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A consumer proposal and a bankruptcy are legal processes in Canada that provide financial relief from unaffordable debts. Both debt solutions share similarities, such as legal protection from creditors. However, many distinctions exist between a consumer proposal and bankruptcy. By understanding these differences, you can learn which is best suited to fix your debt problems. In this guide, we’ll help you do exactly that.
How a consumer proposal and bankruptcy differ
Both a consumer proposal and bankruptcy are designed to reduce your debt burden, but they differ in several important ways. Below, we’ll examine six key differences between the two programs.
Note: we’ll compare a proposal to a first-time bankruptcy, as second bankruptcies operate under slightly different rules.
| Consumer proposal | Bankruptcy | |
| Qualification Requirements | Total unsecured debts must be at least $1,000 but no more than $250,000 (excluding mortgage). | No limit on unsecured debts, but the minimum amount is $1,000. |
| Cost payment structure | Negotiated settlement with up to 80% of unsecured debts forgiven. The remaining debts are consolidated and paid off monthly in fixed installments. | 100% of unsecured debts are forgiven. Monthly payments are a minimum of $200 to cover administrative expenses. Additional payments may be required based on the household’s net income and assets. |
| Impact on assets | Debtor can keep all assets | Debtor must surrender assets except those exempt under bankruptcy law. |
| Timeline to completion | Up to a maximum of five years (can be completed early without penalty) | 9 months or 21 months with surplus income |
| Impact on credit | R7 rating stays on credit report for three years after completion or 6 years after the filing date, whichever comes first. | R9 rating stays on credit report for up to 7 years after completion. |
| Reporting duties | No monthly reporting duties. | Monthly income and expense reports are required |
Qualification requirements
The qualification requirements for a consumer proposal and bankruptcy are mostly the same. However, one notable difference is that you can only file a proposal if your debts (excluding a mortgage on your primary residence) are less than $250,000. If they exceed this amount, you’ll have to opt for bankruptcy or a Division 1 proposal.
Additionally, you’ll need to earn a reliable income to obtain approval for a consumer proposal. In contrast, bankruptcy has no minimum income requirement, so you can file even if you’re unemployed.
Cost and payment structure
Under a consumer proposal, you enter into a new agreement with your unsecured creditors to pay less than you owe. How much debt can you eliminate? That depends on several factors, including your budget, the value of your assets, and how much debt your creditors are hoping to recover. However, creditors typically won’t accept any deal where you repay less than 20% of what you owe.
Once a deal is reached, you’ll make monthly payments on the leftover debt. These payments will never fluctuate regardless of changes in your household income. You can also contribute additional payments during your proposal to pay it off early without penalty.
The payment structure of a bankruptcy is more complex. At a minimum, you’ll have to pay $200 per month, which equals $1,800 ($200 x 9 months) for a first-time bankruptcy. This fee covers the expenses of bankruptcy administration, such as filing fees and credit counselling.
In addition, you’ll need to make extra payments if you earn surplus income. Surplus income refers to monthly earnings exceeding the federal guidelines for a reasonable standard of living. Simply put, the more money you earn, the more you have to pay your creditors. Having surplus income also prolongs the bankruptcy process, resulting in more administrative expenses you must cover.
Impact on assets
If you file a consumer proposal, all your assets are safe from seizure by creditors—you’ll never have to give up anything you own.
Under bankruptcy, you must surrender your assets to your Licensed Insolvency Trustee. These include cash in your bank account, jewelry, rental income properties, inheritances, investments held in TFSAs, and tax refunds related to the year of filing or prior to filing. Your trustee will facilitate their sale and use the proceeds to repay creditors.
However, the notion that you lose everything is one of the most persistent misconceptions about bankruptcy. Federal and provincial law prohibits creditors from taking absolutely everything. Certain assets are exempt from seizure under bankruptcy. These laws are in place to ensure you can maintain reasonable living standards during and after bankruptcy.
Learn more about the assets you can keep if you file for bankruptcy in Ontario.
Timeline to completion
A consumer proposal can last up to five years, though you have the flexibility to pay it off earlier.
You can finish a first-time bankruptcy in as little as nine months, the shortest amount of time legally possible. However, the timeline may extend to 21 months if you earn surplus income. The duration also increases with each subsequent bankruptcy filing.
