Debt Relief Experts
Struggling with debt can feel overwhelming—especially when you think bankruptcy might be your only option. The good news is that personal bankruptcy isn’t the only way to eliminate or restructure your debts. Below, we walk you through the most effective bankruptcy alternatives available in Canada. Each section includes a quick overview, a “read more” breakdown of how that option typically works, and a short checklist to help you decide if it might be right for you. By understanding all these options, you can make a more informed decision—and possibly avoid bankruptcy altogether.
Table of Contents
1. Consumer Proposal
A consumer proposal is a formal, legally binding arrangement to reduce your unsecured debts without declaring bankruptcy. Through this process, a Licensed Insolvency Trustee (LIT) helps you negotiate an agreement with your creditors to repay a portion of your debt, often extending payments over a period of up to five years. You keep your assets, and creditors are legally prevented from taking further action (calls, wage garnishments, etc.).
Consumer proposals have become the #1 alternative to bankruptcy for many Canadians. Today, eight in ten people filing for debt relief with a Licensed Insolvency Trustee choose a consumer proposal over bankruptcy.
Is a Consumer Proposal Right for You?
- You owe $10,000+ in unsecured debt (credit cards, personal loans, tax debt, payday loans etc.).
- You want to avoid bankruptcy but need legal protection from creditors.
- You’re able to make regular monthly payments, but not at the full amount required to pay off your debts in full.
- You have assets you’d prefer to keep.
- You need debt reduction that goes beyond just lowering interest.
How It Works
- Filing Process: A consumer proposal can only be filed with the help of a LIT who helps you craft a proposal that you can afford.
- Creditor Protection: Once filed, you gain a stay of proceedings. Collection calls and wage garnishments stop immediately.
- Creditor Vote: Once filed, creditors vote on whether to accept. If the majority (by dollar value) says yes, all unsecured creditors are bound by the agreement.
- Single Monthly Payment: You’ll make a set monthly payment for up to five years, usually lower than your old payments.
- Credit Impact: A consumer proposal appears as an R7 on your credit report, which is less severe than bankruptcy’s R9.
2. Debt Consolidation
Debt consolidation means combining multiple debts into one new loan. This can simplify your finances as you make a single monthly payment and may reduce interest, but it typically doesn’t lower the actual principal you owe. You can apply for a consolidation loan through a bank or credit union or by refinancing existing debts through a second mortgage or home equity line of credit.
Before you take on a new, high cost loan compare the pros and cons of a consumer proposal versus debt consolidation loan.
Is Debt Consolidation Right for You?
- You have good to fair credit and can qualify for a lower-interest loan.
- You want one payment instead of many and need some interest relief.
- You can reasonably repay your debts in 3–5 years without needing a principal reduction.
- You have stable income but don’t need formal creditor protection or a legal stay of proceedings.
How It Works
- New Loan or Line of Credit: You secure a loan big enough to pay off all your unsecured debts. You then make one monthly payment on that loan.
- Qualification: To be approved, you will need a good credit score, stable income, and sometimes collateral (like a home).
- Interest Savings: If you qualify for a lower interest rate, you might save money over time. However, using assets like your home equity can put your property at risk if you default.
- No Debt Reduction: You still owe the entire principal, which is why consolidation works best for manageable debt levels.
A significant drawback of a debt consolidation loan is that there is no debt reduction. In fact, continuing to use your credit cards to pay for living costs can result in more debt.
3. Credit Counselling & Debt Management Plans
Working with a non-profit credit counselling agency involves creating a payment plan to pay off your debts over time, sometimes at a reduced interest rate. This is called a Debt Management Plan (DMP). While a DMP can streamline payments, you must repay the full balance, and participation by creditors is voluntary.
Is Credit Counselling Right for You?
- You can handle 100% of your debt principal but need help stopping or reducing interest.
- You don’t require legal protection from wage garnishments or lawsuits.
- You’re primarily looking for budgeting support and a structured plan to tackle high-interest debts.
- You prefer working with a non-profit agency for guidance and accountability.
