Consumer Proposal vs Bankruptcy: Which One Is Right For You?

I get it. Just Googling “Consumer Proposal vs. Bankruptcy” can be a painful experience. But sometimes you just don’t have a choice, even when you did everything right. If you’re buckling under the weight of crushing debt, these solutions can help you breathe again. But most people don’t understand the differences between them. One allows you to keep your assets, the other may take some away. One hurts your credit more, while the other one lasts longer. How do you choose? Here’s what to know about a Consumer Proposal vs. Bankruptcy in Canada and which one is right for you.

Consumer Proposal vs. Bankruptcy: What’s The Difference?

Both paths promise a way out, but they’re distinctly different journeys. Let’s take a gentle walk through this crossroads to understand the core differences between a Consumer Proposal vs Bankruptcy. Always remember that financial setbacks do not define you—they’re simply challenges to work through.

Consumer proposal

A Consumer Proposal is a compassionate debt relief plan that allows you to work with your creditors to pay back a fraction of what you owe over a specific period, up to a maximum of five years. After that, the remainder of your debts are forgiven. This is not about surrender, but rather, collaboration. This option is reserved for individuals whose debts do not exceed $250,000, and it can forgive up to 70% of those debts.

With a Consumer Proposal, you get to keep all your assets— like your car, your home, and the personal items that mean the world to you. Once you file a Consumer Proposal, those overwhelming collection calls pause, giving you the mental space to focus on rebuilding.

But it comes with an impact on our credit rating. An R7 rating will be associated with your credit profile for the duration of your Consumer Proposal. After you’ve successfully completed the proposal, this rating remains on your report for an additional 3 years. This rating is given when someone is making special arrangements to repay their debts signifies to lenders that there were issues with repayment, but you’ve taken structured steps to resolve them.

Bankruptcy

Going a step further than a Consumer Proposal, Bankruptcy offers a reset button. While it’s a more drastic solution, it provides a fresh start by wiping out most of your debts. In some cases, it may forgive all of your debt. This process can be as short as 9 months or as long as 21 months for first-timers. But it can last up to 36 months for repeat bankrupts. You are eligible for this option if your total debts are at least $1,000 or more.

However, you might need to part with some of your assets if they are not exempt. The requirements for non-exempt assets, like what happens to your car in Bankruptcy, vary from province to province. These assets are sold to help repay your creditors.

Finally, Bankruptcy has the worst impact on your credit rating, which is why it should be considered a last resort. Your credit profile will receive an R9 (the lowest rating) for the duration of the Bankruptcy and will remain on your credit report for 6 years after discharge for a first-time Bankruptcy. For a second Bankruptcy, it remains for 14 years.

How It All Works: A Deeper Dive Into the Process of a Consumer Proposal vs. Bankruptcy

As we delve deeper into the intricacies of “Consumer Proposal vs. Bankruptcy,” it’s essential to grasp the mechanics that underpin each option. Let’s unravel the layers, step by step, to illuminate the road ahead and empower you with clarity.

How a Consumer Proposal Works

Consultation: You meet with a Licensed Insolvency Trustee (LIT) to review your financial situation.

Proposal Creation: If a Consumer Proposal is the best option, the LIT will craft a proposal detailing how much you will pay back to your creditors, and over what period.

Submission & Voting: The LIT submits the proposal to your creditors. Creditors will have 45 days to vote on it.

Approval: If the majority (by dollar value) of the creditors accept the proposal, all are bound by it.

Payments: You make payments to the LIT, who distributes these to your creditors.

Completion: Once all payments are made according to the proposal, the remaining debts covered by the proposal are forgiven.

How Personal Bankruptcy Works

Consultation: You meet with an LIT to discuss your financial situation.

Filing: If Bankruptcy is the best option, the LIT will file the necessary paperwork.

Surrender of Assets: Non-exempt assets might be sold to repay creditors. Exemptions vary by province.

Duties: During Bankruptcy, you’ll need to attend 2 credit counselling sessions, provide monthly income and expense statements, and possibly make surplus income payments if your income exceeds a set limit determined by the government.

Discharge: After the set period and once all duties are completed, most of your debts are discharged. Some debts like student loans (if they are less than 7 years old), child support, and fines are not discharged, which means you are still responsible for them.

The Role of a Licensed Insolvency Trustee in a Consumer Proposal vs. Bankruptcy

If you’re considering a Consumer Proposal or Bankruptcy, one figure stands as a beacon of guidance: the Licensed Insolvency Trustee (LIT). Understanding who they are and the vital role they play can be your compass to clearer waters.

LITs are federally regulated professionals who have undergone rigorous training and certification to help people and businesses navigate their financial challenges. They aren’t there to judge or take sides. Their role is to ensure that both the debtor and creditors are treated fairly, providing an unbiased perspective.

