What is debt consolidation?
Debt consolidation is combining multiple debts into one new loan. You borrow enough to pay off your existing balances on credit cards, lines of credit, and personal loans, then make a single monthly payment on the new loan. The goal is to secure a lower interest rate than you were paying across several accounts.
Most people use an unsecured personal loan for debt consolidation. Others use a balance transfer credit card or borrow against home equity. Home equity loans often have lower rates because your property secures the debt, but if you miss payments, you risk losing your home.
Debt consolidation does not reduce the total amount you owe. It restructures your payments, so you manage a single account instead of several. Run the numbers before committing, because if the new rate is not lower than your current blended rate, consolidation does not save you money.
What is bankruptcy?
Bankruptcy is a legal process under the Bankruptcy and Insolvency Act (BIA). When you file, a Licensed Insolvency Trustee takes control of your non-exempt assets and distributes the proceeds to your creditors. In return, most of your unsecured debts are discharged.
What bankruptcy discharges
Bankruptcy erases most unsecured debts, including credit cards, personal loans, payday loans, and lines of credit. It does not discharge secured debts like mortgages or car loans, government student loans less than seven years old, spousal or child support, court fines, or debts arising from fraud.
Who qualifies for each option?
Debt consolidation qualifications
You need a stable income and a credit score strong enough to get approved for a lower interest rate. Lenders look at your debt-to-income ratio, your payment history, and your total outstanding balances. If your credit is already damaged by missed payments or collections, you are unlikely to qualify for a rate that saves you money.
Secured consolidation through a home equity loan or line of credit has less strict credit requirements because the lender holds your property as collateral. The risk shifts to you. If you default, you lose your home.
Bankruptcy qualifications
To file bankruptcy in Canada, you must owe at least $1,000, be unable to pay your debts as they come due, and either reside in Canada, carry on business here, or own property in Canada.
You file through a Licensed Insolvency Trustee, who assesses your financial situation and files the paperwork with the Office of the Superintendent of Bankruptcy.
Once filed, creditors must stop all collection activity, including wage garnishments and legal actions. That protection is immediate and automatic under the BIA.
What do you pay under each option?
Debt consolidation payments
Your monthly payment depends on the loan amount, the interest rate, and the repayment term. A $30,000 consolidation loan at 8% over five years costs roughly $608 per month. The same debt at 20% across credit cards costs far more in interest and takes longer to clear.
The payment stays fixed for the life of the loan if you choose a fixed-rate product. Variable rates on lines of credit or home equity products can change, which means your payment amount can go up.
Bankruptcy payments
The base cost of a first-time bankruptcy with no surplus income and no non-exempt assets is roughly $1,800 to $2,400, paid in monthly instalments over nine months. Your actual cost depends on your income, your assets, and whether you have filed before.
If you earn more than $200 above the government’s surplus income threshold, you pay 50% of the excess to your bankruptcy estate each month, and the bankruptcy extends from 9 months to 21 months. As of 2025, the monthly surplus income threshold for a single person is $2,666. For a family of two, the threshold is $3,318. A family of three has a threshold of $4,080.
Source: Office of the Superintendent of Bankruptcy Canada – Directive No. 11R2-2025, Surplus Income
A second bankruptcy with no surplus income lasts 24 months. With surplus income, a second bankruptcy extends to 36 months.
How does each option affect your credit?
Debt consolidation and your credit
Applying for a consolidation loan creates a hard inquiry on your credit report, which can slightly lower your score in the short term. Over time, making on-time payments and reducing your overall balance improves your score. If you miss payments on the consolidation loan, the lender reports the missed payment to the credit bureaus just like any other loan.
Bankruptcy and your credit
Bankruptcy drops your credit rating to R9, the lowest possible score on the Canadian credit rating scale. A first-time bankruptcy stays on your credit report for six to seven years after discharge, depending on the credit bureau and the province. Equifax removes a first bankruptcy after six years. TransUnion removes it after six years in most provinces, but after seven years in Ontario, Quebec, New Brunswick, Newfoundland and Labrador, and Prince Edward Island.
Source: Financial Consumer Agency of Canada – How long information stays on your credit report
A second or subsequent bankruptcy stays on your credit report for 14 years. During that time, getting approved for credit, renting an apartment, or passing certain employment background checks becomes harder.
What happens to your assets?
Debt consolidation does not affect your assets unless you use them as collateral. If you secure the loan with your home or car and then default, the lender can seize the asset. If the loan is unsecured, your assets are not at risk.
Bankruptcy requires you to surrender non-exempt assets to your trustee. Each province sets exemptions that protect certain property, including a basic vehicle, household furnishings, tools of the trade, and in some provinces a portion of your home equity.
RRSPs and TFSAs in bankruptcy
RRSPs are protected in bankruptcy except for contributions made in the 12 months before filing. TFSAs are not protected, and the trustee can seize the full balance.
