount.

If the proposal is rejected, the debtor is automatically declared bankrupt, making this a higher-stakes option.

Why Creditor Approval Matters: The level of creditor involvement can influence your stress levels, the timeline of the process, and the likelihood of success. Proposals offer a chance to negotiate and retain more control, while bankruptcy provides a more automatic path to debt relief. Choosing the right option depends on your financial situation and your ability to make a reasonable offer to creditors.

Asset Retention and Financial Flexibility

One of the most emotionally charged aspects of dealing with insolvency is the question: “Will I lose my home, car, or other valuable possessions?” The answer depends heavily on whether you choose bankruptcy or a proposal, and on the specific terms of your financial situation.

Bankruptcy:

Surrender or Buy Back Assets: In both Summary and Ordinary Bankruptcy, you are required to surrender non-exempt assets to your Licensed Insolvency Trustee (LIT). These assets are then sold, and the proceeds are distributed to your creditors. However, there are important nuances:

Exempt assets—such as basic household items, clothing, and in many provinces, a modest vehicle or tools of the trade—are protected by provincial laws and cannot be seized.

If you own an asset with equity above the exemption limit (e.g., a car), you may be able to keep it by making arrangements to pay the equivalent value to the trustee.

If you cannot afford to keep the asset, you can surrender it, and any remaining debt (such as a mortgage shortfall) will be included in the bankruptcy.

This process can be difficult, especially if you’re emotionally attached to your home or vehicle. However, it provides a clean break from unmanageable debt.

Proposals:

Greater Flexibility to Retain Assets: One of the key advantages of both Consumer and Division I Proposals is the ability to retain your assets. Instead of surrendering property, you agree to make structured payments to your creditors over time. The value of any non-exempt assets is factored into your proposal payments, but you don’t have to give them up.

This is particularly beneficial for homeowners who have equity in their property and wish to retain it.

It also allows you to keep essential assets like a car or business equipment, which may be critical to maintaining your income.

Making the Right Choice: If keeping your assets is a top priority, a proposal may be the better option—provided you have the income to support the repayment plan. Bankruptcy, while more immediate and automatic, may require you to part with valuable possessions unless you can afford to buy them back.

Ultimately, your decision should be guided by a Licensed Insolvency Trustee, who can assess your assets, income, and debts to help you choose the most appropriate path forward.

Reporting, Meetings, and Public Disclosure

When considering bankruptcy or a proposal, it’s important to understand the administrative obligations and the level of public exposure involved. These factors can influence your comfort level with the process and your ability to manage it alongside your personal and professional life.

Monthly Reporting Requirements: In both Summary and Ordinary Bankruptcy, you are required to submit monthly income and expense reports to your Licensed Insolvency Trustee (LIT). These reports help the trustee determine whether you are required to make Surplus Income payments, which are based on your household income and family size.

This reporting can feel intrusive, especially if your income fluctuates.

It also adds a layer of ongoing responsibility during the bankruptcy period.

In contrast, Consumer Proposals and Division I Proposals do not require monthly reporting. Once your proposal is accepted, your payment terms are fixed, and you are not obligated to report changes in income. This can provide a greater sense of stability and privacy.

Meetings of Creditors: The need for a creditors’ meeting varies depending on the process:

Summary Bankruptcy: Only held if more than 25% of unsecured creditors request it.

Ordinary Bankruptcy: A meeting is mandatory.

Consumer Proposal: A meeting is only triggered if 25% of creditors request one within 45 days.

Division I Proposal: A meeting is always required.

These meetings allow creditors to ask questions, vote on proposals, and appoint inspectors. While they are typically procedural, they can be stressful for debtors who are uncomfortable discussing their finances in a group setting.

Public Disclosure and Newspaper Notices: Another key difference is the level of public exposure:

Ordinary Bankruptcy requires a notice in the newspaper, which can be distressing for individuals concerned about their reputation.

Summary Bankruptcy, Consumer Proposals, and Division I Proposals do not require public notices, offering a more discreet path to debt resolution.

