Debt consolidation vs consumer proposal: what each does to your home, credit and debt

Short answer: In debt consolidation vs consumer proposal, the key difference is whether you repay everything. Consolidation, often a refinance or HELOC against your home, pays your debts in full with one new loan, usually at a lower rate. A consumer proposal is a legal deal, set up by a licensed insolvency trustee, to pay creditors part of what you owe or stretch the time to pay, for up to five years ^[1]. Consolidation tends to protect your credit better if you can qualify and afford the payment. A proposal may be more realistic if you can't.

This guide is for Canadian homeowners with credit card, loan or line of credit balances they're struggling to keep up with. We're a mortgage brokerage, not insolvency trustees, so treat this as general information and speak with a licensed insolvency trustee about a proposal.

Why this question is coming up more often

The Office of the Superintendent of Bankruptcy (OSB) reports that consumer insolvencies rose 5.8% in the 12 months to August 31, 2026, compared with the year before, and that proposals made up 78.0% of consumer insolvencies over that period ^[6]. Many people weighing a proposal own a home, and that equity changes the options.

How each option works

Debt consolidation combines several debts into one payment. FCAC notes that moving high-interest debt into a lower-rate product may save money, but it may also stretch the repayment period and cost more interest over time, and it won't help if the spending that caused the debt continues ^[4]. For homeowners, the main tools are a refinance (usually up to 80% of your home's value), a HELOC (up to 65%) or a second mortgage ^[5].

A consumer proposal is a formal, legally binding process under federal insolvency law. The OSB says ^[1]:

• it's available to individuals whose debts total no more than $250,000, not counting a mortgage on their principal residence
• a licensed insolvency trustee (LIT) prepares an offer to pay creditors a percentage of what's owed, more time, or both, and the term can't exceed five years
• once it's filed, you stop paying unsecured creditors directly, and wage garnishments and lawsuits are stopped
• creditors have 45 days to accept or reject it, and you must attend two counselling sessions
• if it's accepted and you meet its terms, you're released from the debts it includes

Fees for a proposal vary case by case and are regulated by the federal government ^[2].

Debt consolidation vs consumer proposal: side by side

Not sure you'd qualify to consolidate? A licensed 8Twelve agent can check your equity and income against options from 65+ lenders before you decide, OAC. See debt consolidation options

Worked example: $60,000 of unsecured debt

Example (illustrative): a homeowner has $60,000 of credit card and loan debt at an average of about 19.99%. The home is worth $650,000 with a $350,000 mortgage. We've assumed a 4.50% refinance rate, $3,000 of legal and appraisal costs and no prepayment penalty (for example, at renewal). The proposal amount is a hypothetical offer; real offers depend on your income, assets and what creditors will accept. None of these figures are quotes.

The new mortgage would be about $413,000, roughly 64% of the home's value. In this example, the homeowner has the equity to consolidate, so the real question is whether they can afford a payment that clears the debt in a few years. If they can, consolidation saves heavily on interest and avoids an insolvency record. If the only affordable version is the 25-year one, the total cost climbs, and a proposal may deserve a serious look.

When consolidation tends to be the better fit

• You have equity and can qualify. A refinance usually needs your new mortgage to stay within 80% of your home's value ^[5]. Our refinance requirements guide covers the rest.
• You can afford a payment that clears the debt in a few years. That's where the interest savings are.
• Your credit matters for a goal soon, such as renewing with a regular lender or helping a child buy a home.
• You've dealt with the cause. FCAC warns that if the spending continues, consolidation adds more debt ^[4].

When a consumer proposal may be the better fit

• You can't qualify to consolidate, or the only loan available would cost more than your current debts ^[4].
• You can't realistically repay the full amount, even at a lower rate.
• Collection action has started, such as a wage garnishment, and you need it stopped ^[1].
• You'd rather not put unsecured debt on your home. Consolidation turns card debt into debt secured by your house.

If you're already in a proposal

Your options aren't closed. In our experience, many banks prefer to see the proposal paid and some time pass, while alternative and private lenders may consider a refinance sooner, at higher cost. Once you've finished, the OSB says you'll receive a certificate of full performance; send a copy to the credit bureaus and keep your documents for future lenders ^[1]. Our guides to refinancing with bad credit and how consolidation affects your credit score go further.

Choosing between debt consolidation vs consumer proposal comes down to whether you can qualify for and afford to repay the full balance. If you can, consolidation usually costs less in the long run and keeps an insolvency record off your report. If you can't, a proposal can give you a fresh start. Get both numbers, one from a licensed insolvency trustee and one from a licensed mortgage agent, before you decide. To compare payments, try our debt consolidation calculator.

This article is for general information only and isn't financial, legal, tax or insolvency advice. Rates, products and terms change without notice and are available on approved credit (OAC). The rate and terms you qualify for depend on your individual financial situation, including credit, income, property and loan-to-value. "Best rates" means the most suitable options available for your situation, not a guarantee of the lowest rate. Example rates and payments are for illustration only, as of November 11, 2026, and are not an offer. 8Twelve Mortgage arranges mortgages through 65+ lenders and does not lend directly. 8Twelve is not a licensed insolvency trustee. Licensed across Canada — see our licences.

Consolidating unsecured debt into your mortgage may lower your monthly payment but can increase the total interest paid over the amortization period. 8Twelve does not fund second or private mortgages; we arrange them with third-party lenders, and any lender or brokerage fees are disclosed in writing before you commit. The 19.99%, 4.50%, $3,000 and $25,000 figures in the example are assumptions, not quotes; payments are rounded. OSB statistics are for the 12 months ending August 31, 2026.