Consumer proposals and bankruptcy in Canada are both legal processes designed to discharge an insolvent individual from debt. Meant to give those who have fallen on hard times a way to hit the “restart” button, these methods of debt recovery take some work, legal negotiation, and compromise. Sometimes they might require an individual to relinquish some of their assets.
The laws and policies surrounding insolvency in Canada are designed to protect and relieve honest debtors who cannot repay their creditors in full. The rules of insolvency relief are mainly outlined in the Canadian government’s Bankruptcy and Insolvency Act, however, as an insolvent individual you do not need to be an expert on the intricacies of that legislation in order to proceed with a debt recovery plan.
Bankruptcy Versus Consumer Proposal
Ultimately, “The Act” outlines the ways in which a Licensed Insolvency Trustee, a credit professional who formerly went by the title “bankruptcy trustee,” can take charge of the insolvent individual’s assets in order to sell and distribute them to the creditors who are owed. Alternatively, in the case of a consumer credit proposal, the trustee acts as a representative of the debtor in order to negotiate an arrangement with the creditors in which both parties agree on a debt compromise.
While the bankruptcy process requires a debtor to relinquish any assets (in accordance with certain rules and limitations) that can go towards their credit, the consumer proposal allows the debtor to pay back a portion of the total sum of debt in regular instalments over a fixed period of time.
The difference in whether or not the insolvent debtor must relinquish any assets is a primary difference between consumer proposal and bankruptcy in Canada. Consumer proposals can take a lot of time and negotiation before the debtor is finally discharged of their debts, but it could be the right method of debt relief for you.
When Do Consumer Proposals Make Sense?
Getting out of debt isn’t going to be easy, but you might not have to resort to filing for bankruptcy in order to finally climb out from your financial burdens. Have you heard about the bankruptcy alternative known as a consumer proposal for debt relief? You might have heard someone you trust mention it and how it helped them tackle their debt. Consumer proposals are a lesser known method of debt relief but in the right circumstances, they can be incredibly effective.
The Ontario consumer proposal makes sense for an individual who has assets that would be seized if they were to file for bankruptcy. When comparing a consumer proposal vs bankruptcy, the former makes sense for someone with a steady source of income that enables them to commit to consistent monthly payments. For those who can uphold the responsibilities of regular monthly payments and who want to avoid the severity of declaring bankruptcy, a consumer proposal is the most sensible method to recover from debt.
In this article, we’ll outline the pros and cons of bankruptcy and explain the value of consulting with a bankruptcy trustee. If you’re looking for reasons why a consumer proposal is a good idea for your debt relief, take a look at these reasons why it might make a lot of sense for you.
You have major investments that are not protected in the case of bankruptcy
There are many benefits of investing your money using an RRSP. Excluding contributions that were made in the 12 months prior to filing for bankruptcy, your RRSP investments are protected from asset seizure when you declare bankruptcy. If you hold many investments outside of RRSPs and want to hold onto those assets, a consumer proposal will protect them. These investments could be in stocks, fine art, cryptocurrency, bitcoin, gold, bonds, or more.
When your liabilities exceed your assets, you’re insolvent
You don’t have a problem if the income that you earn allows you to make your debt payments on time. If you’re struggling with debt but your income is sufficient to pay your creditors, then you might benefit from credit counselling or a debt management plan — you don’t have to file for bankruptcy or file a consumer proposal.
You’re focused on debt-free living
A first bankruptcy can disappear from your credit rating faster than a consumer proposal (depending on how long it takes you to fulfil the obligations for discharge). It can take up to five years to pay off your consumer proposal and even when you receive your certificate of completion, the proposal stays on your credit report for three more years. This can pose a problem for individuals who are planning on securing a new loan in the near future. However, if your goal is to fulfil the terms of your credit proposal and then focus on living debt-free, the impact on your credit score won’t pose a problem.
Home equity
Your principal residence is exempt from bankruptcy-related seizure in Ontario, but only if your equity does not exceed $10,000. For those who have home equity greater than $10,000, a bankruptcy could result in you losing your home or having to pay the equity to hold onto the property. In this scenario, a consumer proposal would protect your equity and allow you to hold onto assets that you would otherwise lose if you declared bankruptcy.
Find Trustworthy Professionals for Debt Relief Advice
If it sounds like either filing bankruptcy or filing a consumer proposal are the best ways for you to address your debt and find a fresh start on life, then schedule a consultation with a bankruptcy trustee. They know better than anyone else about how your financial situation fits into the larger rules and regulations of the bankruptcy and insolvency legislation.
Your bankruptcy trustee can make suggestions about what’s the best way for you to get out of debt with the least amount of difficulty, but ultimately only you can decide which path to take. Whether you choose to file for bankruptcy or if you think the consumer proposal is better suited to your needs, either process will require that you receive credit counselling from a licensed professional.
As a preventative measure, credit counselling can help those who struggle with credit or who need some extra financial education. When you’re already facing insolvency, however, credit counselling is focused on identifying your major weaknesses and financial vulnerabilities before coming up with a plan for how to prevent this situation from happening again.
