When considering Consumer Proposal vs Bankruptcy, keep in mind that everyone’s situation is different – and only a discussion with a Licensed Insolvency Trustee (who will review your current financial situation in detail) will be able to help answer this question for your specific circumstances. Bankruptcy is the last resort and most severe debt removal option – and should not be entered into before all other options have been explored.
Consumer Proposals and Personal Bankruptcies fall under the Bankruptcy and Insolvency Act (the “BIA”). Each can only be filed by a Licensed Insolvency Trustee (such as David Sklar & Associates Inc.). The goals of both are to:
- Offer relief to ‘honest but unfortunate debtors’ and enable them to get on with their lives;
- Stop collection efforts and legal actions (including wage garnishment);
- Stop interest;
- Release the debtor from their debt load; and
- Offer training to avoid future debt problems.
What Is a Consumer Proposal?
A consumer proposal is a legally binding agreement made between a debtor and their creditors, attempting to lower your combined debt total. With the help of a licensed insolvency trustee, you write a proposal asking that your creditors accept a repayment plan that is much more manageable for you. The trustee sends the proposal to the creditors. Click here to learn more about consumer proposal services and what a licensed insolvency trustee will do to help you through the process.
The creditors have 45 days to look over the proposal before giving their answer. If the majority of them agree to the terms, then your proposal is official and the repayment plan goes into effect. If the majority reject them, you and the trustee can adjust the terms in hopes of getting creditors to reconsider. If the creditors still don’t agree to the adjusted terms, then your next best option is to file for personal bankruptcy.
What Are the Qualifications?
The main qualification for a consumer proposal is that you are an individual that owes less than $250,000 (excluding the mortgage on your primary residence), and you’re unable to pay back that debt in a reasonable time. If you have more than that amount, you can ask your licensed insolvency trustee about filing for a Division 1 Proposal. It is similar to a consumer proposal, but it’s directed toward individuals or businesses that owe more than $250,000 (excluding the mortgage on a primary residence).
What Are the Benefits?
There are several benefits that come with a consumer proposal, which often make it the first choice for people struggling with insolvency. Here is a brief list of advantages that could make you turn to a consumer proposal.
The debtor isn’t the only one who has to abide by the rules of the consumer proposal. The creditors have signed the dotted line to legally agree to these rules and restrictions:
- They cannot charge interest.
- They cannot charge late fees and penalties.
- They cannot make collection calls.
- They cannot continue garnishing wages.
- They cannot take legal action against you.
- They cannot contact you about your debt. They must contact the licensed insolvency trustee.
Strict Repayment Terms
Once the agreement is in effect, your scheduled repayments stay the same. It does not matter if you get an increase in income. Your payment amount will not suddenly rise or change. There will be no nasty surprises. It will be consistent from day one.
Keep Your Assets
One of the biggest advantages that comes with a consumer proposal is that you will get to keep your assets. So, if you’re worried about losing a car, a property or an investment, you can rest assured that they will go untouched during the repayment process. However, this does come with a down-side.
What Are the Cons?
Paying for Assets
You will still have to take care of your assets while going through the consumer proposal process. Responsibilities like mortgage payments, property tax payments, auto loan payments, car insurance, etc. will continue on as normal. You will have to manage your money carefully so that one obligation doesn’t outweigh the other.
Credit Report Notice
A consumer proposal will impact your credit score. It will not have as strong of an impact as personal bankruptcy, but you will notice that the number is lower.
A consumer proposal can remain on your credit report a maximum of 6 years from the date you file A consumer proposal that is completed in five years, will be removed from your credit report one year later (six years from the date you filed).
A consumer proposal that is completed in two years, will remain on your credit report an additional 3 years from the date you completed payment (for a total of five years).
A consumer proposal paid immediately as a lump sum, will be removed three years after the completion of the proposal.
Consumer Proposal Failure
One of the biggest disadvantages that comes with filing a consumer proposal is that there is still a chance that you violate the terms and end the agreement before you complete it. When you fall behind three months of payments, the proposal will be annulled. You will return to your original debt load. Creditors can charge you accruing interest, late fees and penalties. Collection activities can recommence.
If you think you’re going to miss a payment, you should talk to your licensed insolvency trustee immediately. If necessary and appropriate, they can file an amendment to your proposal so that you prevent a future annulment.
If you fall behind three payments, your next best choice for debt relief will be to file for personal bankruptcy.
What Is Personal Bankruptcy?
Filing for personal bankruptcy in the province of Ontario should be considered a last resort for debt relief. When an individual files for bankruptcy, they declare that they cannot repay those debts. To repay creditors, assets are settled and disbursed. Once meeting all of your legal requirements, you will receive a Discharge — this legally declares you released from the debts covered by the process.
Click here to learn more details about personal bankruptcy services and how a licensed insolvency trustee will help you through it.
What Are the Qualifications?
Any individual that owes more than the total equity of their assets is eligible to file for bankruptcy. If you owe more than $1000 that you can’t repay, then it’s a potential solution for your financial problems.
Individuals that can’t get consumer proposals accepted or who fail to complete their proposals should file for bankruptcy.
What Are the Benefits?
Personal bankruptcy does not have a long list of benefits that are different from a consumer proposal. The main advantage of the process is that it allows people with insolvency to get legitimate debt relief and get a chance at a fresh financial start. The blank slate comes with consequences, but many debtors willingly accept these consequences so that they can move on from the stress of outstanding debts and collection calls.
People who might consider personal bankruptcy advantageous are those who won’t be harshly affected by the settling of assets. Debtors that don’t have property or large assets that will be liquidated and distributed among creditors may not worry as much about the impact. It all depends on your situation.
What Are the Cons?
One of the things that people worry about with personal bankruptcy is losing their assets. In order to repay creditors, a licensed insolvency trustee takes the debtor’s assets, settles them and distributes the results among creditors. A silver lining is that trustees will not settle every asset you own. The province of Ontario has multiple asset exemptions for items like household furnishings, clothing and essential tools.
Your credit history can affect your employment opportunities — this is especially true if you intend to work in Finance. Personal bankruptcy will stay on your credit report for six to seven years, depending on the credit bureau. It strongly impacts your credit score. If an employer runs a credit check and sees this information, they may disqualify you as a candidate for the job.
The stigma of bankruptcy continues to thrive. This can make people avoid filing. It’s possible that with rising levels of financial insecurity, the public will be more sympathetic and understanding when it comes to bankruptcy.
David Sklar & Associates
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next. If you need financial help, we are still here for you. We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.
Before you make a decision and commit to one form of debt relief, do your research. You want to know all of the benefits and consequences that come with it, whether they’re big or small. And if you’re still unsure about your choice, you can always rely on the professional opinion of an experienced licensed insolvency trustee.