Consumer Proposal vs. Bankruptcy
First, know that there is help available for your situation. And, there is no need to be embarrassed. Many people you see every day have had this same problem – they just don’t talk about it.
In Canada, we are lucky to have several very constructive, legal insolvency solutions that can give you a new financial start. Over 100,000 of Canadians use these options every year.
If you have tried managing your debts on your own (perhaps through better budgeting), already considered a debt consolidation loan, and credit counselling – and are at a place where you feel like you are “out of options” and can’t pay 100% of your debts – you will want to learn about Consumer Proposal and Personal Bankruptcy and how each of these two debt management solutions work, and how they compare to each other. Once you decide and act on your best option, you’ll be able to rest easy again.
How Consumer Proposal and Bankruptcy Work
Consumer Proposal – over 50,000 per year are filed by Canadians
Most debtors with a stable income can make a sound Consumer Proposal, which is a legally binding agreement between you and your creditors, set up by a Licensed Insolvency Trustee.
With the Trustee, you work out what you can realistically afford to pay towards your debts. If your Proposal is accepted by creditors, you make the required payments. When you have paid the full amount of the Proposal, your debts will be erased. Note that the vast majority of Consumer Proposals are accepted by the creditors.
Personal Bankruptcy – for the most serious consumer debt situations
Personal Bankruptcy is an option for very serious consumer debt situations. If your debts are very high (over $250,000), and/or if you have no regular income, Bankruptcy may be the best solution.
To file for Bankruptcy, the first step is to meet with a Licensed Insolvency Trustee. Your first meeting is free. A typical first Bankruptcy lasts 9 or 21 months, depending on your income level. You may be required to liquidate significant assets such as your house and investments, and you may also need to make monthly payments – all depends on your situation. When the term of the Bankruptcy is finished and you have completed your obligations, your debts will be erased.
Head-to-Head Comparison of Consumer Proposal and Bankruptcy
|Lasts from 1 to 5 years.||Lasts until official discharge – typically 9 or 21 months.|
|Available for debts of up to $250,000 (not including home mortgage).||No limit on debts to be cleared.|
|Can only be administered by a Licensed Insolvency Trustee. Administrative fees are regulated by the federal government.||Can only be administered by a Licensed Insolvency Trustee. Administrative fees are regulated by the federal government.|
|First meeting with Trustee is free; administrative costs of Consumer Proposal are typically rolled into Proposal payments.||First meeting with Trustee is free; administrative costs of Bankruptcy are typically rolled into Bankruptcy payments, if required.|
|Consumer Proposal is usually more favourable than Bankruptcy for both debtors and creditors.||Bankruptcy is a last resort, when other solutions are not possible.|
|Creditors have 45 days to vote for or against the Proposal once it is filed.||No creditors voting is required. They cannot stop the process once Bankruptcy is filed.|
|Creditors are legally barred from contacting you once Proposal is filed.||Creditors are legally barred from contacting you once Bankruptcy is filed.|
|You are not required to surrender assets, and you maintain control of your finances.||The Trustee acts as “Receiver” for your assets (except for Provincial exemptions) and distributes them to the benefit of your creditors.|
|Total amount to be paid to creditors must be greater than they would receive in a Bankruptcy.||Total amount to be paid (if applicable) is based on debtor’s income and assets.|
|If your income increases during your Consumer Proposal, your payments are unaffected.||If your income increases during your Bankruptcy, your payments may increase.|
|Consumer Proposal can be paid off early.||Not applicable.|
|Serious effect on credit rating; rating fully recovers in approximately three years post-Proposal with good credit habits.||More serious effect on credit rating; rating fully recovers in approximately six years post-Bankruptcy with good credit habits.|
|Typically, no monthly financial reports to the Trustee are necessary.||You must make monthly financial reports to your Trustee.|
|Two mandatory counselling sessions must be attended.||Two mandatory counselling sessions must be attended.|
|During the term of your Proposal, you may be restricted from certain Finance industry jobs or from being a Board Member, although this is uncommon.||During the term of your Bankruptcy, you will likely be restricted from certain Finance industry jobs or from being a Board Member.|
|You receive income tax refunds.||Income tax refunds for the calendar year of the Bankruptcy go to the creditors.|
|Answer to question, “have you ever been bankrupt?” = No.||Answer to question, “have you ever been bankrupt?” = Yes.|
|When complete, you receive a “Certificate of Full Performance,” and your debts are erased.||When complete, you receive a “Certificate of Discharge,” and your debts are erased.|
Is Consumer Proposal right for you?
Does this sound a lot like your situation:
- Do you owe under $250,000?
- Are you unable to make your monthly payments, and unsure if you can EVER pay off your creditors completely?
- Do you need protection from creditor harassment?
- Do you have significant regular monthly income?
- Do you wish to retain your assets, such as your home?
Or, is Bankruptcy right for you?
- Do you owe more than $1,000 (no limit), and are unable to pay your monthly bills?
- Do you need protection from creditor harassment?
- Do you have little or no regular income on which to base a payment plan?
- Do you have assets such as a home that could be used to pay a portion of what you owe creditors?