Bankruptcy Alternatives: How to Avoid Bankruptcy in Canada

Have you ever dreaded hearing the phone ring, worried it might be a collection agency calling about a debt that has grown far beyond your ability to pay off? If so, you aren’t alone. 

More and more Canadians are struggling with the rising cost of living, while wages have not kept pace. As a result, an increasing number of individuals have turned to programs available under the Bankruptcy and Insolvency Act for financial relief.

In the first quarter of 2025, the Government of Canada reported 35,753 insolvencies, a 7.5% increase over the previous 12-month period. That included 7,995 bankruptcies and 27,562 consumer proposals. The Yukon Territories saw the greatest change at +34.9% over 12 months, and the Northwest Territories saw fewer insolvencies at 7.4% in the same period. 

While bankruptcy can be a good tool for getting rid of your debt and putting an end to collection calls, it isn’t always the best option. If you want to avoid filing for bankruptcy, read on to learn more about it: what it is, when it can be a good idea, and four alternatives to bankruptcy.

What Is Bankruptcy?

Bankruptcy is a form of insolvency that falls under the Bankruptcy and Insolvency Act. Insolvency is when someone is unable to pay their debts on time. It is administered by a Licensed Insolvency Trustee (LIT), who is licensed by the Government of Canada.

The LIT will help you understand the process of filing for bankruptcy, including potential financial impacts, which debts you will still have to pay, and which assets you may lose or be able to keep if you file for bankruptcy.

Filing for bankruptcy in Canada is different from filing a consumer proposal (another form of insolvency administered by an LIT) in a few key ways:

• In a bankruptcy, you do not have control over which assets you keep or lose. The LIT will sell non-exempt assets (such as second homes, luxury goods, or property assets beyond the provincial allowance) to cover your debts to your creditors. In a consumer proposal, you may be able to retain your assets.
• A consumer proposal is an agreement with your creditors that allows you to either pay a portion of what you owe (typically more than what they could get in a bankruptcy filing) or get an extension on your payment period.
• If you default (miss 3 payments or are 3 months behind), your proposal will be annulled.

Does Bankruptcy Clear All Debt?

Bankruptcy does not clear all debts. It can help you clear unsecured debts like credit cards, unsecured loans, and payday loans. It will not discharge debts like:

• Court-imposed debts (parking fines, bail, criminal fees)
• Spousal or child support
• Debts resulting from your own fraudulent behaviours
• Student loans of less than 7 years since the final day of studies or the expected graduation date if you did not complete your studies

When Is Filing for Bankruptcy the Right Choice?

When considering your options for getting out of debt, should you try to avoid bankruptcy? Remember: there is no shame in filing for bankruptcy if you really need to get out of overwhelming debt. Filing for bankruptcy can be a good option if you:

• Have Lost a Major Income Source and Can’t Get Creditors to Extend Your Repayment Dates. If you or your significant other have recently become unemployed and are unable to make your monthly minimum debt payments on top of meeting basic living expenses, bankruptcy may be a viable option.
• Can’t afford the minimum monthly payments. If you struggle to keep up with your minimum debt payments, bankruptcy could be a useful tool for getting out of debt.
• Find yourself borrowing more or using credit to cover living expenses. If you find yourself borrowing more or consistently using credit to cover monthly living expenses, it may be time to consider bankruptcy.
• Have reached your credit limit. If you’re close to hitting the limit on what you can borrow and don’t see a path to paying your debt down, then you may have no other choice but to file for bankruptcy.
• Creditors are taking forceful tactics to recover money owed. If your creditors are taking legal action against you to recover debt, such as taking you to court and getting a judgment for a wage garnishment, it may be time to consider filing for bankruptcy.
• Can’t get your creditors to negotiate your debt. If you have excessive debt and aren’t able to get your creditors to agree to a consumer proposal or other bankruptcy alternatives, then you may need to file for bankruptcy.

If you need to escape debt, trying to avoid bankruptcy is a natural impulse. However, there are times when it is necessary, and countless others have used this tool to get out of debt so they can get their lives back on track.

“Filing for bankruptcy doesn’t mean losing everything,” Bergeron says. “In fact, it’s possible to retain certain assets, such as a home, vehicle, or investments, depending on their individual situation and provincial exemptions.”

Why Avoid Bankruptcy?

