The Pros and Cons of Filing Bankruptcy in Canada

When you have little hope of resolving your debts, and you’ve exhausted all other options, declaring bankruptcy can sometimes be the best way to stop the rot.

Despite its drawbacks, bankruptcy is a positive step for people struggling with overwhelming debts they cannot afford to repay, as it enables them to make a fresh start.

This guide examines the pros and cons of filing for bankruptcy in Canada, helping you decide whether it makes sense for your situation and how it compares with alternatives such as a consumer proposal.

Advantages of bankruptcy

Here are the key benefits of personal bankruptcy:

1. Protection from creditors

Bankruptcy protects you from creditors and gives you some breathing space.

Once filed, an automatic stay of proceedings begins, meaning your creditors can no longer initiate or continue legal proceedings against you.

Collection calls, wage garnishments, and any legal action must stop. Because this is a legal agreement, creditors must follow these rules.

2. Eliminate your debts quickly

Bankruptcy eliminates most unsecured debts in as little as 9 months for first-time filers without surplus income, making it a relatively fast path to debt relief. This includes credit cards, personal loans, payday loans, unsecured lines of credit and tax debts.

Some debts cannot be discharged, such as court fines or penalties, which we’ll cover in more detail later.

You do not need creditor approval to file for bankruptcy. Once the process is completed, you are released from your dischargeable debts and can start rebuilding your credit.

3. Your rights are protected

Bankruptcy is carried out by Licensed Insolvency Trustees who are licensed by the Office of the Superintendent of Bankruptcy (OSB). This ensures that everyone involved in your bankruptcy is held accountable and that your legal rights are established throughout the process.

Source: Government of Canada – Office of the Superintendent of Bankruptcy

Your trustee works with your creditors on your behalf and arranges two mandatory financial counselling sessions to help you manage your finances better going forward.

4. Some assets are protected

Bankruptcy does not mean losing everything. Federal law protects certain assets, including most Registered Retirement Savings Plans (RRSPs), except for contributions made within the 12 months before filing.

Source: Government of Canada – Bankruptcy and Insolvency Act, Section 67(1)

Provincial and territorial laws set additional exemptions that typically protect household furniture, necessary clothing, tools and equipment needed for your job, and, in most provinces, one vehicle up to a set equity value.

Exemption amounts vary significantly by province. For example, Ontario allows up to $7,117 in vehicle equity while Alberta allows $5,000.

Sources: Ontario Execution Act and Alberta Civil Enforcement Act

5. It can sometimes cost less

Depending on your financial situation, the cost of bankruptcy may be lower than other debt solutions. If you have few assets and income below the surplus income threshold, bankruptcy might be more affordable than a consumer proposal.

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Disadvantages of filing for bankruptcy

Filing for bankruptcy is not the best option for everyone. Consider these potential disadvantages carefully.

1. It can sometimes cost more

Bankruptcy can be expensive on a monthly basis if you have a substantial income. When you file for bankruptcy in Canada, your income determines how much you pay.

You pay more if you earn more than the government’s surplus income threshold, and you make surplus income payments if your income goes up.

For 2025, a single person can earn up to $2,666 per month before surplus income applies. Anything over $200 above this threshold requires you to pay 50% of the excess into your estate.

Source: Government of Canada – Office of the Superintendent of Bankruptcy, Directive No. 11R2-2025

If you have a high income, a consumer proposal might be better because, while it has you paying back more of your debts, it is spread over 5 years and can often be more affordable on a monthly basis.

2. It can take longer to complete

In most cases, a first bankruptcy lasts 9 or 21 months, whereas a second bankruptcy lasts 24 to 36 months. If you are required to pay surplus income, this increases the length of your bankruptcy and costs more.

3. It will damage your credit

Bankruptcy harms your credit score, making it extremely difficult to obtain credit.

Your credit report will show a record of the bankruptcy with an R9 credit rating in the public records section for 6 years after discharge with Equifax, or 7 years with TransUnion in Ontario, Quebec, Newfoundland and Labrador, and Prince Edward Island.

Source: Government of Canada – Financial Consumer Agency of Canada

If you have missed payments or debts in collections, your credit score has probably already been affected, so bankruptcy could help improve your credit in the long run by resolving your outstanding debts.

4. You must perform some duties

To be discharged from your bankruptcy, you must perform some duties during the process:

• Surrender your non-exempt assets and credit cards.
• Make your payments on time.
• Submit proof of income each month.
• Provide income tax return information.
• Attend financial counselling sessions.