Impact on credit
A consumer proposal results in an R7 rating on your credit report, the second lowest in Canada. This rating indicates that you’ve entered into a formal debt agreement with your creditors to repay a portion of what you owe. It negatively affects your credit score since the arrangement amounts to a partial default. The R7 rating will stay on your report for up to three years after completing your proposal or six years after filing, whichever date arrives sooner.
Bankruptcy impacts your credit standing more severely. Following your filing date, an R9 rating will appear on your credit report, which is the worst score you can get in Canada. It signifies that you’ve declared bankruptcy, or your debt is in collections. Naturally, your credit score will take a big hit if it hasn’t already. The R9 rating will remain on your credit report for six to seven years after discharge.
Reporting duties
A consumer proposal demands fewer ongoing duties than bankruptcy. You don’t have to report your budget, inheritances, new assets you’ve bought, or any other changes in your household’s finances. All you need to do is maintain your monthly payments, which never change unless you decide to amend your proposal.
Under bankruptcy, you send your LIT monthly income and expense reports for your household. These reports allow your LIT to determine if your net income is higher than the limits permitted under the surplus income rules. If your earnings breach this ceiling, you must make surplus income payments to your creditors.
How a consumer proposal and bankruptcy are similar
Despite some stark differences, a consumer proposal and bankruptcy share some crucial similarities:
Governed by the Bankruptcy and Insolvency Act (BIA). Both proposals and bankruptcies are governed at the federal level under the BIA, which sets the rules for how the programs are carried out. The Office of the Superintendent of Bankruptcy (OSB) oversees Canada’s insolvency industry, ensuring debtors, creditors, and all other parties are protected and treated fairly.
Deal exclusively with unsecured debts. You can only include unsecured debts when applying for either program. Some examples include credit cards, payday loans, taxes, medical bills, unsecured personal loans, and government student loans (provided seven years have passed since your graduation).
Administered by a Licensed insolvency trustee (LIT). In Canada, only an LIT can file a consumer proposal or bankruptcy on your behalf. Non-profit credit counsellors, debt settlement companies, and other financial professionals cannot legally administer either program. Don’t be fooled by those claiming otherwise that lack the LIT credential.
Mandatory credit counselling. Both debt relief solutions require you to attend two credit counselling sessions. Here, you will learn about budgeting, rebuilding your credit score, and other money management skills. Your LIT conducts these sessions, or they may assign the task to a Registered Insolvency Counsellor (RIC).
Legal protection from creditors. Both a proposal and bankruptcy provide you with legal protection from creditors through a court order. This order (called a stay of proceedings) prevents creditors from calling you, charging interest on your balance, and taking legal action against you, such as garnishing your wages.
Insolvency is a public record. Bankruptcies and proposals are public records in Canada, meaning anyone can access the information. However, someone wishing to look up your insolvency must pay a fee to search for it on the OSB’s website. As a result, you don’t have to worry about people knowing that you declared bankruptcy or filed a proposal.
Should you choose a consumer proposal or bankruptcy?
Based on the differences discussed in this guide, a consumer proposal is a better solution if:
- Your debts (excluding a mortgage on your primary residence) total under $250,000
- You own high-valued assets and want to keep them
- You’re okay with spending a few years resolving your debts
- You have the income to repay a portion of what you owe
- You want monthly payments that are affordable and stable while offering the flexibility to pay more
- You want to minimize the negative impact on your credit score
- You want to avoid financial reporting duties
Choose bankruptcy if:
- Your unsecured debts are higher than $250,000
- You own few assets, or most of your assets are exempt from seizure
- You’re unemployed or earn a low income
- You cannot afford to repay any percentage of your debts
- You want to complete the insolvency process fast (a first-time bankruptcy can last as little as nine months)
- You’re more concerned with obtaining debt relief than minimizing the impact on your credit
Learn if a consumer proposal or bankruptcy is the best solution for you
While a consumer proposal and personal bankruptcy are similar in many ways, there are several key differences between the two debt solutions. Understanding how both solutions work is essential to choosing the most effective one for your financial situation. We recommend learning the steps for filing a consumer proposal and filing for personal bankruptcy in Ontario.
If you’re unsure of which is right for you, schedule a free consultation with a Licensed Insolvency Trustee from David Sklar & Associates. We can help you explore all your debt relief options and answer your questions and concerns. More importantly, we can help you create a plan that allows you to say goodbye to your debts for good.