Source: Government of Canada – Bankruptcy and Insolvency Act, s. 67(1)(b.3)
You can buy back non-exempt assets by paying their value to the trustee if you have the funds. Most first-time filers have few or no non-exempt assets.
Debt consolidation vs bankruptcy comparison
| Debt consolidation | Bankruptcy | |
|---|---|---|
| What happens to your debt | You repay the full amount at a lower interest rate | Most unsecured debts are discharged |
| Monthly payment | Fixed loan payment based on rate and term | Surplus income payments if above the threshold |
| Total cost | Full principal plus interest | Base cost of roughly $1,800 to $2,400 plus surplus income |
| Timeline | Typically 2 to 5 years | 9 to 21 months (first time) |
| Credit impact | Hard inquiry, then gradual improvement | R9 rating for 6 to 7 years after discharge |
| Assets | Not affected unless used as collateral | Non-exempt assets surrendered |
| Eligibility | Stable income, reasonable credit score | Owe at least $1,000 and unable to pay debts |
| Legal protection from creditors | None | Immediate stay of proceedings |
| Who administers it | Bank or lender | Licensed Insolvency Trustee |
When does each option make sense?
Debt consolidation works if
You can afford the monthly payment, and the interest rate saves you money compared to what you are paying now. Consolidation is worth considering if your debts are spread across several high-interest accounts and you want to simplify payments. You need a stable income and enough credit to qualify for a reasonable rate.
Debt consolidation fails if you do not change the spending habits that created the debt. The loan clears your credit cards, but if you keep using them, you end up deeper in debt than when you started. That’s money down the drain.
Bankruptcy makes sense if
You cannot repay your debts, and consolidation is not an option. If creditors are garnishing your wages, suing you, or threatening legal action, bankruptcy stops it immediately through the automatic stay of proceedings.
Bankruptcy is for people who are insolvent and have no realistic path to repaying what they owe. The cost is your credit and possibly some assets. If you are already months behind on payments and your credit is damaged, bankruptcy lets you draw a line under it and start rebuilding. If you are current on payments but still struggling, a consumer proposal is worth considering before filing for bankruptcy.
Frequently asked questions
Can I get a debt consolidation loan with bad credit?
You can get approved, but the interest rate is high. If the rate is not lower than what you are paying now, consolidation does not save you money. Lenders see poor credit as high risk and price the loan accordingly. A secured loan against home equity is an option if you own property, but you risk losing your home if you default.
Does bankruptcy erase all debts in Canada?
No. Bankruptcy discharges most unsecured debts, such as credit cards, personal loans, and lines of credit. It does not discharge secured debts, student loans less than seven years old, spousal or child support, court fines, or debts from fraud.
How long does bankruptcy stay on my credit report?
A first-time bankruptcy stays on your credit report for six years after discharge with Equifax, and six to seven years with TransUnion, depending on the province. A second bankruptcy lasts for 14 years. As of October 2025, the Financial Consumer Agency of Canada confirms these timelines.
Can I keep my house and car if I file for bankruptcy?
It depends on your province’s exemption rules and how much equity you have. Each province sets limits on the value of a vehicle and home equity you can protect. If your equity exceeds the exemption, the trustee can sell the asset, or you can pay the equivalent value to keep it. In many cases, people filing bankruptcy keep their home and vehicle because their equity falls within the provincial limits.
What happens if I miss payments on a debt consolidation loan?
The lender reports the missed payment to the credit bureaus, which damages your credit. If you secured the loan with your home or car, the lender can seize the asset. If the loan is unsecured, the lender can send your account to collections or sue you.
Which is better, debt consolidation or bankruptcy?
Neither is universally better. Debt consolidation works if you can afford to repay your debts and qualify for a lower interest rate. Bankruptcy works if you are insolvent and cannot repay what you owe. The right choice depends on your income, assets, and total debt load. A Licensed Insolvency Trustee can review both options with you at no cost.
Can I file for bankruptcy if I have a job?
Yes. Having income does not disqualify you from bankruptcy. If you earn above the surplus income threshold, you pay more, and the bankruptcy lasts longer, but you can still file. As of 2025, the threshold for a single person is $2,666 per month after tax.
Does debt consolidation hurt my credit score?
Applying for a consolidation loan creates a hard inquiry on your credit report, which can lower your score slightly. Over time, making on-time payments and reducing your overall debt improves your score. The short-term dip is small compared to the long-term benefit of paying down debt consistently.
Can I consolidate debt without taking out a loan?
A consumer proposal is a legal alternative to bankruptcy that lets you settle your debts without a new loan. You make one monthly payment to a Licensed Insolvency Trustee, who distributes the funds to your creditors. A consumer proposal reduces the total amount you owe and stops interest, but it appears on your credit report for three years after completion or six years after filing, whichever comes first.
Talk to a Licensed Insolvency Trustee
Your first consultation is free and without obligation. A trustee will review your situation and explain whether debt consolidation, bankruptcy, or another option makes sense for you.