Bankruptcy vs. Consumer Proposal – Which is Better?
The circumstances surrounding your debt, income and family size will help you determine whether a consumer proposal or filing for bankruptcy is the right choice for you:
Individuals who do not own a lot of property (assets) or would not like to protect their assets, or who are living in a province with a high exemption limit for the assets you own and would like to protect should consider filing bankruptcy as it is often the quicker and cheaper way out of debt.
When you file a bankruptcy with your creditors you can be discharged from bankruptcy in 9 months (if you are filing bankruptcy for the first time and don’t have excess income).
In almost all cases going bankrupt is cheaper than filing a proposal with your creditors.
Are There Advantages to Filing a Consumer Proposal Over Bankruptcy?
Bankruptcy gives you the quickest path to a fresh financial start so are there any benefits to filing a consumer proposal when bankruptcy will have you out of debt in as little time as nine months?
If you are considering bankruptcy or a consumer proposal one of the main advantages of a consumer proposal is that you will be able to retain all of your assets.
Many individuals do not want to go bankrupt and a consumer proposal is the #1 alternative to bankruptcy in Canada, that offers certain benefits over bankruptcy.
With a consumer proposal individuals can avoid bankruptcy and make a plan to settle the debts that they owe in a fair and responsible manner.
Will My Income Affect Me?
Most bankruptcies last 9 months and result in an automatic discharge at the end of the nine month period. If you have excess income your bankruptcy will be extended to 21 months.
If you are filing bankruptcy a second time you will be in bankruptcy for 24 months. If you have surplus income, and are filing bankruptcy a second time. you will be in bankruptcy for 36 months (3 years)
If you have a very large income, the cost of bankruptcy will rise dramatically.
In a consumer proposal your income does not impact the terms of the proposal (although individuals with higher incomes likely have higher debt loads, and therefore your income could indirectly impact the cost of your proposal payments as you will have to make a plan to repay more because of your higher debts.)
We have outlined the main comparisons of the aspects of a consumer proposal vs bankruptcy below:
Consumer Proposal: Individuals or couples (a business is not allowed to file a consumer proposal under the Bankruptcy and Insolvency Act) are eligible to file a consumer proposal if their total debts are less than $250,000 (or $500,000 if a couple file a proposal together), not including the mortgage on a principal residence.
Individuals must have a sufficient source of income in order to make a fair proposal offer to your creditors.
Creditors will vote on whether to accept your proposal, although 99.9% of consumer proposals are accepted, as the creditors will end up better off than if a person was to claim bankruptcy.
Bankruptcy: If you are insolvent – which, by definition, means you owe more than $1,000 and cannot pay your debt as it becomes due – you are eligible to file bankruptcy in Canada.
Consumer Proposal: You will submit a consumer proposal offer to your creditors that lays out the payments that will be required and the payment will be fixed for the life of the proposal.
The payment you agree to make to your creditors covers all fees, including the fee for the consumer proposal administrator.
What you agree to pay your creditors monthly is the exact cost each month.
Bankruptcy: In bankruptcy the costs are based on your income; the higher your income the more you have to pay.
You might also lose assets which can contribute to the cost of bankruptcy in Canada.
Consumer Proposal:There are no restrictions or limits on the assets you can keep when filing a proposal with your creditors, so by filing a consumer proposal you can protect all of your assets.
Bankruptcy: When filing bankruptcy you will be required to turn over any non-exempt assets to your bankruptcy trustee.
However, most bankrupts have no assets they lose.
Consumer Proposal:A consumer proposal results in an R7 credit rating, which means you have made a settlement with your creditors.
A note of the fact you filed a consumer proposal will stay on your credit report for a period of 36 months from the date of the final proposal payment.
Bankruptcy: A bankruptcy will result in an R9 credit rating to show on your credit report which will remain on your report for 7 years (first time bankruptcy) or 14 years (second time bankruptcy).
An R9 rating is the worst possible credit rating, although you will be able to being rebuilding your credit immediately after your discharge from bankruptcy.
Consumer Proposal: You will not be responsible for reporting to the trustee (your proposal administrator) each month.
Bankruptcy: During bankruptcy you will be required to update your trustee with a monthly budget of your income and expenses and you will have to provide your trustee with copies of your pay stubs so he or she can calculate any required surplus payments (if any.)
Consumer Proposal: Under a consumer proposal agreement you are entitled to keep all tax refunds or credits that you are owed.
Bankruptcy: In bankruptcy you will have to surrender your tax refunds and/or tax credits to your trustee for the benefit of your bankruptcy estate.
Here is a check list to help you decide:
- How long will I be in bankruptcy and what will my monthly payments be?
- What assets are protected by my province?
- Frequently Asked Questions.
- How long will it take for me to rebuild my credit rating after a bankruptcy or a consumer proposal?
- Interest stops accumulating on your debt when a bankruptcy or consumer proposal is filed;
- Debt collectors and creditors cannot take collection action against you once the bankruptcy or consumer proposal is filed.
Division I Proposals
A Division I Proposal can be filed if a person has debt in excess of $250,000.
- A Proposal can only be filed with the assistance of a Licensed Insolvency Trustee (who is known as a proposal administrator during this process);
- A Proposal is simply an agreement between the debtor and his creditors;
- The filing of a Proposal will stop any legal action undertaken or considered by the unsecured creditors to whom you owe debt;
- Secured creditors are not bound by the terms of a Proposal and therefore must concur in the filing of the Proposal;
- The creditors must be better off under a Proposal than under a bankruptcy;
- Creditors will take a vote on whether to accept, reject or modify the Proposal, in person or by mail, at a creditors’ meeting.
Comparison of Bankruptcy vs Consumer Proposal.
These are the two most popular ways of getting debt relief for Canadians suffering from a financial crisis.
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|Key Considerations.||Consumer Proposals.||Bankruptcy|
|When will my debt be erased from the credit bureau?||3 years after the consumer proposal is completed.||Bankruptcy: 6 years after the
|Can I pay back less then I owe and have the rest of the debt erased?||Yes.||Yes.|
|Once I make a plan, will my creditors, including CRA, be forced to stop all actions against me including trying to collect money; phoning me; garnisheeing my wages or repossessing my assets?||Yes.||Yes.|
|Which will give me a better credit rating?||You can start to rebuild your credit rating as soon as your consumer proposal has been completed.||You can start to rebuild your credit rating as soon as you have been discharged.|
|Which is quicker?||Lasts up to 5 years.||Most 1st time bankrupts are discharged in nine months.|
|What are the qualifications?||Can include consumer debt up to $250,000, excluding mortgages.||No restrictions on the amount of debt.|
|What assets are retained?||Can include assets that might be lost in a bankruptcy.||Only assets set by the province or territory of residence.|
|What happens if income increases?||The proposal payments do not change.||There may be additional funds payable and the bankruptcy term may be extended.|
|What happens to windfalls?||Windfalls, such a lottery winnings and inheritances are retained.||If triggered prior to or during the bankruptcy, they go to the trustee, for the benefit of the creditors.|
|Which is cheaper?||A consumer proposal must offer more than the creditors would get in a bankruptcy.||A bankruptcy is cheaper, with most costing the minimum of $200./month for 9 months.|
|Is Government approved Credit Counselling offered?||Yes.||Yes.|
|What if I have a dispute?||You have the right to have your dispute mediated.||You have the right to have your dispute mediated.|