Debt Consolidation vs Consumer Proposal

What is a debt consolidation loan?

A debt consolidation loan combines multiple debts into one new loan with a single monthly payment. You borrow enough to pay off your existing debts, then repay the new loan over a set term. The goal is a lower interest rate and one payment instead of several.

Consolidation works for unsecured debts like credit cards, personal loans, and payday loans. It does not cover secured debts, such as mortgages or car loans. You are not reducing what you owe. You are restructuring it into one place.

Approval depends on your credit score, your income and your debt-to-income ratio.

What is a consumer proposal?

A consumer proposal is a legal agreement under the Bankruptcy and Insolvency Act (BIA). You repay a portion of your unsecured debt over up to five years, and your creditors forgive the rest. Only a Licensed Insolvency Trustee can file a consumer proposal on your behalf.

Once filed, interest stops immediately, and creditors stop all debt collection actions. That includes wage garnishments, lawsuits, and collection calls. Protection is automatic under the BIA and begins the day you file.

Source: Government of Canada – Bankruptcy and Insolvency Act, Section 69

In the 12 months ending September 2025, 78.6% of all consumer insolvency filings in Canada were consumer proposals rather than bankruptcies. Most people dealing with unmanageable debt are choosing proposals over bankruptcy, and the numbers keep climbing.

Source: Office of the Superintendent of Bankruptcy Canada – Insolvency Statistics, September 2025

How do you qualify for each option?

Debt consolidation eligibility

You need a credit score good enough to get a loan with a reasonable interest rate. Most lenders require a score in the mid-600s at a minimum for an unsecured consolidation loan.

If your score is below that, you either do not qualify, or the rate is so high that consolidation would cost more than your original debts.

Lenders also look at your debt-to-income ratio. If you are already stretched thin, approval is unlikely. Some lenders offer secured consolidation loans, which put your home or other assets at risk if you default. That is a gamble worth thinking hard about before you sign.

Consumer proposal eligibility

You need to owe between $1,000 and $250,000 in unsecured debt (not counting your mortgage) and have enough income to make monthly payments. The income threshold is lower than what consolidation requires because the payment is based on what you can afford, not what the lender demands.

Source: Government of Canada – Bankruptcy and Insolvency Act, Section 66.11

A consumer proposal is more accessible than a debt consolidation loan for people with poor credit or those already facing collection action. Your credit score does not determine whether you qualify.

How does each option affect your total debt?

Debt consolidation loan

A debt consolidation loan does not reduce what you owe. You repay the full amount plus interest over the term of the loan.

If you consolidate $30,000 in credit card debt into a loan at 8% over five years, you pay back roughly $36,500 in total. Every dollar of the original debt remains.

Consumer proposal

Your debt is reduced. Creditors agree to accept less than the full amount, and the rest is legally forgiven once the consumer proposal is completed.

The total debt you repay depends on your income, assets, and the creditors you can work with.

Interest stops accruing the day you file. Whatever you owe at the time of filing is the baseline for the consumer proposal. The number does not grow.

Take a moment to consider this, because if you are paying 20% or more on credit cards right now, interest is eating you alive.

What are the payment structures?

Consolidation payments

You make fixed monthly payments over a set term, usually three to five years. The payment amount depends on the loan’s interest rate and term length. If you miss payments, the lender takes collection action like any other loan. There is no legal protection.

Consumer proposal payments

You make one fixed monthly payment to the trustee, who distributes it to your creditors. The payment is based on what you can afford, not what creditors demand. Your payment stays the same for up to five years, even if your income increases.

If your income drops and you cannot keep up, you can apply to amend the consumer proposal before you fall too far behind. If your income goes up, your payment stays the same unless you voluntarily increase it to finish sooner.

How does each option affect your credit?

Debt consolidation loan

Applying for a debt consolidation loan triggers a hard credit inquiry, which temporarily lowers your score. If you make regular on-time payments, your score improves over time. Paying off the original debts also lowers your credit utilization ratio, which helps your score recover.

Your credit report shows the original accounts as paid in full. That is the upside of consolidation. You are not avoiding the debt, so there is no insolvency notation on your report.

Consumer proposal

A consumer proposal is recorded on your credit report as an R7 rating, meaning you are making payments under a special arrangement. It stays on your report for three years after you complete all payments, or six years from the date you filed, whichever comes first.

Source: Financial Consumer Agency of Canada – How long information stays on your credit report

If your credit is already damaged from missed payments, maxed-out cards, or collection accounts, then the credit impact is irrelevant. A consumer proposal gives you a clear timeline for when the record drops off and lets you start rebuilding from day one.

What legal protections do you get?

Debt consolidation loan

A debt consolidation loan gives you no legal protection from creditors. If you fall behind on payments, creditors pursue wage garnishments, lawsuits, or other collection actions. If you used a secured loan, you risk losing the asset you put up as collateral.

Consumer proposal

A consumer proposal provides automatic legal protection the day you file. Creditors stop wage garnishments, lawsuits, and collection calls as long as you keep up with your payments. That protection comes from the BIA and does not require court approval.