Why This Matters: For many people, the emotional toll of insolvency is as significant as the financial one. The idea of reporting income monthly, attending creditor meetings, or seeing your name in the newspaper can be overwhelming. Proposals offer a more private and less administratively burdensome alternative, which is why they are increasingly popular among Canadians seeking debt relief.

Payments, Income, and Duration

When choosing between bankruptcy and a proposal, one of the most practical considerations is how much you’ll be expected to pay—and for how long. The structure of payments, how they’re calculated, and how long the process lasts can vary significantly between the two options.

Bankruptcy: Income-Based and Variable Duration
In both Summary and Ordinary Bankruptcy, your payments are determined by the Surplus Income guidelines set by the federal government. These guidelines consider your household income, family size, and allowable living expenses. If your income exceeds the threshold, you are required to make additional payments (Surplus Income payments).

Surplus Income payments are recalculated monthly based on your actual income.
If your income increases, your payments will go up; if it decreases, your payments may be reduced.  This can make budgeting difficult, especially if your income is unstable or seasonal.

The duration of bankruptcy also depends on your income and whether you’ve filed before:
First-time bankrupts: Discharged in 9 months if no surplus income, or 21 months if surplus income applies.

Second-time bankrupts: Discharged in 24 months without surplus income, or 36 months with it.

Third or more times: Discharge is determined by the court and may take longer.

Proposals: Fixed Payments and Predictable Terms
In contrast, both Consumer Proposals and Division I Proposals offer fixed monthly payments that do not change with income. This provides a more predictable and manageable repayment plan.

Payments are negotiated based on your ability to pay and the value of your assets.
The maximum term for a Consumer Proposal is 5 years, though many are completed sooner.
Division I Proposals have no legal time limit but are typically structured over a similar period.

This stability can be a major advantage, especially for individuals with fluctuating income or those who want to avoid the uncertainty of surplus income calculations.

Early Completion

Another benefit of proposals is the ability to complete them early. If you come into extra money—through a bonus, tax refund, or inheritance—you can pay off the remaining balance and be released from your obligations sooner. Bankruptcy, on the other hand, cannot be completed early; you must wait until the discharge period ends.

Choosing the Right Fit
If your income is stable and you can afford to make consistent payments, a proposal may offer more control and less stress. If your income is low or unpredictable, bankruptcy might be the more realistic option—though it comes with more oversight and potentially longer consequences.

Tax Implications and Windfalls

Taxes and unexpected financial gains—like inheritances or lottery winnings—can significantly impact your insolvency process. Whether you file for bankruptcy or submit a proposal, it’s important to understand how these elements are treated under Canadian law.

Income Tax Returns and Refunds
In bankruptcy, your Licensed Insolvency Trustee (LIT) is responsible for filing your tax return for the year in which you declare bankruptcy. This return is split into two parts:

Pre-bankruptcy return: Covers January 1 to the date of bankruptcy.
Post-bankruptcy return: Covers the date of bankruptcy to December 31.

Any tax refunds from the year of bankruptcy and prior years become part of the bankruptcy estate and are used to repay creditors. You may retain refunds from subsequent years, but only after you’ve been discharged.

In contrast, under a Consumer Proposal or Division I Proposal, you continue to file your own tax returns as usual. You retain any refunds, although you may choose to use them to pay down your proposal faster.  (Note:  if you owe Canada Revenue Agency when you file your proposal, they may retain all or a portion of these funds).  

Income Tax Debt
In bankruptcy, all income tax debt up to the date of filing is included and discharged, including amounts owed on the pre-bankruptcy return.

Credit Impact and Long-Term Consequences

In proposals,  if you owe taxes for prior years, those debts can be included in the proposal settlement. A portion of taxes owed for the year in which the proposal is filed may be included in the proposal based on a pro-ration Canada Revenue Agency will calculate after the Notice of Assessment for that year is issued.

Windfalls: Inheritances, Lottery Winnings, and More
If you receive a windfall—such as an inheritance, lottery winnings, or a legal settlement—before your discharge from bankruptcy, it becomes part of the bankruptcy estate and must be surrendered to the trustee. This can significantly increase the amount available to creditors and may delay your discharge.

