Bankruptcy and Consumer Proposals in Canada
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Bankruptcy and Consumer Proposals in Canada: What Homeowners Need to Know
Life after a bankruptcy or consumer proposal can feel overwhelming — especially when you’re trying to secure or maintain a mortgage. The good news is, it’s not the end of your financial future. With the right knowledge and support, Canadian homeowners can recover, rebuild credit, and access mortgage options that fit their situation.
This guide explains the differences between bankruptcy and consumer proposals, how they impact your mortgage, and what solutions are available to homeowners across Canada.
What Is a Bankruptcy or Consumer Proposal?
A bankruptcy occurs when you assign your assets to a Licensed Insolvency Trustee (LIT) in exchange for having most of your debts eliminated. It’s a legal process governed by the Bankruptcy and Insolvency Act (BIA) and is recognized across Canada.
A consumer proposal is different. Instead of surrendering assets, you negotiate with creditors through an LIT to repay a portion of what you owe, usually over a period of up to five years. It’s also a legal procedure, but it allows you to keep your home and other assets if you can continue making payments.
Bankruptcy vs. Consumer Proposal: Key Differences
| Factor | Bankruptcy | Consumer Proposal |
|---|---|---|
| Duration | 9–21 months (first bankruptcy) | Up to 5 years |
| Assets | Some assets may be surrendered | Keep most assets |
| Credit Impact | Stays on credit report for 6 years after discharge | Stays for 3 years after completion |
| Cost | Based on income and assets | Fixed monthly payment |
| Mortgage Impact | Major challenge with traditional lenders | Easier to work with alternative lenders |
How Bankruptcy and Consumer Proposals Impact Mortgages
Both bankruptcy and consumer proposals make it harder to get approved with A lenders (major banks and credit unions). These lenders typically require that your proposal is fully paid off and a waiting period has passed before they’ll consider your application.
However, there are alternative mortgage solutions:
Private lenders often focus more on your equity and down payment than your credit history.
Alternative (B) lenders may consider you sooner, usually with a minimum down payment of 20%.
Financing Options:
Learn about Home Equity Loans
Explore Second Mortgages
Mortgage Options If You Are in Bankruptcy or Consumer Proposal
Home Equity Loan
A home equity loan allows you to borrow against the value of your home. Approval is based primarily on your available equity, not your credit score. This makes it a popular choice for paying off a consumer proposal early.
Private Mortgage
Private lenders provide short-term financing solutions that don’t require perfect credit. Whether you need to refinance or purchase a new property, a private mortgage gives you fast access to your home equity.
Alternative Lender (B Lender)
These lenders offer mortgages up to 80% of a property’s value. They do require at least a 20% down payment, but they are often more flexible than banks when it comes to credit history.
Second Mortgage
A second mortgage is another option to access equity without replacing your existing mortgage. Funds can be used to pay off a consumer proposal, rebuild credit, or cover other financial needs.
Refinancing a Home With a Bankruptcy or Consumer Proposal
Yes, it’s possible to refinance a home even if you’re in a proposal. The key is working with lenders who specialize in these situations.
Example:
Home value: $400,000
Current mortgage: $200,000
Available equity: $200,000
In this case, a lender may allow refinancing up to 80% loan-to-value (LTV), which would provide $120,000 in available funds. That can be used to pay off your consumer proposal early and rebuild credit faster.
Buying a Home After Bankruptcy or Consumer Proposal
You have two main options:
Alternative lenders → Require 20% down (example: $500,000 home = $100,000 down). These lenders are often the best path right after a bankruptcy or proposal.
Wait and rebuild credit → If you want to work with an A lender in the future, you’ll need to show two years of good repayment history after your proposal is discharged.
***Having a co-signer can improve your chances, but the 20% down payment rule still applies.
Why Paying Off a Consumer Proposal Early Helps
Paying off your proposal early offers several benefits:
Some proposals include early payoff discounts, saving you money.
Eliminates a monthly payment, freeing up cash flow.
Starts the 3-year credit reporting period sooner, which helps you qualify for prime mortgages faster.
Helps you access better mortgage rates, credit cards, and lines of credit sooner.
Alternatives to Bankruptcy and Consumer Proposals
Sometimes, homeowners can avoid bankruptcy or a proposal altogether by exploring other solutions:
Debt Consolidation Loans – Merge debts into one lower monthly payment.
Home Equity Loans – Use equity to pay off debts without affecting credit as much.
Credit Counselling – Professional guidance to negotiate lower payments with creditors.
Speak to a Mortgage Professional
Every bankruptcy or consumer proposal is unique. The right mortgage solution depends on your equity, income, and financial goals. Figuring out your short-term needs and long-term goals, so that you can achieve your financial goals for a brighter future. At LendToday, we specialize in helping Canadians rebuild after financial challenges.
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FAQs About Bankruptcy and Consumer Proposals in Canada
What is the difference between bankruptcy and a consumer proposal?
Bankruptcy involves surrendering assets to eliminate debt, while a consumer proposal is a negotiated repayment plan that lets you keep your assets.
Can I get a mortgage while in a consumer proposal?
Yes, but usually with an alternative or private lender, and often with at least 20% down.
How soon after bankruptcy can I qualify for an A lender?
Typically two years after discharge, provided you’ve rebuilt credit responsibly.
Do I always need 20% down if I’ve had a bankruptcy?
Yes, for B lenders and private lenders. A lenders may require less down, but only after your credit is rebuilt.
Should I pay off my consumer proposal early to qualify for better rates?
Yes — the earlier you pay it off, the sooner you can move back to traditional lending and secure lower interest rates.