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Last reviewed: 15 September 2026

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Bankruptcy vs. the consumer proposal in Canada, explained

Our own Chapter 7 vs. Chapter 13 explainer covers the U.S., where two different bankruptcy chapters and a means test decide the path a filer takes. Canada runs the comparable decision through a single federal statute, the Bankruptcy and Insolvency Act (BIA), and one requirement neither route can skip: a licensed professional has to administer it. Which of the two paths gets used, and how long it actually takes, isn't obvious from the outside — and the more commonly used one isn't bankruptcy at all.

One statute, one required professional, two different processes

A Licensed Insolvency Trustee (LIT) is the only professional in Canada authorized under the BIA to administer either a consumer proposal or a personal bankruptcy — a credit counsellor, a debt-settlement company, or a lawyer without an LIT license can advise on debt generally, but can't file either one. LITs are licensed and regulated federally by the Office of the Superintendent of Bankruptcy (OSB), part of Innovation, Science and Economic Development Canada, which sets the rules both processes run under and can suspend or cancel a trustee's license for misconduct. The BIA gives an LIT a dual, explicitly impartial role in both processes: informing a debtor of their options before they choose, then administering whichever one they pick in a way that's supposed to protect the debtor's rights and the creditors' claims equally, not act as either side's advocate.

The consumer proposal: a negotiated settlement Canadian creditors can't simply veto

A consumer proposal is only available to a "consumer debtor" as the BIA defines the term in section 66.11 — an individual whose total debts, not counting anything secured by their principal residence, don't exceed $250,000. Within that limit, an LIT files a formal offer with creditors — typically a percentage of the debt repaid over time, or a lump sum — for a term the BIA caps at five years (60 months) under section 66.12(5). Creditors then have 45 days from the filing to indicate whether they accept or reject it; a meeting is only called if creditors holding at least 25% of the proven claims' total value ask for one, and if that threshold isn't hit, the proposal is deemed accepted automatically once the 45 days run out. Where a vote does happen, a consumer proposal needs only a simple majority — more than 50% — of the dollar value of claims actually voted, with no separate requirement that a majority of creditors by headcount agree too. That's a materially lower bar than the BIA's other kind of proposal (a "Division I" proposal, used for larger debtors), which requires both a majority in number of creditors and two-thirds in value, and where a rejection puts the debtor straight into a deemed assignment in bankruptcy — a consequence the consumer-proposal process doesn't carry the same way. Once accepted or deemed accepted, and then approved or deemed approved by the court 15 days later, a consumer proposal binds every unsecured creditor — including one that voted against it or never responded at all.

Consumer proposals have become the dominant form of Canadian consumer insolvency. In the 12 months ending July 31, 2026, Canadians filed 113,841 consumer proposals against 31,840 bankruptcies — proposals accounted for roughly 78% of all consumer insolvencies, outnumbering bankruptcies by more than 3 to 1, per the Office of the Superintendent of Bankruptcy's own monthly insolvency statistics. The most recent quarterly breakdown points the same direction: 28,923 consumer proposals against 8,600 bankruptcies in the second quarter of 2026 alone.

Personal bankruptcy: a discharge timeline that turns on your income, not a fixed date

Filing personal bankruptcy doesn't produce an automatic, uniform end date — how long it lasts depends on whether it's a first or repeat bankruptcy and on something called surplus income: the portion of your net monthly household income above a threshold the OSB sets annually by family size (Directive No. 11R2-2026, in effect for 2026, ranges from $2,716 for one person up to $7,188 for a household of seven or more). If your surplus income is under $200 a month, you owe nothing extra and a first-time bankruptcy discharges automatically at 9 months. At $200 a month or more, you must pay 50% of the amount above the threshold to your LIT for the length of the bankruptcy, which extends a first bankruptcy to 21 months. A second bankruptcy runs 24 months without surplus income or 36 months with it. A third or subsequent bankruptcy has no automatic discharge at all — the LIT must apply to the court, a judge hears the case, and the process routinely runs longer than three years, with the court free to refuse the discharge outright or grant it on conditions.

