Consumer Proposal vs Bankruptcy Canada

Key Elements of a Consumer Proposal

1. Repayment Plan: In a consumer proposal, debtors work with a Licensed Insolvency Trustee (LIT) to create a repayment plan. This plan outlines the amount to be repaid, typically a percentage of the total debt, and the duration of the repayment period, which can be up to five years.
2. Asset Retention: One of the major advantages of a consumer proposal is that it allows individuals to keep their assets, including their home, vehicle, investments, and tax refunds. This is particularly beneficial for those who have significant equity in their assets.
3. Monthly Payments: Debtors in a consumer proposal make fixed monthly payments to their LIT, who distributes the funds to creditors according to the agreed-upon terms. The amount of these payments is determined by the debtor’s income and ability to repay the debt.
4. Credit Rating Impact: While a consumer proposal does have an impact on credit ratings, it is generally less severe than bankruptcy. The proposal will be reflected on the debtor’s credit report for a minimum of three years after completion.

What is Bankruptcy?

Bankruptcy is a legal process designed to help individuals or businesses who are unable to repay their debts. It provides a fresh start by eliminating most unsecured debts and allowing individuals to rebuild their financial lives.

Key Elements of Bankruptcy

1. Discharge of Debts: Bankruptcy provides a discharge of most unsecured debts, relieving individuals of the obligation to repay them. However, certain debts, such as child and spousal support, fines, penalties, and student loans in certain circumstances, may not be discharged.
2. Asset Liquidation: In bankruptcy, assets may be liquidated to repay creditors. However, there are exemptions that allow individuals to retain necessary assets, such as a primary residence and a vehicle within specific value limits.
3. Length of Bankruptcy: The duration of bankruptcy depends on various factors, including income levels, previous bankruptcies, and compliance with the bankruptcy process. The minimum term for a first-time bankruptcy is typically nine months, but it can extend up to 36 months depending on the specific circumstances.
4. Credit Rating Impact: Bankruptcy has a significant impact on credit ratings. It will be reflected on the debtor’s credit report for a minimum of six years after discharge, making it more challenging to obtain credit during that period.

Comparing Consumer Proposal and Bankruptcy

Now that we have outlined the basic concepts of consumer proposals and bankruptcy, let’s delve deeper into their key differences and understand which option may be more suitable for specific situations.

Asset Retention

One of the most significant advantages of a consumer proposal is the ability to retain assets. Debtors can keep their home, vehicle, investments, and other valuable possessions. This is particularly beneficial for individuals who have substantial equity in their assets and wish to protect them from liquidation. In contrast, bankruptcy may require the surrender of certain assets, although exemptions exist for primary residences and vehicles within specific value limits.

Debt Repayment

In a consumer proposal, debtors negotiate new payment terms with creditors through their LIT. The amount to be repaid is typically a percentage of the total debt, and the repayment period can extend up to five years. This allows debtors to make manageable monthly payments based on their income and financial capacity.

On the other hand, bankruptcy relies on the liquidation of assets to repay creditors. The debtor’s income and assets are assessed to determine the amount to be repaid during the bankruptcy period, which can range from nine to 36 months, depending on various factors. Bankruptcy may be a better option for individuals who are unable to make any significant payments towards their debts.

Impact on Credit Rating

Both consumer proposals and bankruptcy have an impact on credit ratings. However, a consumer proposal generally has a less severe effect on credit scores compared to bankruptcy. A consumer proposal remains on the debtor’s credit report for a minimum of three years after completion, while bankruptcy remains for a minimum of six years after discharge.

It’s important to note that creditworthiness can be rebuilt over time by making timely payments, using credit responsibly, and seeking professional guidance to improve financial management.

Eligibility and Process

To file a consumer proposal, debtors must meet specific criteria, including having total debts of less than $250,000 (excluding mortgage debt) and a stable income to support the repayment plan. Consulting with an LIT is essential to assess eligibility and create a viable proposal.

In contrast, bankruptcy is available to individuals who are insolvent and owe at least $1,000 in debt. While creditors cannot stop someone from filing for bankruptcy, they may object to the discharge if they believe the debtor has been dishonest or has misused credit.