Consumer Proposal vs Personal Bankruptcy: Which is the Best For Me?
What are the Differences Between a Consumer Proposal and Personal Bankruptcy?
If you have heavy debts and are looking for insolvency debt relief, then there are two main options available to you in Canada – Personal Bankruptcy and Consumer Proposals – but which should you choose?
Choosing the right kind of debt relief
The kind of debt relief that will best help you, will largely depend on the size of your debt and whether you are able to handle it, albeit with a little help from a credit counsellor.
If you have a manageable debt then you will usually be advised away from consumer proposals and personal bankruptcy and towards alternatives such as money management training and debt consolidation.
If however, you have a debt that you are unable to deal with, then insolvency relief such as a consumer proposal or personal bankruptcy becomes a practical and more viable option.
Let’s take a look at what consumer proposals and personal bankruptcy actually are.
What is a consumer proposal?
A consumer proposal is a legally binding agreement that allows you to pay all, or a portion of, your debts to your creditors over a set period of time that can be up to 5 years.
To be eligible for a consumer proposal, your debts must not exceed $250,000 (not including mortgage debt on your primary residence).
The process is a part of the Bankruptcy and Insolvency Act and is designed to help you to come up with a proposal to offer your creditors that will help you to pay back the entirety, or a percentage of the debt, that you owe them.
By entering into a consumer proposal with your creditors, you agree to make a payment to your consumer proposal administrator, who in turn, will then pay your creditors.
At the end of the agreed period, any outstanding debt is cleared.
What is personal bankruptcy?
During the personal bankruptcy process, rather than paying off your debts with financial repayments you legally surrender all of your assets to a Licenced Insolvency Trustee, who will then exchange them with your creditors to eliminate your debts.
To be eligible for personal bankruptcy in Canada a person must only meet two criteria:
- They must owe at least $1000;
- They must be insolvent, meaning that they cannot repay their debt.
The goal of bankruptcy is to give a person a fresh start, and not to punish them or to humiliate them, which is why some assets are exempt from the bankruptcy process.
Exemptions can vary from each provincial government to the next, but in general, personal items such as clothing and household items below a certain value will not be included in the proceedings, and in some provinces, cars below a certain value and house equity are also exempt.
Which is better – a consumer proposal or personal bankruptcy?
Every person’s debt and financial situation is different, but generally, it is agreed that wherever possible, it is better to file a consumer proposal than to declare personal bankruptcy.
One of the most obvious reasons why many people tend to prefer a consumer proposal over bankruptcy is that they get to keep their assets, only paying off what they can afford and knowing that their debt will be wiped clean in 5 years or less.
Here’s how a consumer proposal and personal bankruptcy stand up side by side on some key factors:
Bankruptcy – Depending on how much you earn and whether your earnings will increase, bankruptcy can end up being very expensive thanks to surplus income payments. Bankruptcy can also be a shorter process than a consumer proposal, meaning that more payments need to be made in a shorter space of time.
Consumer proposals – Because a consumer proposal is negotiated upfront, monthly payments remain the same regardless of a change in income, and the payments are also evenly spread across a longer period of time, often making them more affordable.
Bankruptcy – The bankruptcy process can be completed in as little as 9 months, however, if you are required to make surplus income payments, then this can be extended up to 21 months, meaning that you end up paying a lot more.
Consumer proposals – Consumer proposal agreements can vary in duration but can never exceed 5 years, or 60 months.
Bankruptcy – During the bankruptcy process to be absolved you must surrender certain assets. This can include things like your home and your car etc. Some assets up to a certain value are exempt from the process but these can change depending on your location.
Consumer proposals – No assets are surrendered during a consumer proposal agreement.
Bankruptcy – Bankruptcy is notoriously bad for your credit rating, causing you to receive an R9 rating, which is the worst rating that you can have. This can remain on your credit report for up to 14 years!
Consumer proposals – Although still not great, a consumer proposal will cause you to have an R7 rating attached to your credit rating, however, this will only stay on your account for 3 years after your final payment has been made.
Bankruptcy – When declaring bankruptcy in Canada, you will be required to submit monthly expenses and income reports for evaluation and may need to provide your payslips as evidence to your trustee. This information is required to determine if surplus income payments are required.
Consumer proposals – Unlike bankruptcy, the only thing you need to remember to do during your consumer proposal agreement is to make your agreed monthly repayments.
So which should you choose?
It’s clear that a consumer proposal and bankruptcy are two very different forms of debt management, each with their own advantages depending on your situation.
In general, unless you have no income to pay your monthly repayments, a consumer proposal is preferred, allowing people to keep their assets, requiring less workload and causing less damage to a person’s credit rating.
That being said, for some people, bankruptcy provides a quicker solution and can see them debt-free in a much shorter space of time.
Because it can be difficult to know whether you would be better off declaring bankruptcy or filing a consumer proposal it is always best to speak with a professional who can offer you advice.
Here at Bankruptcy Canada, we are trusted consumer proposal administrators and bankruptcy experts and can help guide you to the decision that is right for your personal situation.
To find out more about our debt counselling services or to speak to a licenced trustee get in touch with us on (877) 879-4770 or send us an email by clicking here.