Some of the biggest reasons to avoid filing for bankruptcy include:

• The impacts on your credit. When you declare bankruptcy, it will stay on your credit report as a negative event for six or seven years after the discharge, depending on the province. This can make it more difficult to secure financial services (such as loans and credit cards) in the future.
• Loss of assets. Under bankruptcy proceedings, your LIT will seize and “realize” some of your assets to make payments to your creditors to help cover your debts. Under a bankruptcy, you don’t have control over which assets are used to repay your debts—your LIT does. If possible, they may try to consult with you to protect your most important non-exempt assets.
• Potential career impacts. An employer cannot fire you for filing for bankruptcy in Canada. Unless a garnishment is placed on your pay or the LIT needs payroll information, your current employer might not even be notified that you’ve filed for bankruptcy. Some employers might have a conduct clause requiring you to disclose if you file for bankruptcy. However, future employers may see a bankruptcy filing in your financial history and could choose not to hire you if they feel it makes you a risk. For example, if you’re applying for a job where you would be handling large sums of money, the employer might opt to avoid hiring someone with financial issues in their credit history.

Managing Debt Before It Becomes Too Large

Bankruptcy is sometimes referred to as the last option for getting out of debt, as its impacts can be highly disruptive despite the benefits.

Ideally, the best solution is to avoid accumulating too much debt in the first place. An ounce of prevention is worth a pound of cure, especially when the cure has compounded interest attached.

Have you been considering bankruptcy? Don't lose hope, and keep in mind no financial challenge is too great to overcome with the guidance of our certified Credit Counsellors. Check out these tips to begin your journey toward improving your financial situation:

1. Talk to a Credit Counsellor for personalized guidance about your unique situation. They can provide you with free, confidential credit counselling to help you understand your debt management options and provide you with helpful resources to regain control. 

2. Create a monthly budget and follow it. Tracking your monthly income and expenses can help you get the insight you need to eliminate wasteful spending that leads to excessive debt.

3. Prioritize debt repayments and focus on the largest debts with the highest interest rates first. Take a few minutes to look at your debts, their interest rates, and your available budget for making payments, then use that information in a debt calculator tool to give yourself an idea of how long it will take to pay off your debt.

4. Consider your mortgage or rent. Is it higher than you can comfortably afford? If so, consider downsizing to a smaller home, one in a less costly neighbourhood, or getting a roommate to share costs with.  When shopping for a new home, consider homes that are considerably less than the upper limit of your mortgage amount. Aim to spend a maximum of 37-42% of your gross (before tax) monthly income.

5. Negotiate with your creditors. If you have an income but not enough to pay your debts in full, you may be able to negotiate with your creditors. If you’re considering bankruptcy, tell your creditors this, and in some cases, they may agree to lower your debts by 25-50%. This is often called an informal debt settlement.

6. Liquidate personal assets. Hold a garage sale or sell more valuable items on an online marketplace to quickly access extra cash. You could also consider selling stocks or bonds if they have significant value. 

7. Get help from family and friends. In certain circumstances, family and friends may be able to help, if it means avoiding bankruptcy. When borrowing from friends or family, always have a written plan and details to avoid confusion and help everyone feel comfortable with the arrangement. 

8. Pick up a part-time job or side gig. Consider adding a small side gig or part-time job temporarily, until you’re in a better financial situation. Consider gig-jobs like car-hires, food deliveries, or selling your skills online. 

9. Dip into your retirement funds. While likely not your first choice, you may have options to dip into your retirement savings to help you get out of debt now. In doing so, however, you may have to pay income tax on the amount you withdraw, and it can reduce your income in retirement. It could also change the amount of government benefits you receive, which are based on your income. Be sure to consult your financial advisor before taking this step to ensure it’s right for your situation.

How to Avoid Bankruptcy: 4 Bankruptcy Alternatives

Now that we’ve covered some reasons why you might not want to file for bankruptcy, how can you avoid bankruptcy when you’re in debt? One of the first things to do is to explore bankruptcy alternatives.

Bankruptcy Alternative 1: Debt Consolidation Loan

If you’re struggling with heavy debt but still have a good credit score, you may qualify for a debt consolidation loan. This is when you take out a new loan to pay off your existing debts, essentially rolling all of your debt into a single payment that is, hopefully, easier to manage.

With good credit, you may get a loan for a lower monthly interest rate than your existing debts, which can help reduce the total amount of money you pay in the long run.

However, it’s important to exercise strict spending control after getting the loan. It’s all too easy to start leaning on your credit again before paying off the loan. This may lead to your overall debt increasing instead of decreasing.

