Bankruptcy vs Consumer Proposal – Which is Better?
When considering Consumer Proposal vs Personal 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.
Consumer Proposal Considerations
The debtor is normally able to keep all of their assets including their homes and cars. However, they must continue to make secure loan payments that may exist for those assets. In other words, your mortgage and car payments won’t be affected by debt relief. A Consumer Proposal provides relief for unsecured debt such as credit card debt, lines of credit, payday loans, and similar types of debt.
Through a Licensed Insolvency Trustee (previously known as a Bankruptcy Trustee), the debtor makes an agreement with their current unsecured creditors to pay off a portion of the outstanding unsecured debt over a set period of time (cannot be longer than 5 years). Once the debtor has honoured the agreement, they are released from the outstanding unsecured debts. The agreed-upon monthly payment is calculated based on the amount of the debt, equity in any assets and the debtor’s income and expenses.
It’s important to remember that a Consumer Proposal is a proposal to creditors. The majority of creditors must find the proposal fair. If the majority agrees, all unsecured creditors are bound by the agreement.
The Licensed Insolvency Trustee is responsible for collecting monthly Consumer Proposal payments and distributes these funds to the creditors in accordance with the BIA.
A Consumer Proposal is a smart decision for debtors with significant assets such as house, car, vacation or income properties, valuable art, non-RRSP investments, and who have a stable income. For more information about Consumer Proposals, call David Sklar & Associates and talk to a Bankruptcy Trustee.
Personal Bankruptcy Considerations
The debtor is allowed to keep some assets, but may be required to release major assets such as homes, which are in turn are settled by the Bankruptcy Trustee with the proceeds distributed to the creditors. If the debtor has what is calculated to be Surplus Income, they will have to pay a portion of their income into their Bankruptcy Estate over a period of 21 months (for first-time bankrupts). Surplus Income is calculated based on the total income of your family, the size of your family and a standardized guideline set by the Government each year.
There are some important assets that are exempt from Bankruptcy proceedings, though many have limits to their value. These exemptions include some equity in your principal residence, some equity in your personal vehicle, tools of the trade, furniture and appliances, clothing, pension plans, RRSP investments (except contributions made in the 12 months before filing for Bankruptcy), and certain types of life insurance policies.
When considering Bankruptcy vs Consumer Proposal, keep in mind there are situations where individuals may be eligible to file Bankruptcy but ‘other factors’ motivate them to file a Consumer Proposal. For example:
- the person works in a profession that does not allow Bankruptcy;
- the stigma of Bankruptcy is totally unacceptable to the debtor;
- there are assets that the debtor is not willing to give up; or
- going into Bankruptcy may force a spouse into Bankruptcy as well.
If none of these situations apply to you, Bankruptcy proceedings may make more sense than a Consumer Proposal if you do not have significant assets like a home, vacation or income properties, or non-RRSP investments or your income is not sufficient to afford a proposal.
Whatever your situation, it is essential to review your unique case with a Bankruptcy Trustee. The team at David Sklar & Associates will go through your finances and discuss the options that make the most sense for you. A Bankruptcy Trustee will help you make the right decision for your financial future.
There are other important differences between Consumer Proposals vs Bankruptcy including:
ADDITIONAL INCOME:
If during the Consumer Proposal process the debtor unexpectedly earns or receives money or assets over the amount declared in their proposal – the terms of their proposal agreement does not change.
If during Bankruptcy, the bankrupt unexpectedly earns or receives money or assets over the amount declared in their Bankruptcy – then the amount they are required to pay into their Bankruptcy may increase and the length of time they spend in Bankruptcy may also be increased.
FUTURE EMPLOYMENT:
Where a job application form asks if a person has ever declared Bankruptcy (usually where an employee needs to be bonded) anyone who has declared Bankruptcy must answer yes. Bankruptcy may hurt your chances of being bonded which may impact whether or not you are hired.
A Consumer Proposal is not considered the same as a Bankruptcy on application forms which is an important factor to remember when considering and comparing whether to proceed with a Bankruptcy vs Consumer Proposal.
Professions for which being bonded is commonly a requirement include repair technicians, cleaners, accountants, bookkeepers, financial officers, bank tellers and more. Any profession where you handle money or have access to valuables, whether it’s in someone’s home or through handling cash transactions, often requires bonding.
CREDIT REPORT:
Bankruptcy stays on your credit report for 6 years after the discharge date, or 7 years after the date filed without a discharge date. If a second bankruptcy is filed, then the first re-appears on your Equifax credit report, and both bankruptcies remain for 14 years after the discharge dates.
A consumer proposal will be removed from your credit report 3 years after you’ve paid off all the debts according to the proposal, or 6 years from the date it was filed, whichever comes first
CORPORATE BANKRUPTCY AND CONSUMER PROPOSALS:
In addition to helping individual consumers with Bankruptcy and Consumer Proposals, David Sklar & Associates also provides debt relief services to businesses and corporations. The goal of the Division I Proposal process is to keep small to mid-sized companies running as they make debt payments.
Corporate Bankruptcy and Proposal Services include an analysis of current debt, identifying possible solutions and their ramifications, creating and filing Division I Proposals, developing restructuring tracking, and negotiating debt and interest concessions with a company’s creditors.
SUMMARY
There are significant differences when comparing Bankruptcy vs Consumer Proposal. Determining which is your best option can only be done with the assistance of a Licensed Insolvency Trustee. If you live in the Greater Toronto Area, are contemplating filing a Consumer Proposal or Bankruptcy, and would like to speak with a Trustee – call David Sklar & Associates Inc. at 416-498-9200 to book a free initial consultation.
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