Bankruptcy vs. Consumer Proposal
Bankruptcy or a Consumer Proposal:
Which is Better For Me?
In Canada, individuals facing overwhelming debt have two primary debt relief options: filing for bankruptcy or submitting a consumer proposal. While both bankruptcy and consumer proposals aim to provide individuals with a fresh financial start and protect them from creditors, there are significant differences between the two. This article will delve into the key distinctions, advantages, disadvantages, and eligibility criteria of bankruptcy and consumer proposals to help you make an informed decision.
Bankruptcy vs a Consumer Proposal: Find out which works for your situation here.
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.
In almost all cases going bankrupt is cheaper than filing a proposal with your creditors.
Consumer proposal reviews are usually very good since it is a very attractive debt relief option.
A consumer proposal is usually less harsh on your credit score than bankruptcy.
Debt included in a proposal or bankruptcy are unsecured debts.
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Bankruptcy is a structured legal process that allows individuals to eliminate their debts by surrendering their assets, with a few exceptions. When you file for bankruptcy, a Licensed Insolvency Trustee (LIT) takes control of your assets, investigates your financial affairs, and monitors your progress in fulfilling bankruptcy duties. These duties include attending credit counseling sessions and filing monthly reports on your income and expenses.
Typically, bankruptcy lasts for either 9 or 21 months, depending on factors such as surplus income. Individuals who file for bankruptcy for the first time without excess income can be discharged in as little as 9 months. However, those with surplus income may have to fulfill their bankruptcy duties for 21 months. If a person files for bankruptcy a second time, the minimum duration increases to 24 months, or 36 months for debtors with surplus income.
Pros and Cons of Bankruptcy
Quick Debt Elimination: Bankruptcy offers the fastest path to a debt-free life. Once you complete your bankruptcy duties, you will receive a discharge, relieving you of your debt obligations.
Cost-Effective: In most cases, filing for bankruptcy is cheaper than submitting a consumer proposal. The costs of bankruptcy are based on your income, meaning that individuals with higher incomes pay more.
Protection from Creditors: Upon filing for bankruptcy, all legal actions taken by your unsecured creditors, such as wage garnishments and collection calls, must cease.
Asset Surrender: When filing for bankruptcy, you must surrender non-exempt assets to your trustee. However, it’s worth noting that most individuals do not have significant assets to lose.
Credit Rating Impact: Bankruptcy results in an R9 credit rating, the most severe rating possible, which can remain on your credit report for 7 years (or 14 years for a second bankruptcy).
Unraveling the Consumer Proposal
A consumer proposal is a legal agreement negotiated between you and your creditors, facilitated by a Licensed Insolvency Trustee. It offers an alternative to bankruptcy, allowing you to settle your debts by making reduced payments over a specific period. To be eligible for a consumer proposal, your total debt must be less than $250,000 (excluding your mortgage), and you must have a stable source of income to make a fair proposal offer to your creditors.
Unlike bankruptcy, a consumer proposal enables you to retain all of your assets. This debt relief option provides immediate protection from debt collectors and stops accumulating interest on your debts.
Pros and Cons of Consumer Proposals
Asset Retention: One of the major advantages of a consumer proposal is that you can keep all of your assets, protecting your financial well-being.
Credit Score Impact: While a consumer proposal will result in an R7 credit rating, indicating a settlement with your creditors, it remains on your credit report for a shorter period, typically 3 years after completing your payments.
Flexible Repayment Terms: Consumer proposals allow for flexible repayment terms, as the payment amount is determined upfront and remains fixed for the duration of the proposal, making it easier to budget and manage your finances.
Longer Debt Repayment Period: Unlike bankruptcy, which can be discharged within months, consumer proposals typically last up to 5 years or 60 months. However, it is possible to pay off a consumer proposal early.
Potential Higher Costs: The cost of a consumer proposal is negotiated between you and your creditors. While it provides the opportunity for reduced monthly payments, it may still involve a higher overall cost compared to bankruptcy.
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To determine whether bankruptcy or a consumer proposal is the right choice for you, understanding the eligibility criteria is crucial.
- Insolvency: You must owe more than $1,000 and be unable to pay your debts as they become due.
Consumer Proposal Eligibility:
- Total Debt: Your total debts must be less than $250,000 (excluding your mortgage).
- Income: You must have a sufficient source of income to make a fair proposal offer to your creditors.
- Creditor Acceptance: A majority of your creditors must accept your proposal for it to be granted.
Comparing Bankruptcy and Consumer Proposal: Key Differences
To further understand the differences between bankruptcy and consumer proposals, let’s compare them across various aspects:
|Duration||9 months (or 21 months with surplus income)||Up to 5 years|
|Asset Retention||Surrender non-exempt assets||Retain all assets|
|Credit Rating||R9 (7 years on credit report)||R7 (3 years after completion)|
|Monthly Reporting||Required||Not required|
|Tax Refunds||Surrendered to the trustee||Retained by the individual|
|Cost||Based on income, can be cheaper than a consumer proposal||Negotiated settlement, can involve higher costs than bankruptcy|
It is essential to note that the decision between bankruptcy and a consumer proposal should not be based solely on the impact on your credit score. Instead, consider factors such as your financial situation, debt load, assets, and the cost and impact of each option on your budget.
Seeking Professional Guidance
Choosing the right debt relief option can be overwhelming. It is advisable to seek guidance from a Licensed Insolvency Trustee who can assess your unique circumstances and provide impartial advice. They can help determine whether bankruptcy or a consumer proposal is the most suitable solution for your specific financial situation.
At Bankruptcy Canada, we have assisted numerous individuals in managing their debts and finding the best path to financial freedom. Our team of experts is equipped to guide you through consumer proposals, personal bankruptcy, and other debt relief solutions.
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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 discharge.|
|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.|