In a proposal, however, windfalls are yours to keep, provided they occur after the proposal is accepted. You can use them to pay off your proposal early, but you are not obligated to do so. This flexibility is one of the reasons many people prefer proposals over bankruptcy.

Planning Ahead
If you anticipate receiving a windfall or have complex tax issues, it’s essential to discuss these with your LIT before choosing a path. The right strategy can help you protect your assets and minimize long-term financial consequences.

One of the most common concerns people have when considering bankruptcy or a proposal is: “How will this affect my credit?” While both options will impact your credit score, the severity and duration of that impact differ significantly—and so do the long-term consequences for your financial future.

Bankruptcy: A Heavier Mark on Your Credit Report

Filing for bankruptcy is considered a serious credit event. It signals to lenders that you were unable to meet your financial obligations and required legal intervention to resolve your debts.

A first-time bankruptcy remains on your credit report for 6-7 years after discharge.

A second or subsequent bankruptcy stays on your report for 14 years after discharge.

This extended reporting period can make it difficult to obtain new credit, rent a home, or even secure certain jobs—especially those involving financial responsibility. While it’s possible to rebuild your credit after bankruptcy, it typically takes longer and requires more effort.

Proposals: A Shorter-Term Impact
In contrast, both Consumer Proposals and Division I Proposals have a less severe impact on your credit report:

The proposal is removed 3 years after full completion or 6 years from the date you filed your proposal, whichever time period is less, regardless of how many times you’ve filed.
Since proposals are seen as a proactive effort to repay debts, they may be viewed more favorably by future lenders than a bankruptcy.

This shorter reporting period can make it easier to rebuild your credit and regain financial stability sooner. Many individuals are able to qualify for secured credit cards, car loans, or even mortgages within a few years of completing a proposal.

Rebuilding Credit After Insolvency

Regardless of the path you choose, rebuilding your credit is possible—and it starts with small, consistent steps:

Pay all bills on time, including utilities and cell phone plans.
Consider a secured credit card to demonstrate responsible credit use.
Monitor your credit report regularly to ensure accuracy.
Avoid taking on new debt unless absolutely necessary.

Working with a credit counselor or financial advisor can also help you create a plan to restore your financial health.

Looking Ahead
While insolvency can feel like a setback, it’s also a fresh start. By understanding the long-term implications and taking proactive steps to rebuild, you can emerge from the process stronger and more financially resilient.

Choosing the Right Path for Financial Recovery

Facing overwhelming debt can feel isolating and stressful—but it’s important to remember that you have options, and you’re not alone. Canada’s insolvency system is designed to provide individuals with a structured, legal path to financial recovery, whether through bankruptcy or a proposal.

Throughout this article, we’ve explored the key differences between the four main options:

Summary Bankruptcy: A streamlined process for individuals with minimal non-exempt assets.
Ordinary Bankruptcy: A more formal process for those with higher-value assets or complex financial situations.
Consumer Proposal: A flexible, negotiated repayment plan for individuals with less than $250,000 in debt.
Division I Proposal: A more formal proposal process for those with larger or more complex debt loads.

Each option has its own eligibility criteria, creditor involvement, asset implications, reporting requirements, and long-term consequences. Bankruptcy may offer a quicker discharge and immediate relief, but it comes with more oversight, potential asset loss, and a longer-lasting impact on your credit. Proposals, on the other hand, offer more control, privacy, and the ability to retain assets—but require a steady income and creditor approval.

The best choice depends on your unique financial situation, your goals, and your ability to make consistent payments. That’s why it’s essential to consult with a Licensed Insolvency Trustee (LIT)—the only professionals in Canada legally authorized to administer bankruptcies and proposals. They can help you assess all of  your options, explain the implications, and guide you toward the most appropriate solution, which may include an alternate solution than a bankruptcy or proposal.

Ultimately, whether you choose bankruptcy or a proposal, the goal is the same: to give you a fresh start. With the right support and a clear plan, you can rebuild your financial future and regain peace of mind.