LIT in Consumer Proposals

Building Bridges: An LIT helps draft a Consumer Proposal, ensuring it’s fair and feasible. They’re instrumental in bridging the gap between you and your creditors, leading negotiations and presenting the proposal on your behalf.

Protection & Assurance: Once a Consumer Proposal is filed, LITs ensure that you’re protected from debt collectors, giving you peace of mind to focus on your repayment plan.

LIT in Bankruptcy

Navigating the Process: Bankruptcy can feel overwhelming, but with an LIT, you have someone to illuminate each step, from filing the necessary documents to understanding your duties.

Asset Management: While Bankruptcy might entail the loss of some assets, LITs help identify which are exempt according to provincial guidelines, ensuring that you retain as much as possible.

Financial Cost & Obligations of a Consumer Proposal vs. Bankruptcy

Understanding the costs and obligations associated with your choices is paramount in choosing the right path forward. Both a Consumer Proposal and Bankruptcy are significant steps, each bearing its own financial implications. Let’s unpack these commitments so you’re equipped with the knowledge to make an informed decision.

Consumer Proposal

Upfront Costs: Generally, there are no upfront fees required from you. The Licensed Insolvency Trustee (LIT) is paid from the payments you make into the proposal, which is a portion of the debt you’ve agreed to repay.

Monthly Payments: Based on negotiations with your creditors, you’ll make fixed monthly payments over a period, usually up to 5 years. These payments are typically less than the total amount of debt you owe.

Obligations: It’s crucial to consistently make these payments. Missing 3 payments can result in your Consumer Proposal being annulled, which means losing its protective benefits.

Personal Bankruptcy

Initial Cost: While Bankruptcy doesn’t come with upfront fees like a traditional service, there are costs involved. These are often termed as ‘base contributions’ which cover administrative costs. The exact amount varies based on your income and family size.

Surplus Income Payments: If your income surpasses a government-set threshold, you’ll be required to make additional payments, known as surplus income payments. This ensures that those with higher incomes repay a larger portion of their debt.

Asset Consideration: One of the more challenging aspects of Bankruptcy is the potential loss of assets. Some assets are exempt depending on provincial laws, but non-exempt assets may be sold to repay creditors. In other cases, you may need to ‘buy back’ an asset by making monthly payments for it to the LIT, as is the case with vehicles in some provinces.

Obligations: Beyond financial payments, individuals are required to attend two credit counselling sessions, report monthly income and expenses, and possibly participate in Bankruptcy mediation if disputes arise.

Short & Long-term Benefits of a Consumer Proposal vs. Bankruptcy

Facing the choice between a Consumer Proposal and Bankruptcy is undoubtedly daunting. But understanding the benefits of each, both immediate and future-facing, can cast a guiding light on this difficult path. Let’s explore the advantages of each solution, ensuring you see not just the present relief they offer, but also the long-term horizon they shape.

Consumer Proposal: Short-term Benefits

Controlled Repayment: You repay only a portion of your debts, often resulting in significantly reduced monthly payments compared to the original debt load.

Asset Retention: One of the primary reliefs is that you get to keep your assets, including your home, car, and other valuable possessions.

Protection from Creditors: Once the proposal is filed, all collection efforts, including calls, demand letters, wage garnishments and lawsuits, cease.

Consumer Proposal: Long-term Benefits

Clear Debt in Defined Period: With a Consumer Proposal, there’s a clear end in sight—once you’ve made all the agreed-upon payments, the remaining debt is forgiven.

Less Impact on Credit: While an R7 rating is a setback, it’s less severe than an R9 from Bankruptcy. The stain on your credit report lasts for three years after completing the proposal, offering a relatively quicker recovery path.

Personal Bankruptcy: Short-term Benefits

Immediate Relief: Upon filing, you’re granted an immediate stay of proceedings, halting all creditor actions.

Debt Forgiveness: Most, if not all, of your unsecured debts are wiped out upon discharge.

Predictable Term: A first-time Bankruptcy typically lasts 9 months if there are no surplus income payments.

Personal Bankruptcy: Long-term Benefits

Fresh Financial Start: It’s a clean slate. Post-discharge, you’re free from the burden of the debts included in the Bankruptcy.

Mandatory Financial Counselling: This equips you with tools and knowledge to better manage finances in the future, reducing the risk of falling into debt again.

Extended Implications for Multiple Filings: While this might not sound like a benefit, the extended 14-year period for a second Bankruptcy on your credit report acts as a deterrent, encouraging more cautious financial decisions moving forward.

