Consumer Proposal vs. Bankruptcy in Ontario

It’s worth starting with a point that’s often misunderstood: a consumer proposal and bankruptcy are both federal insolvency processes, governed by the Bankruptcy and Insolvency Act, a statute that applies the same way across every province and territory in Canada. Neither one is a creation of Ontario law, and Ontario doesn’t have its own separate, made-in-Ontario version of either process.

This matters because it’s easy to assume, given how much of debt collection and judgment enforcement in Ontario is governed by provincial rules — things like a writ of seizure and sale, garnishment, or Small Claims Court — that insolvency works the same way. It doesn’t. Once a debtor moves into a formal consumer proposal or bankruptcy, federal insolvency law takes over as the governing framework for the debts it covers, generally overriding the provincial collection and enforcement steps described elsewhere on this site.

That said, Ontario law still plays a supporting role in places — for example, in determining what personal property is exempt from seizure, a concept that can also be relevant in a bankruptcy. Our guide to what assets are exempt from seizure in Ontario covers this exemption concept in the context of ordinary judgment enforcement, and similar exemption principles can carry over into how a bankruptcy treats a debtor’s property.

It’s also worth being clear about what federal insolvency law doesn’t do. It doesn’t replace the ordinary rules that apply to a debt that was never part of a formal filing — if a debtor never files a consumer proposal or bankruptcy, provincial collection and enforcement tools remain the operative framework for a creditor trying to recover what’s owed. The federal processes only come into play once a debtor, with a Licensed Insolvency Trustee, formally initiates one of them.

Both a consumer proposal and bankruptcy must be administered by a Licensed Insolvency Trustee, sometimes still referred to by the older title “trustee in bankruptcy.” This is a federally regulated role, and the trustee acts as a neutral administrator of the process — communicating with creditors, overseeing the debtor’s compliance with the process, and ultimately issuing or supporting the debtor’s discharge once its requirements are met.

Because of this regulated role, a Licensed Insolvency Trustee is generally the right starting point for anyone genuinely considering either option, since they can assess a debtor’s specific income, assets, and debts, and explain realistically which process — or neither — fits the situation best. This guide describes how the two processes generally work, but it isn’t a substitute for that individualized assessment.

Most Licensed Insolvency Trustees offer an initial consultation at no charge, specifically to review a debtor’s overall financial picture and explain what options might realistically be available. This initial conversation doesn’t commit a debtor to filing anything, and it’s generally a useful, low-risk way to get a clearer, individualized sense of whether a consumer proposal, bankruptcy, or some other option fits best before deciding on anything.

A consumer proposal is a formal offer, prepared with a Licensed Insolvency Trustee, to repay creditors a portion of what’s owed — often, though not always, less than the full amount — over a period of up to five years. Once filed, it generally stops most collection actions and legal proceedings against the debts it covers, giving the debtor breathing room while the proposal is considered.

Creditors then vote on whether to accept the proposed terms. If creditors holding the required proportion of the affected debt accept — or don’t respond at all within the relevant timeframe, which generally counts as acceptance — the proposal becomes binding on all the creditors it covers, even those who voted against it. The debtor then makes the agreed payments to the trustee, who distributes them to creditors.

One of the main practical appeals of a consumer proposal is that it generally allows a debtor to keep more of their assets — including, in many cases, their home, subject to its equity — compared to bankruptcy, since the process is built around a negotiated repayment rather than a surrender of property. It can also be a useful option for a debtor whose income makes bankruptcy’s surplus-income requirements less attractive.

Bankruptcy is a different federal process in which a debtor formally surrenders certain assets, through the Licensed Insolvency Trustee, in exchange for being released — discharged — from most unsecured debts once the process is complete. It generally doesn’t involve negotiating a partial repayment the way a consumer proposal does, though a debtor with surplus income above a set threshold may still need to make payments during the bankruptcy.

Certain property is generally exempt from being surrendered in a bankruptcy, following similar exemption principles to those that apply to ordinary judgment enforcement in Ontario, though a bankruptcy can still put significant assets — particularly meaningful home equity — at greater risk than a consumer proposal would.

A first-time bankruptcy can sometimes be completed in a relatively short period, often within roughly nine months to a year for a debtor with no surplus income obligations, though this timeline can extend for a debtor with surplus income or for someone who has been bankrupt before. A bankruptcy also generally stops most collection actions and enforcement steps once filed, similar to a consumer proposal.

A discharge from bankruptcy generally releases a debtor from most unsecured debts covered by the process, though certain obligations are generally excluded regardless of which process is used, and a debtor’s conduct during the bankruptcy — such as cooperating fully with the trustee and attending any required financial counselling sessions — can affect how smoothly and quickly the discharge is granted.

In very general terms, a consumer proposal tends to suit a debtor who has some ability to make ongoing payments and wants to keep more of their assets, while bankruptcy can suit a debtor with little or no ability to pay anything meaningful toward their debts and who prioritizes a potentially faster resolution over asset retention. Neither description fits every situation, and the right choice depends on a detailed look at income, assets, and the specific debts involved.

Cost is another practical difference. A consumer proposal’s administration costs are generally built into the proposal payments themselves, while bankruptcy involves its own fee structure tied to the surplus-income rules and the trustee’s statutory fees. Either way, a Licensed Insolvency Trustee will generally walk through the specific costs before a debtor commits to either process.

The number of previous filings can also matter. A debtor going through bankruptcy for a second or subsequent time generally faces a longer process and stricter conditions than a first-time filing, which is one reason a consumer proposal is sometimes considered the more attractive route for a debtor who has been through bankruptcy before and wants to avoid repeating a longer, more restrictive process.

A creditor that has already obtained a court judgment, or is actively pursuing enforcement such as garnishment or a writ of seizure and sale, generally has to stop that enforcement once a consumer proposal or bankruptcy is formally filed, for any debt covered by the filing. The underlying judgment doesn’t disappear instantly, but the ability to actively enforce it against the debtor is generally put on hold by the federal filing.

This is one of the more immediate, practical effects that draws some debtors toward considering insolvency once enforcement has become active — it can halt a garnishment or a pending Sheriff’s seizure while the broader process plays out. Whether that’s the right response to active enforcement, compared with negotiating directly or pursuing a private settlement, again comes back to the specific numbers involved, which a Licensed Insolvency Trustee is positioned to assess.

This guide is general information about how a consumer proposal and bankruptcy typically work under federal law, not a substitute for advice from a Licensed Insolvency Trustee about a specific financial situation. The right choice between the two — or deciding that neither is appropriate yet — depends on details this general overview simply can’t capture, including exact income, assets, and the mix of debts involved.

For related general information about how debt and enforcement work outside the insolvency system, see our Money & Enforcement hub, including our guide to settling a debt for less, a private alternative some debtors consider before deciding whether a formal insolvency process is the better fit.