A concrete example: a single filer with $2,916 in net monthly income — $200 above the 2026 one-person threshold of $2,716 — owes $100 a month (50% of the $200 excess) to their LIT for 21 months, rather than walking away discharged at 9 months for nothing.

What neither route erases

Both a discharged bankruptcy and a completed consumer proposal leave some obligations standing. Court fines and penalties, support and alimony obligations, and debts arising from fraud or fraudulent misrepresentation survive either process under BIA section 178(1). Government student loans get their own specific rule: section 178(1)(g) keeps a student loan from being discharged if the bankruptcy is filed within seven years of the date the person last ceased being a full- or part-time student — a single, one-time date the Supreme Court of Canada confirmed in Piekut v. Canada (National Revenue), 2025 SCC 13, resolving years of inconsistent lower-court approaches to borrowers who'd been in and out of school more than once. Inside that seven-year window, section 178(1.1) offers a narrower court-ordered exception: after five years have passed since a person stopped being a student, a court can still order the loan discharged if the person acted in good faith and is, and will continue to be, unable to repay it because of genuine financial hardship.

This explains how two federal insolvency processes actually work — it isn't a recommendation to file either one, and it isn't a substitute for sitting down with a Licensed Insolvency Trustee about your own numbers. A first consultation with an LIT is standard practice before either process begins; verify any trustee you're considering directly against the OSB's own public registry of licensed trustees before signing anything.

References

  1. Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 66.11 (definition of "consumer debtor" and the $250,000 aggregate-debt threshold, excluding debt secured by a principal residence) and s. 66.12(5) (five-year/60-month maximum term for a consumer proposal); independently cross-checked against multiple Licensed-Insolvency-Trustee-firm summaries of the same sections and the Office of the Superintendent of Bankruptcy's own public consumer guidance.
  2. Bankruptcy and Insolvency Act, ss. 66.13-66.18 (45-day creditor response period, 25%-in-value threshold for calling a creditors' meeting, deemed acceptance where no meeting is requested, simple-majority-in-value voting threshold for a Division II consumer proposal) and ss. 54, 57-62 (majority-in-number-and-two-thirds-in-value threshold and deemed-bankruptcy consequence of rejection for a Division I proposal); independently cross-checked across the Office of the Superintendent of Bankruptcy's own "You Owe Money" and "You Are Owed Money" consumer guidance pages and multiple Licensed-Insolvency-Trustee and law-firm summaries of the same voting mechanics.
  3. Office of the Superintendent of Bankruptcy, Directive No. 11R2-2026 (Surplus Income), effective 2026 — Superintendent's Standards by family size ($2,716 for one person up to $7,188 for seven or more), the $200-per-month floor before a surplus-income obligation applies, and the 50% contribution rate; independently cross-checked against multiple independently published summaries of the same directive.
  4. Bankruptcy and Insolvency Act, s. 168.1 and related discharge provisions — automatic discharge at 9 months (first bankruptcy, no surplus income) or 21 months (with surplus income), 24 or 36 months for a second bankruptcy, and no automatic discharge for a third or subsequent bankruptcy (court application and hearing required); independently cross-checked across multiple Licensed-Insolvency-Trustee firms' public summaries of the same discharge timeline rules.
  5. Bankruptcy and Insolvency Act, s. 178(1) (debts surviving discharge, including court fines, support obligations, and fraud-based debts) and s. 178(1)(g)/(1.1) (the seven-year student-loan rule and the five-year hardship exception); Piekut v. Canada (National Revenue), 2025 SCC 13 (Supreme Court of Canada, decided April 17, 2025), confirming a single "last date ceased to be a student" governs the seven-year clock; independently cross-checked against the Supreme Court of Canada's own case page (scc-csc.ca) and law-firm and legal-press summaries of the decision.
  6. Office of the Superintendent of Bankruptcy monthly/annual insolvency statistics — 113,841 consumer proposals against 31,840 bankruptcies filed by consumers in the 12 months ending July 31, 2026 (proposals accounting for approximately 78% of consumer insolvencies); independently cross-checked against The Globe and Mail's reporting of 28,923 consumer proposals against 8,600 bankruptcies for the second quarter of 2026 alone, confirming the same roughly 3-to-1 pattern through a different outlet and a different time slice.

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