Signs you need to declare bankruptcy or file for consumer proposal

Personal finance contributor Christopher Liew on filing for bankruptcy or a consumer proposal. (Getty Images / J Studios)

Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.

Filing for bankruptcy or a consumer proposal isn’t something anyone wants to do, but for some Canadians, it can be the lifeline they need when their debt becomes unmanageable.

So, how do you know when it’s time to consider one of these legal options?

Let’s break it down.

Signs your debt has become unmanageable

Bankruptcy or a consumer proposal isn’t a first resort, but for some, it’s the most realistic way to stop the bleeding.

If you’re constantly missing payments, juggling credit cards, or can’t even cover the minimums, you may already be insolvent. That means your debt is no longer manageable with your current income.

Here are key warning signs:

• You owe more than you can repay in five years
• Collectors are calling or legal threats are piling up
• Your wages are being garnished
• You’re thinking of draining your RRSP or TFSA to stay afloat
• You feel overwhelmed, anxious, and stuck

If any of these sound familiar, it might be time to speak with a Licensed Insolvency Trustee. A bankruptcy or consumer proposal will hurt your credit in the short term, but it can also stop interest charges, end collection calls, and give you a structured plan to move forward.

What happens when you declare bankruptcy?

The concept of bankruptcy was first introduced in England in 1542 under King Henry VIII as a way of providing conditional forgiveness to merchants who may have lost valuable cargo due to shipwreck, piracy, or other mishaps. Before bankruptcy forgiveness, these merchants may have been forced into a position of indentured servitude to pay off their debts.

Today, bankruptcy is considered a last resort that provides legal relief from most debts. However, it significantly impacts your credit score and your report will reflect the bankruptcy for six to seven years after your discharge (or longer if you’ve declared more than once).

Lenders view bankruptcy as a major red flag, which can make it more difficult to qualify for new credit during that period.

A consumer proposal, on the other hand, is a formal agreement to repay a portion of your debt over time. While it’s less damaging than bankruptcy, it still stays on your credit report for three years after completion. During and after repayment, your credit score may remain low, but the damage is not permanent.

Repairing your credit after bankruptcy or a consumer proposal

New reports are showing that an increasing number of Canadians missed credit card or mortgage payments in the first quarter of 2025. While a few missed or late payments shouldn’t drive you to bankruptcy immediately, these mishaps can lead down a slippery slope if you don’t find a way to get back on top of your finances.

That being said, if you do end up having to file for bankruptcy or a consumer proposal with a creditor, it can have a serious impact on your creditworthiness:

• Your credit cards may be cancelled
• You may become ineligible for new loans or lines of credit
• Your interest rates may increase
• You may find it harder to be approved for rental housing
• You may be denied for a mortgage loan

With time and work, though, you can rebuild a positive credit profile. These are the first steps you should take.

1. Make sure your debts are discharged

After your bankruptcy or consumer proposal is completed, make sure you obtain your credit reports from both Equifax and TransUnion (which you can get for free). While reviewing your report, check that all included debts are marked as “settled,” “included in proposal,” or “discharged.”

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Mistakes on your credit report can delay your progress, so dispute any errors as soon as possible.

2. Start using a secured credit card

After a bankruptcy or consumer proposal, you likely won’t be eligible for a traditional credit card with a line of credit. Instead, you’ll have to apply for a secured credit card that works like a prepaid debit card.

Essentially, you pay your credit balance upfront and can use the card freely after. Each time you pay your credit balance, you’ll have an on-time payment marked on your report. With enough time and use, you’ll regain trust in the eyes of credit card companies.

3. Pay all future bills on time

Bankruptcy and consumer proposals are a second chance - so don’t mess it up. Missed payments can damage an otherwise pristine credit profile. Missed payments on a credit profile that’s already gone through bankruptcy can have an even more severe impact since it shows you’re a repeat offender who can’t learn from your mistakes.

4. Keep your credit utilization low

Once you’re able to rebuild trust with creditors and receive a traditional line of credit, make sure that you keep your utilization rate on that card low - ideally under 30 per cent. This shows creditors that you’re using your card responsibly, as opposed to maxing out your balance in a state of financial desperation or with irresponsible spending (both major red flags).

5. Limit new credit applications

Whenever you apply for a new line of credit or a loan, you’ll have a credit inquiry that will remain on your credit profile for two years. Too many inquiries on your credit profile can show desperation and can indicate that you’re not in a financial position to be able to cover your basic expenses.

Ideally, you want to limit your inquiries to less than one or two per year, especially during the fragile period while you’re rebuilding your credit from the bottom.

When can you apply for major credit again?

If you’ve declared bankruptcy, it may take up to six years for the bankruptcy to fall off of your credit before lenders and creditors are able to trust you with major lines of credit.

During this period, you’ll need to be frugal and set up an emergency savings fund to cover unexpected expenses in cash. You may also have to be willing to continue driving and maintaining the same vehicle, as you may not be approved for a new auto loan.

Rebuilding your credit is a process that requires time and patience. The good news is that you get a fresh start and your debts aren’t held against you for the rest of your life. During these years, take the time to build good habits and lay a solid financial foundation for yourself, so you can come back stronger than ever.

More from Christopher Liew:

• How to rebuild your credit if you have a bad score
• Tired of living paycheque to paycheque? Here’s some advice
• How much does divorce in Canada really cost?
• The credit card habits that are putting Canadians deep in debt