Try our debt repayment calculator to compare what your costs might be through credit counselling compared to a consumer proposal.
How It Works
- Budget Analysis: A credit counsellor reviews your finances and proposes a repayment schedule, typically 3–5 years.
- Interest Relief: Creditors may agree to reduce or freeze interest if you stick to the DMP.
- Full Repayment: There’s no principal reduction—just interest relief. Your credit counselling agency will also charge a one time fee and an ongoing fee of 5-15% of your payments.
- No Legal Protection: Unlike a consumer proposal, a DMP doesn’t force all creditors to comply, and they could still pursue collections.
- Credit Impact: Credit counselling has the same impact on your credit rating as a consumer proposal. Both appear as an R7.
4. Debt Settlement (Informal Negotiation)
Debt settlement means offering your creditors a lump-sum payment for less than the total you owe. Negotiations can be direct or through a settlement firm, but there’s no guarantee creditors will cooperate. Most large creditors do not like working through an informal debt settlement arrangement. The Canada Revenue Agency has no legal authority to settle tax debt informally either. There’s also no automatic stay of proceedings, so creditors may still sue or garnish wages during negotiations.
Is Debt Settlement Right for You?
- You have access to a lump sum (from savings or family).
- You’re comfortable with no formal legal protection.
- You understand some creditors might refuse the offer.
- You prefer a quick resolution if it works (versus a longer repayment plan).
How It Works
- Lump-Sum or Payment Arrangements: You try to convince creditors it’s in their interest to accept a lower amount rather than see you file for bankruptcy.
- Creditor Response: Each creditor independently chooses whether to accept or reject.
- Risks: You might face lawsuits, wage garnishments, or ongoing collection calls if talks fall through. Fees from settlement firms can also be significant.
- Success Rate: Results vary, and if you don’t have a readily available lump sum, creditors may be unwilling to wait months or years.
Need More Certainty or Legal Protection? Contact Us to discuss whether a consumer proposal or another option might be safer for your situation.
5. Budgeting & DIY Approaches
Strategies like tracking expenses, reducing costs, or seeking help from family/friends can work if you have a solid plan and your debt load isn’t massive.
Is a Budgeting/DIY Solution Right for You?
- Your total debt is relatively low or moderate.
- You have the discipline and know-how to track spending, reduce expenses, and manage negotiations.
- You prefer informal solutions and don’t need immediate legal protection.
- You can either handle the risk of creditors taking action or have minimal assets to protect.
How It Works
- Create a Personal Budget: Track income and expenses to see where you can cut costs and free up cash for debt payments.
- DIY Debt Negotiation: You might try calling creditors directly to ask for interest reductions or extended payment terms.
- Borrowing from Friends/Family: While family loans can help avoid bankruptcy, consider the relationship impact and create clear repayment terms. Document the loan and ensure it won’t create hardship for family members.
- “Do Nothing”: Choosing to ignore debts can lead to wage garnishments, lawsuits, or added fees. However, if your are unemployed or have limited income or assets, you may be creditor proof which mean you may be able to wait out your creditors while you focus on other financial concerns.
Frequently Asked Questions
Making Your Decision
Choosing the right debt solution depends on factors like the amount of debt you owe, your income, and the urgency of stopping creditor actions. If you only need an interest break and you can afford to repay your full balance, debt consolidation or a debt management program might suffice. But if you need significant debt reduction and want formal legal protection, a consumer proposal could be your best option.
No matter which alternative you lean toward, you don’t have to figure it out alone. A quick conversation with a Licensed Insolvency Trustee can clarify your financial situation and help you choose the most effective path. The key is to take action—the sooner you explore your options, the closer you’ll be to a fresh financial start.
Why Choose Us?
- Licensed by the Canadian government
- Over 25 years in Ontario helping people become debt-free
- No-pressure, judgment-free advice from accredited experts, not salespeople
- Clear explanations of all your debt relief options and answers to all your questions
- Immediate protection from creditors
Let’s talk about your unique debt challenges and chart a path to being debt free.