Bankruptcy Alternative 2: Debt Consolidation Program

What should you do if you don’t have a great credit score and can’t qualify for a loan with favourable terms? 

A debt consolidation program (DCP, also often referred to as a debt management plan or DMP) is an alternative to bankruptcy, where you and a Credit Counsellor make an arrangement with your creditors. The counsellor negotiates with your creditors on your behalf to stop or reduce interest on unsecured debts, create a set timeline for debt repayment, and roll all debts into a single, easy-to-track payment plan.

“The primary difference between bankruptcy and a DCP is that with a DCP, you would repay 100% of your debt at a lower interest rate, potentially 0%. Under bankruptcy, you potentially do not repay anything to your creditors,” Mike Bergeron, Credit Manager at Credit Canada, explains.

Joining a debt consolidation program can have an impact on your credit score. However, the impact of a DCP on your credit is usually less than the impact of a bankruptcy proceeding.

DCPs provide a clear path to getting out of debt and offer creditor protection so that you can navigate the debt restructuring process without fear of lawsuits, wage garnishments or asset seizures.

Learn more about how debt consolidation programs work. 

Bankruptcy Alternative 3: Consolidating Debt Into Your Mortgage

If you have equity in your home (i.e., your home is worth more than you owe on your mortgage), then you may want to consider consolidating your debt into your mortgage.

Since mortgages are secured debts (the home being the asset securing the mortgage), they typically have lower interest rates than unsecured loans. This can be a good way to reduce your overall interest payments. However, there are some factors to consider:

• The cost of breaking your current mortgage. Refinancing your home may result in added fees and costs. This may require you to carefully measure the cost of the fees against what you expect to pay in interest to see if it’s worthwhile for you.
• How consolidating debt into your mortgage affects your equity. When you roll other debts into your mortgage, you’re reducing the amount of equity you have available to cover other expenses and delaying the day when you’ll own your home free and clear. This can make it harder to get a home equity loan in the future if you need it to cover an emergency.
• The risk of accruing more debt. If you use your home to pay off your credit cards, you may find it tempting to start spending on those cards again. It may help to cut up the credit cards after you use a mortgage consolidation to pay them off for this very reason.

Before applying to refinance your mortgage, consult with a mortgage specialist to see if this would be a good move for you financially.

Bankruptcy Alternative 4: Consumer Proposals

As mentioned earlier, Licensed Insolvency Trustees administer consumer proposals, which are another bankruptcy alternative. Here, the LIT helps you negotiate with your creditors to most likely reduce your debts and create a repayment plan that lasts up to 60 months (five years). At the end of the period, you’ll be free of those debts if you’ve kept up with your payment plan.

However, for a consumer proposal to go through, your creditors have to agree to it. So, your LIT will have to balance your creditors’ needs against your own needs to find the best compromise. Most creditors will accept the proposal unless they strongly feel it isn’t enough.

Bankruptcy Alternative Comparisons

Case Study: Recovering From Over-Reliance on Credit

Ashley, a hardworking mother of three and a dedicated Personal Support Worker (PSW), earns a good income but has never received child support to help cover her children's expenses. Over time, she began to fall behind on her debts. To manage unexpected car repairs, her kids' activities, and a bit of family travel, she relied on credit until she realized she had dug herself in too deep.

Eventually, Ashley traded in her aging car for a newer one to avoid the stress of being stranded. While this provided peace of mind, it also increased her financial strain. Feeling overwhelmed and overextended, she reached out to Credit Canada for support in regaining control of her finances.

Ashley was relieved to learn that she had multiple options. She decided not to rush into a formal solution like bankruptcy, even though it could offer a lower monthly payment for her budget. Instead, with proper budget management, Ashley and her Credit Counsellor established that with the interest relief and structured payments of a Debt Consolidation Program, she could afford to pay off her $24,000 debt in full.

With this in place, Ashley is now on track to become debt-free in four years by making manageable payments of $500 a month. She gets to keep her new vehicle and is also setting money aside toward a future down payment on a home.

Are you in debt and looking for ways to avoid bankruptcy? Reach out to Credit Canada at 1(800)267-2272 to speak to a certified Credit Counsellor. 

Our credit counsellors have helped over 2 million Canadians free themselves from the weight of debt. Credit counselling is free, confidential and non-judgemental, to help you gain clarity on your situation and next steps. 

Or, chat with Mariposa, our AI-powered debt management agent, available 24/7 with personalized guidance whenever you need it.