Your Licensed Insolvency Trustee will guide you through this process.

5. Your assets may be at risk

In bankruptcy, your assets vest with the trustee, who may or may not sell them and distribute them to your creditors. Each province and territory has different rules on exempt assets, which determine what you can keep.

You may lose any non-exempt assets, such as RRSP contributions you have made in the last year, some savings and investments, and your tax refund for the year.

If your home has excess equity, you must pay this surplus to your creditors through your bankruptcy if you wish to keep your home. In Ontario, for example, only $10,783 in home equity is exempt. If you can’t afford to do this but want to protect your home, a consumer proposal is a better option.

Properly secured loans are not affected by bankruptcy as long as you continue to repay them.

A consumer proposal is an attractive alternative if you have income and assets to protect.

6. Not all debts can be discharged

Not all debts can be discharged through bankruptcy, such as:

• Secured debts, like a mortgage or car loan.
• Fines or penalties imposed by a court, e.g. a parking ticket or fine.
• Unpaid alimony or child support.
• Debts obtained by fraud or through false pretense (e.g. lying on a loan application).
• Student loans (if less than seven years since leaving university or college)
• An award by a civil court for damages arising from personal or sexual assault.

7. It can impact your employment

Some professional associations have standards requiring individuals to disclose bankruptcy, including accountants, lawyers, real estate agents and investment brokers. Ensure you check with your professional association or society before filing.

If this applies to you, a consumer proposal can be a better alternative, as your employment is not affected in most cases.

8. You cannot be a director of a company

You are not allowed to be a director of a company while bankrupt. If you file a consumer proposal, you can remain a company director and continue to control your business.

How a consumer proposal compares to bankruptcy

If you want to manage your debt without losing assets or risking higher payments if your income increases, a consumer proposal may be the better option.

In 2024, consumer proposals accounted for 78.8% of all consumer insolvencies filed in Canada, reflecting a growing preference for this alternative to bankruptcy.

Source: Government of Canada – Office of the Superintendent of Bankruptcy, Insolvency Statistics in Canada 2024

Weighing the bankruptcy pros and cons against a consumer proposal helps clarify which path suits your situation.

• You keep your assets. Your home, car, and RRSPs remain yours.
• Your payments don’t change. The monthly amount is agreed at the start and won’t increase if your income rises.
• No surplus income payments. In bankruptcy, higher earnings mean higher payments. In a consumer proposal, your payments do not change based on your income.
• Slightly less damage to credit. It shows as an R7 rating instead of R9, and it’s removed from your credit file sooner after completion.
• More time to repay. Payments can be spread out for up to five years, keeping them manageable.
• Same legal protection. Creditors can’t chase you once your proposal is filed and accepted.
• No professional restrictions. You can stay on as a company director and continue practicing in most regulated fields.
• Fewer hoops to jump through. You’ll attend two financial counselling sessions, but you don’t need to file monthly income reports or surrender assets.

Is bankruptcy suitable for you?

After considering the advantages and disadvantages of declaring bankruptcy, you may find that bankruptcy can be avoided by filing a consumer proposal instead.

However, if you have little or no income and few assets, bankruptcy might be the most practical way to become debt free.

Bankruptcy might be the best option if you:

• Are overwhelmed with debt you cannot afford to repay
• Cannot meet your financial obligations as they come due
• Are receiving frequent collection calls
• Face legal action or wage garnishment for your debts
• Have limited income and few non-exempt assets

If the disadvantages of bankruptcy concern you, particularly the credit impact, potential asset loss, or professional restrictions, a consumer proposal is often a better choice.

Other options include debt consolidation loans and credit counselling programs. Before deciding, consult a Licensed Insolvency Trustee, who can assess your situation and may suggest a more favourable solution.

Read more about the bankruptcy process in Canada.

Get free debt relief advice

If you have a low income, no significant assets, and mounting bills, the pros of bankruptcy might outweigh the cons. A consumer proposal is often better if you have a steady income and assets to protect, such as your home or retirement savings.

At Moses Advisory Group, our Licensed Insolvency Trustees have helped thousands of Canadians get their finances back on track. We will walk you through all available options specific to your situation.

Our job is not to push you toward one solution or another. It is to give clear, straightforward advice so you can make the right decision for your situation with confidence.

Frequently Asked Questions