Consumer Proposal vs. Bankruptcy
Learn how how to decide which one is best for you
What are my debt relief options?
Like filing a consumer proposal, declaring personal bankruptcy will help you to clear your debts and protect you from creditors. Understanding the pros and cons of a Consumer Proposal vs. Personal Bankruptcy will help you make the right decisions.
A consumer proposal and bankruptcy are the two federally regulated debt relief programs available in Canada
While both a Consumer Proposal and a Bankruptcy provide protection from creditors and allow you to clear burdensome debts, they’re distinct from one another in many ways. Depending on your circumstances, one may be more appropriate for you than the other. As a result, getting to know the benefits and drawbacks of each is essential to ensure you make the right choice.
Consumer Proposal vs. Bankruptcy
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Consumer Proposal vs. Bankruptcy
An overview of the key differences
Filing a consumer proposal or declaring personal bankruptcy will help you to clear your debts and protect you from creditors but there are some important differences to be aware of.
One major advantage of a consumer proposal is that you will not lose any of your assets and you are not required to surrender anything.
No limit on the amount of unsecured debt you can discharge
Available to individuals & businesses
You keep your Assets: Home, Car, RRSP’s, RESP’s, & Investments
Keep Your Tax refund
You must surrender your tax refund
Payments are based on what you can afford to pay
Payments are flexible – you can pay the entire balance immediately in a lump sum or stretch your payments over a maximum of 5 years
Payments are NOT flexible – first bankruptcy can last 9 – 21 months; second bankruptcy can last 24 – 36 months
Remains on your credit report for 3 years after completion or 6 years from the time of filing, whichever comes first
No monthly reporting required
Monthly reporting required
Let’s examine some of the ways a consumer proposal differs from bankruptcy in detail:
To qualify for a consumer proposal, you must be a Canadian resident and legally insolvent. You must have the financial means to repay at least a portion of your debts, as a consumer proposal doesn’t eliminate them entirely. These debts must be no greater than $250,000. In addition, your creditors must accept the terms of your proposal for it to be legally binding.
To declare bankruptcy, you must be a Canadian resident and demonstrate to creditors and the court that you’re insolvent. Unlike a consumer proposal, there’s no limit on how much debt you can discharge through bankruptcy.
Legal procedure and reporting requirements
Unlike bankruptcy, a consumer proposal is a far less complex legal proceeding. There are fewer documents to fill out, fewer requirements to complete the process, and you generally don’t need to make any court appearances.
Bankruptcy proceedings can be tedious and drawn out. There’s extensive paperwork to complete, and you must go through the process of liquidating your non-exempt assets. In addition, you’ll need to report to your trustee your total income and living expenses each month.
When you file a consumer proposal, all your assets are exempt from seizure by your creditors. This feature is the primary advantage that a consumer proposal has over bankruptcy. You’ll never need to surrender your home, vehicle, investments, tax refund, and other personal belongings.
Conversely, if you declare bankruptcy, you must surrender your assets to have your debts discharged. Still, the law allows you to retain some of your assets, primarily those deemed necessary for your well-being. You can even keep your home, provided you pay out the non-exempt home equity in your property. You may also need to pay out any increased value in the home equity from the time of the bankruptcy until your discharge.
Under a consumer proposal, your trustee will base your monthly payment obligations on what you can afford.
Whatever amount you agree upon with your creditors never changes for the duration of your proposal. There are no other administrative fees and consulting fees to pay aside from your monthly payment.
Under bankruptcy, your monthly payment is based on your income, expenses, assets, and the number of people in your household. Since your income can fluctuate, your payments may vary. If your income rises sharply, your payments can increase significantly due to you reaching the surplus income threshold.
Time to complete
You may spread out your payments over five years when you file a consumer proposal. You also can pay off your balance early by making periodic lump sum payments.
On the other hand, you can complete bankruptcy in as little as nine months (or as long as 21 months if you earn a high income and must make extra payments). Should you file for bankruptcy a second time, you’ll be responsible for making payments anywhere from 24 to 36 months.
If you are 3rd or more times bankrupt, you may not get your discharge for much longer than 3 years, if at all. Conversely, there are no restrictions for filing a consumer proposal if you have previously been two or more times bankrupt.
Credit score impact
A consumer proposal and bankruptcy both negatively impact your credit score, but to different degrees.
Opting for a consumer proposal will result in an R9 credit rating appearing on your credit report during the consumer proposal. Upon completion of the consumer proposal, the rating improves to an R7. The credit bureaus will remove all record of the consumer proposal from your report three years after you complete your last payment or six years from when you file, whichever comes first.
In the case of bankruptcy, you’ll receive an R9 rating on your credit report, which is the most severe in Canada. It’ll remain on your report for six to seven after you’ve been discharged, depending on which province you reside in. If you declare bankruptcy a second time, an R9 rating will remain on your credit report for 14 years.
How is a consumer proposal similar to bankruptcy?
While a consumer proposal and bankruptcy have stark differences, they also share some common attributes.
First, filing for either debt relief program provides you with legal protection from creditors. What this means is that any collection calls and wage garnishment will cease. And your creditors can no longer sue you to recover the money you owe them.
Second, both programs serve to reduce or eliminate your unsecured debts only. This includes:
- credit cards
- lines of credit
- payday loans
- banks loans
- medical bills
- tax debt
- certain student loans
Third, you’ll need to attend two credit counselling sessions when you enroll in either program. These sessions equip you with the financial knowledge and tools to help you manage your money and avoid future debt problems.
Consumer proposal vs bankruptcy: which is right for you?
Both a consumer proposal and bankruptcy can help you resolve crippling debt problems for which there are no easy solutions. However, they’re only equally suitable in some scenarios. One may be more appropriate than the other, depending on the severity and urgency of your debt troubles. Both offer advantages and disadvantages, which you must consider by factoring in your income, assets, goals, etc.
Still not sure whether a consumer proposal or bankruptcy is best for you? Then the next step is to book a meeting with one of our Licensed Insolvency Trustees to explore your options. We can help you assess your finances honestly and straightforwardly and determine what path you should pursue to tackle your debts.
At David Sklar and Associates, we’ve helped thousands of people in Ontario significantly reduce their debt and rebuild a strong foundation for a new financial future. We’ve helped folks from all walks of life – we can help you, too!
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