Credit Counselling
Anyone who files for personal bankruptcy or who makes a consumer proposal in Canada is required to complete two mandatory credit counselling sessions. Think of these sessions as an opportunity to learn the strategies and skills you have lacked in the past. With this opportunity, you can master your personal finance in order to set yourself up for long-term financial stability.
The two credit counselling sessions must be completed in order for the debtor to finalize their debt relief. Once the counselling sessions are done, the debtor (you) can then be discharged from their bankruptcy. In the case of a consumer proposal, the debtor receives a certificate of completion. You can receive your counselling directly from the bankruptcy trustee that administered your debt relief or you can work with another authorized counsellor.
The team at David Sklar & Associates is well-equipped to meet all of the conditions of insolvency recovery. In addition to our Licensed Insolvency Trustees, our certified insolvency counsellors can give you the counselling sessions you need to finally reset your debt. The counsellor must have been granted a certificate from the Office of the Superintendent of Bankruptcy and they will have completed over 100 hours of supervised counselling experience with a bankruptcy trustee.
Your counsellor needs to meet certain legislative requirements, but you also want to look for someone with good people skills and who demonstrates an empathetic and patient approach to your case. Your two mandatory credit counselling sessions must be completed within 210 days of when you first filed for bankruptcy or when you first put forth a consumer credit proposal. There are two distinct purposes to the counselling according to the session.
First Stage Counselling
The first stage of your counselling is where your counsellor will provide valuable advice about spending and shopping habits, the warning signs of financial difficulties, how to obtain and use credit, and money management as a whole. It’s possible that due to lack of financial education, you haven’t been made aware of the best ways to use credit. This is a great time to learn how to develop a healthy relationship to credit. This session must be completed within 60 days of filing.
Second Stage Counselling
From there, the debtor has a maximum of 210 days after they initially filed for debt relief to complete the second stage of credit counselling. During this stage, the counsellor will follow up with the debtor on the principles discussed at the first stage counselling to help the debtor understand their strengths and weaknesses with regards to money management. This stage will also assist in identifying the budgetary and non-budgetary causes of the insolvency.
In some cases, there may be more serious underlying issues beyond money management, such as substance addiction, compulsive spending disorders, or gambling addictions. In order to address these larger, mental health-related issues, the bankruptcy trustee or certified insolvency counsellor may refer the debtor to a community program or a specialized professional. The professional will work with the insolvent party to understand how these issues affected their insolvency while providing the debtor with additional and appropriate organizations, agencies, or community members who can offer ongoing support.
The purposes of the second-stage counselling are more specific and varied than the first session. This might be where you and your trustee focus on any personal issues that have been negatively impacting your spending behaviour. It is not within a bankruptcy trustee’s expertise to address behavioural or psychological issues like addiction or destructive spending habits. But through the referral process and by talking about these potential issues in general terms, the debtor will begin to develop a fuller, healthier understanding of their finances.
In the second counselling session, the debtor and counsellor will cooperate to create a feasible plan of action that will encourage the development of positive financial habits that will ultimately lead to economic stability. This is a good opportunity for the debtor to come prepared with their long-term financial goals since the trustee can help them focus on how to turn their goals into actionable items.
Consumer Proposal FAQ
There are plenty of questions that a bankruptcy trustee can answer for you if you’re still uncertain about the differences between filing for bankruptcy and trying to negotiate a consumer credit proposal. One common question that crops up, again and again, is: how much does a consumer proposal cost?
In order to be successful with your consumer proposal, you and your bankruptcy trustee have to present your creditors with a sum that exceeds what they would expect to receive if you were to file for bankruptcy. In order to figure out how to come up with this sum, the trustee will evaluate which of your assets would be made available in the case of a bankruptcy. Additionally, your trustee will have to take into consideration what your budget is for consumer proposal payments. You don’t have to pay any other up-front fees or extra costs, and your trustee or consumer proposal administrator gets paid out of what you settle on to pay your creditors.
In short, the cost for filing a consumer proposal is covered in the proposal payments that you agree to make and you don’t have to make any further or separate charges.
If your financial situation improves during the agreed-upon term of your consumer proposal, you can pay it off earlier than expected so as to expedite the process and focus your energy towards bouncing back sooner than originally planned. In order to fulfill the duties of your proposal, you have to make all of the required payments and attend the aforementioned mandatory counselling sessions.
While the bankruptcy process requires that you report many details of your income, you don’t have to make these declarations with a consumer proposal and you get to hold onto assets such as tax refunds that you are owed.
Consumer proposals aren’t the same as filing for bankruptcy, however, there are some similarities between the two debt relief processes. Ultimately whether one is better than the other is specific to your situation and requires professional input and level-headed discretion. Whichever path you end up taking, you simply need to resolve to stay committed to the process. Financial freedom can be yours, simply start the process by meeting with a bankruptcy trustee ASAP.