Source: Government of Canada – Bankruptcy and Insolvency Act, Section 69

You keep all your assets, including your home and car, as long as you stay current on secured debts like your mortgage or car loan. A consumer proposal does not force you to sell anything.

What are the costs and fees?

Debt consolidation loan

The main cost is the interest rate on your loan. Some lenders charge origination or administrative fees, but these are usually small. The real cost is in the interest you pay over the life of the loan. If your credit is poor, the rate is high enough that consolidating your debts would end up costing more than your original debts combined.

Consumer proposal

The trustee’s fees are built into your monthly payment and are regulated under the BIA. You do not pay anything upfront, and you never see a separate bill. The total amount you repay includes the trustee’s fees, the portion going to creditors, and a government levy.

Even with the fees included, a consumer proposal typically costs less than repaying the full debt on your own because your total debt is reduced, and interest stops the day you file.

Debt consolidation vs consumer proposal comparison

Feature	Debt consolidation loan	Consumer proposal
Total debt repaid	100% plus interest	A portion (typically 20% to 50%)
Interest	Continues at the loan rate	Stops the day you file
Legal protection from creditors	None	Automatic under the BIA
Credit impact	Hard inquiry, then improves with payments	R7 rating for 3 years after completion or 6 years from filing
Eligibility	Good credit score and income required	Income to make reduced payments, no minimum credit score
Assets at risk	Possible if using a secured loan	You keep all assets
Payment flexibility	Fixed by lender terms	Based on what you can afford, can be amended
Who administers it	Bank or lender	Licensed Insolvency Trustee
Fees	Interest and possible origination fees	Trustee fees built into payments, regulated by the BIA
Maximum term	Varies by lender	Up to 5 years

Which option is right for you?

Debt consolidation works best if you have a credit score in the mid-600s or higher, your total unsecured debt is manageable relative to your income, and you can commit to the full repayment. If the math works on paper and you can stick to the payments, consolidation is a sensible route.

A consumer proposal makes more sense if you are insolvent, meaning you owe more than you can pay back in full. It is the better option if your credit is already damaged, creditors are already taking action against you, or the interest on your existing debts makes repayment impossible.

Talk to a Licensed Insolvency Trustee

If you are not sure which option fits your situation, talk to a Licensed Insolvency Trustee. The initial consultation is free and confidential. A trustee will review your debts, income, and expenses, then explain your options with no obligation.

Frequently asked questions

Can I get a debt consolidation loan with bad credit?

You can qualify, but the interest rate will be high. If the rate is higher than what you are already paying, a debt consolidation loan gives you no benefit. Some lenders offer secured loans, but this puts your home or other assets at risk if you default.

Does a consumer proposal eliminate all my debt?

A consumer proposal covers unsecured debts like credit cards, personal loans, tax debt, utility arrears, and payday loans. It does not cover secured debts, such as mortgages or car loans. You keep making those payments separately if you want to keep the asset.

How long does a consumer proposal stay on my credit report?

Equifax and TransUnion both remove a consumer proposal from your credit report three years after you complete all payments, or six years from the date you filed, whichever is sooner. If you finish a five-year consumer proposal on schedule, the record drops off one year after your last payment.

What happens if I miss a payment on a debt consolidation loan?

The lender takes collection action like any other loan. That includes reporting the missed payment to credit bureaus, charging late fees, and potentially pursuing legal action. There is no legal protection with a debt consolidation loan.

What happens if I miss a payment on a consumer proposal?

If you fall behind by the equivalent of three monthly payments, the consumer proposal is automatically annulled under the BIA. That means creditors resume collection actions, including wage garnishments and lawsuits. If your income drops and you cannot keep up, talk to your trustee about amending the consumer proposal before you fall three payments behind.

Can I file a consumer proposal if I owe more than $250,000?

A consumer proposal under the BIA is available if you owe $250,000 or less in unsecured debt, not counting your mortgage. If you owe more than $250,000, you can file a Division I Proposal under the BIA instead, which has no debt limit but follows a slightly different process.

Will consolidating my debt improve my credit score?

The initial hard inquiry temporarily lowers your score. If you make on-time payments and lower your credit utilization ratio, your score improves over time. If you miss payments or take on more debt, your score drops further.

Can I keep my credit cards during a consumer proposal?

You surrender the credit cards included in the consumer proposal. Your credit card accounts are closed as part of the filing. You can apply for a secured credit card during the consumer proposal to start rebuilding your credit, but unsecured credit cards are off the table until the consumer proposal is completed.

Is debt consolidation or a consumer proposal better for me?

Neither option is better in the abstract. Consolidation works if you can afford to repay everything and your credit is strong enough to get a reasonable rate. A consumer proposal works if the math does not add up to full repayment. If creditors are already taking action against you or your debt-to-income ratio makes consolidation impossible, a consumer proposal is the realistic option.

Do I need to talk to a Licensed Insolvency Trustee to file a consumer proposal?

Yes. Only a Licensed Insolvency Trustee can file a consumer proposal. The trustee assesses your financial situation, negotiates with your creditors, and administers the consumer proposal from start to finish. The initial consultation is free.