Alternating Between Bankruptcy and Consumer Proposal

Understanding Switching Between Bankruptcy and a Consumer Proposal

Before delving into the topic of “Can You Switch Between Bankruptcy and Consumer Proposal?”, it’s critical to grasp the basic concepts of both bankruptcy and consumer proposal.

Bankruptcy and consumer proposal are two insolvency alternatives in Canada governed by the Bankruptcy & Insolvency Act. These options provide a legal pathway for consumers to eliminate overwhelming debt. The decision to file a bankruptcy or a consumer proposal is typically based on the individual’s financial situation at the time of filing. However, finances can change, and these modifications can impact the feasibility of continuing with the chosen insolvency option.

Shifting from a Consumer Proposal to Bankruptcy

Circumstances might compel you to consider the question, “Can You Switch Between Bankruptcy and Consumer Proposal?” The answer is yes, but it’s crucial to understand why this would be necessary and whether it’s the appropriate solution.

If you’re unable to keep up with your consumer proposal payments due to an alteration in your financial situation, you have three primary alternatives:

 

  • Reschedule, postpone or defer up to two payments. This option could be suitable if your financial strain is temporary. However, falling three months behind on your payments will lead to automatic annulment of your proposal, meaning your creditors can pursue you for the full amount plus interest.
  • Amend the terms of your original proposal. Life changes, such as switching to a lower-paying job or going through a divorce, can permanently strain your finances. In such cases, it’s possible to submit a new amended proposal to your creditors to lower your monthly payment for the remaining term of the proposal. However, this is a risky strategy, because if the creditors reject your proposed amendment, the proposal is automatically annulled.
  • Switch to bankruptcy. If you’re unable to make your proposal payments, transitioning to bankruptcy could be your best option. You can include new debt incurred since the start of your proposal in your bankruptcy, and your trustee can explain this option in more detail.

 

Transitioning from Bankruptcy to a Consumer Proposal

Conversely, it’s also feasible to file a consumer proposal while currently bankrupt. Changes in circumstances, such as an unexpected promotion resulting in a pay increase or an inheritance, could prompt this decision. Any additional income or assets you acquire while bankrupt become a potential asset of the estate while bankrupt.

When your circumstances change during bankruptcy, you have two main options:

 

  • Continue with your bankruptcy and make any required new surplus income payments.
  • File a consumer proposal while bankrupt. If you decide to file a consumer proposal, you’ll need to meet with your trustee to determine what terms to offer your creditors. When filing a consumer proposal, you must disclose your current situation. If your income has increased, or you’re expecting to receive a lump sum of money, you must disclose this information to the creditors. This will affect what they’ll want to receive in a proposal. They’ll still expect to receive their share of what they would be getting if you were to complete your bankruptcy. However, with a proposal, you can keep any assets you may inherit or extend the payment terms if surplus income is the issue.

 

Switching Licensed Insolvency Trustees

When you’re in the middle of a bankruptcy or a consumer proposal, it’s not possible to switch trustees. However, if you filed a bankruptcy or proposal with another Licensed Insolvency Trustee, it’s common to switch to a different trustee for your second filing.

Filing a Consumer Proposal while Bankrupt

If you’ve filed bankruptcy and have not been discharged, you may opt to make a consumer proposal to your creditors. But, it’s crucial to understand that the proposal must be filed before your discharge from bankruptcy. Once you’ve been discharged from bankruptcy, most, if not all, of your debts will be discharged.

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