When it comes to managing debt, citizens of Ontario have multiple options available. Two of the most popular are Consumer Proposals and filing for Bankruptcy. This article aims to provide a thorough comparison of Consumer Proposal vs Bankruptcy in Ontario, helping you make an informed decision.
Understanding Consumer Proposals and Bankruptcy
What is a Consumer Proposal?
A Consumer Proposal is a legally binding agreement negotiated between a debtor and their creditors, under the supervision of a Licensed Insolvency Trustee (LIT). This arrangement allows an individual to repay a portion of their debt over a specific period, up to a maximum of five years.
What is Bankruptcy?
Bankruptcy, on the other hand, is a legal process where a debtor, unable to pay back their debts, surrenders their assets in exchange for the elimination of their debts. This is also managed by an LIT.
Key Differences Between Consumer Proposals and Bankruptcy
In essence, both Consumer Proposals and Bankruptcy are legal procedures designed to provide financial relief to debtors. However, there are critical differences between the two.
Assets
In a Consumer Proposal, you retain all your assets, whereas, in Bankruptcy, you may have to surrender some assets, depending on their value and exemption limits set by the province.
Debt Repayment
A Consumer Proposal involves repaying a portion of your debt over time, while Bankruptcy may result in a complete discharge of your debts, subject to certain exceptions.
Duration
While a Consumer Proposal can last up to five years, the length of a Bankruptcy process varies. For first-time bankrupt individuals, it may last from 9 to 21 months.
Credit Rating
Both options affect your credit rating. However, a Consumer Proposal is recorded as an R7 rating and remains on your credit report for three years after completion. In contrast, a first-time Bankruptcy is marked as an R9 and stays on the record for six to seven years after discharge, depending on the province.
Cost Implications of Consumer Proposal vs Bankruptcy in Ontario
Cost of a Consumer Proposal
The cost of filing a Consumer Proposal consists of a setup fee and a portion of your monthly payments. The setup fee is around $1,500. The LIT then takes the first 20% of your monthly payments as their administration fee.
Cost of Bankruptcy
Bankruptcy costs are more complex. They are based on income guidelines, surplus income, and asset value. A typical Bankruptcy cost is around $1,800, but it may go up if you have surplus income or valuable assets.
Assets Impact
With a Consumer Proposal, you keep all your assets. However, in Bankruptcy, you may have to give up some assets, depending on their value and provincial exemption limits.
Time Duration
On average, a Consumer Proposal lasts around five years. In contrast, a first-time Bankruptcy can be completed in 9 to 21 months, depending on your income and whether it’s your first bankruptcy.
Impact on Credit
Both Consumer Proposal and Bankruptcy negatively impact your credit. However, the credit repair process can begin sooner after a Consumer Proposal than a Bankruptcy.
Long-Term Consequences
Both options result in a permanent public record, which can affect future lending and employment opportunities. Subsequent bankruptcies have more serious consequences.
Alternatives to Consumer Proposals and Bankruptcy
Other options like Debt Management Programs, or simply budgeting and saving, can be alternatives to Consumer Proposals and Bankruptcy.
Making the Right Choice: Consumer Proposal vs Bankruptcy in Ontario
Making the right choice between a Consumer Proposal and Bankruptcy depends on your financial situation, including your income, assets, and total debt. It’s advisable to consult with a non-profit credit counselling service to explore all options and make an informed decision.
In conclusion, both Consumer Proposals and Bankruptcy are viable options for managing overwhelming debt. However, each has its pros and cons, and the best choice depends on individual circumstances. Always seek professional advice before making such a significant financial decision.