Short & Long-term Consequences of a Consumer Proposal vs. Bankruptcy

Both Consumer Proposal and Bankruptcy are effective debt relief tools. While they both offer a lifeline to those drowning in debt, each comes with its own set of thorns. It’s important to approach these paths with eyes wide open, understanding not just the relief they offer, but the challenges they may present.

Consumer Proposal: Short-term Consequences

Credit Impact: Your credit rating will be marked as R7, indicating that you’re paying your debt through a special arrangement and not as originally agreed.

Commitment to Payments: You are bound to the agreed monthly payments. Failing to meet these, especially missing three payments, can lead to the annulment of the proposal.

Potential Creditor Rejection: Creditors may not always accept the initial proposal. You need further negotiations or even reconsider your options.

Consumer Proposal: Long-term Consequences

Credit Report Duration: The R7 rating lingers on your credit report for three years after you complete the proposal, impacting your ability to access credit or secure loans at favourable rates.

Mortgage Challenges: Lenders are typically hesitant to approve a mortgage or might require a larger down payment if the Consumer Proposal is recent.

Interest Accumulation: While you might pay a reduced amount on the principal, interest on some secured debts like mortgages might continue to accrue.

Personal Bankruptcy: Short-term Consequences

Asset Loss: There’s a potential loss of valuable assets, except for those exempted by provincial regulations. This might include valuable heirlooms, properties, or investments. For example, contributions made to an RRSP account in the previous 12 months can be seized and you may need to hand over a portion of your savings account.

Stigma & Emotional Impact: Bankruptcy is still severely stigmatized, making it an incredibly demoralizing experience for many people. This can weigh heavily on your mental and emotional well-being.

Surplus Income Payments: If your income is over a certain threshold, you’ll be required to make additional payments, extending the duration of the Bankruptcy.

Personal Bankruptcy: Long-term Consequences

Severe Credit Impact: Your credit report will bear the R9 rating. For a first-time Bankruptcy, it remains for 6 years post-discharge. A second Bankruptcy extends that period to 14 years. Just filing for Bankruptcy will have an immediate and severe impact on your credit score which can take years to rebuild.

Future Lending Hurdles: A Bankruptcy will result in higher interest rates, challenges in getting approved for loans, or even obtaining simple credit products, like a credit card. Your LIT may even prohibit you from applying for new credit during your Bankruptcy.

Career Limitations: Bankruptcy might limit your ability to hold specific jobs, especially in finance or roles that require fiscal responsibility.

When to File for Consumer Proposal vs. Bankruptcy

A Consumer Proposal is better suited for people with debts below $250,000 (or $500,000 for joint proposals with a spouse). This option is preferable if you have a stable income that allows you to make partial debt repayments for up to five years. Another advantage is the ability to retain valuable assets, such as your house or car, which might be vulnerable in Bankruptcy proceedings. Additionally, from a credit perspective, a Consumer Proposal might be viewed as a less severe blow compared to the brunt of Bankruptcy.

On the other hand, Bankruptcy is the better choice for people who are overwhelmed by debt, especially if it exceeds the limits set for Consumer Proposals or if repaying even a fraction seems out of reach. While the idea of parting with non-exempt assets can be daunting, it’s a reality for many choosing this path—though the specifics of what’s exempt vary by province.

There’s also the allure of quicker relief; those with income below the surplus threshold might find immediate relief in the potential 9-month term of a first-time Bankruptcy. And, if you’ve tried the Consumer Proposal route before but faced annulment due to missed payments, Bankruptcy may loom as the next logical step.

Regardless of the path, certain universal factors remain consistent. Both avenues require the guidance and expertise of a Licensed Insolvency Trustee (LIT) to steer the process and communicate with creditors. It’s also pivotal to recognize that neither route provides a blanket solution—certain debts like recent student loans, court fines, or child support arrears are not covered by either a Consumer Proposal or Bankruptcy.

Last but not least. your future financial needs and goals, whether it’s purchasing a home or launching a business, can deeply influence your decision. The implications of both a Consumer Proposal and Bankruptcy will linger, but they cast different shadows on your unique credit journey.

Using These Solutions To Regain Wealth

It’s difficult to talk about wealth when you are over-indebted. However, personal Bankruptcy and the consumer proposal help individuals experiencing financial difficulties to start from scratch, without ruining their future. In fact, if there’s only one thing to remember, it’s that these solutions enable you to repay your debts without having to dip into your RRSP or your pension fund.

You will surely go through a delicate period, but your future is not compromised. While you shouldn’t take the loss of access to credit lightly, Bankruptcy helps those who’ve gone bankrupt to start over and get back to accumulating wealth.

Consumer Proposal and Bankruptcy are quite complex subjects. Licensed Insolvency Trustees generally offer a free, no-obligation initial consultation to alleviate your concerns.