Bankruptcy vs Consumer Proposal

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You have decided to see a trustee to get some options to deal with your financial crisis.  From the research you have done you have homed in on either bankruptcy or a consumer proposal to deal with your debt problem.

So how is the decision made between bankruptcy and a consumer proposal?   You have reviewed the comparison chart on bankruptcy vs a consumer proposal.  But what is next?

Bankruptcy Vs Alternatives In Canada

A local bankruptcy trustee can provide all the information you need to decide between a consumer proposal and bankruptcy.  A bankruptcy trustee can also provide an unbiased perspective because he is not emotionally involved.   Trustees bring their training, experience and expertise to your financial problem.  Trustees are non-judgemental and are only concerned with getting you the best solution to your debt problem.

Home Purchases being put off due to debt

Photo Credit Castanet

There are a number of considerations going into the decision of choosing between bankruptcy and consumer proposals:

The value judgement decision:

Some people hate the idea of bankruptcy so much that they will do anything to avoid having to file bankruptcy, even if it is the quickest and least costly method of achieving a debt free life.

I had a person see me, whose debt problem was quite straight forward.  I suggested that bankruptcy was his best options because it was the cheapest and quickest way to deal with his debts.   A bankruptcy would have cost him $1,800 payable over 9 months at $200 per month.  He would keep all his assets and all his debt of $20,000 would be erased upon his discharge 9 months hence.

He thanked me for my advice but he told me that the thought of being bankrupt was so abhorrent to his upbringing and moral code that he could not do that.

I designed a consumer proposal for him where he would pay $8,000 over a period of 36 months at the rate of $222 a month.  His creditors accepted the consumer proposal.  He was happy that his creditors approved the consumer proposal and faithfully made his payments.

The cost decision:

This is the way most people choose.   Bankruptcy is usually the cheapest and quickest way to get a fresh start.  For most people a bankruptcy will cost $1,800 payable at the rate of $200 a month for 9 months.  In the vast majority of cases the person keeps all his assets and has all his debts erased.

The consumer proposal decision:

A consumer proposal is a popular choice for dealing with a debt crisis.  Slightly more than half of the people choose a consumer proposal over a bankruptcy. Consumer proposals are almost always accepted by the creditors because the creditors know that they will get more money than if the person files bankruptcy. Once accepted, consumer proposals have a 98% successful completion rate.

People choose a consumer proposal mainly because they can keep assets that might be lost in a bankruptcy.  The main rules for filing a consumer proposal are the creditors have to be better off than if a bankruptcy were filed and the length of the consumer proposal cannot be for more than five years.

I had a couple come to see me whose financial details were as follows:

  1. The husband worked and the wife was a stay at home mother;
  2. The husband earned $4,500 a month take home pay;
  3. They had two children ages 3 and 6;
  4. The husband’s debt was $40,000;
  5. The wife’s debt was NIL;
  6. They lived in Vancouver;
  7. In a bankruptcy the husband would be required to pay $280 a month for 21 months or a total of $5,880 (Calculated by our Bankruptcy Predictor);
  8. In a bankruptcy the creditors would get the excess equity in the house of $13,000 plus the monthly payments of $5,880 for a total of $18,880 over 21 months;
  9. All their assets were exempt from seizure (BC exemptions) except for a house which had equity (after hypothesizing a sale) of $50,000.  Since the house was in joint tenancy 50% or $25,000 belonged to the wife, which was not part on the bankruptcy.   50% belonged to the husband which, after applying the BC exemption of $12,000, left $13,000 that belonged to the bankruptcy estate.

We discussed various options for a way for them to keep their house.   I asked if they had a relative or someone who would pay the bankruptcy estate the $13,000 equity in the house.  They said there was no one because their parents and siblings were not well off.

We discussed filing a consumer proposal, which must offer the creditors more than they would get in a bankruptcy over a term of not more than five years.  I suggested that I thought the creditors would accept a total of $24,000, which would mean that payments of $400 a month for 60 months would have to be paid.   I asked if they could afford those payments.

After they had thought it over for a short time they said that they could afford those payments.

The consumer proposal was filed and accepted by the creditors.   The couple made the payments so that they kept their house and had the debt settled in 60 months.

More information on bankruptcy and consumer proposals.