Consumer Proposals Versus Bankruptcy: Which Is Best For You?
The cost of living in Canada continues to climb higher and higher.
With beautiful scenery, gorgeous cities, a friendly populace and extraordinary cultural and geographic diversity, it’s one of the most desirable places on the planet to live.
But all those wonderful things come at a price.
The cost of living has been steadily on the rise for years, accompanied by long periods of wage stagnation.
While wages started to rise last year, this has not been sufficient for many households to bridge the shortfall between the cost of paying the bills, and their income.
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As such, many households are finding that they have to rely more and more on various lines of credit.
But as credit card payments, car finance payments, unsecured loans and hire purchase agreements all add up, Canadians can find that the squeeze on their personal finances gets tighter and tighter, slowly eroding their disposable income and making it impossible to save.
Over time, debts can start to spiral out of control.
More and more of your repayments can be consumed by interest, putting less and less of a dent in the principal repaid.
This can be a source of great frustration and enormous worry.
But no matter how bad your debts have become, there are always solutions.
But which is the best fit for you?
Let’s take a look in this honest and unbiased breakdown…
Consumer Proposals vs Bankruptcy: What’s the difference really?
They’re a way for honest debtors to hit the “reset button” when they have become insolvent.
By this we mean that their debts have reached a point where they exceed the debtor’s capacity to repay.
Let’s take a look at what makes them different.
A Consumer Proposal
A Consumer Proposal is often seen as an alternative to Bankruptcy.
It is similar to a debt management plan, although it is more advantageous in several ways.
Most notably because it prevents you from needing to repay the entirety of what you owe (the principal) to your creditors.
A licensed Proposal Administrator (more on those shortly), will work with you to work out what you can reasonably afford to repay and will put the proposal to your creditors on your behalf.
Note that the arrangement doesn’t need to please all of your creditors.
If a 51% majority or more vote in favour of a Consumer Proposal, you and they are legally bound by its terms.
Unlike a bankruptcy, assets like your vehicle or your property are protected.
However, a Consumer Proposal will invariably last longer than a bankruptcy, especially if applying for a first bankruptcy.
It will typically take around 5 years to repay a Consumer Proposal and even when the debt is repaid and your Certificate of Completion received, it can still take a further 3 years for the proposal to be expunged from your record.
A Personal Bankruptcy may be a more expedient way to wipe the slate clean and get a fresh start.
Unlike a Consumer Proposal, it allows the applicant to write of most or all of their debt and start to rebuild their credit faster.
Bankruptcy can come with a range of benefits.
It puts an end to harassment from creditors, liberates you from wage garnishment and gives you back your disposable income.
Despite what you may have heard, you won’t necessarily lose all of your assets.
However, they are not protected in the same way that they are under a Consumer Proposal.
Although a Bankruptcy will stay on your credit report for 6 years (14 if it is not your first), it can allow you to get access to credit sooner than you may think.
Those applying for bankruptcy in Canada are expected to satisfy certain requirements within the first 9 months of bankruptcy.
If you are able to do this, your bankruptcy will end in an automatic discharge.
If you do not, however, your bankruptcy may go to court.
Your obligations include:
- Providing all information needed to file your pre-bankruptcy and post-bankruptcy tax returns;
- Submitting your monthly income and expense reports;
- Making sure all necessary payments are covered;
- Attending two counselling sessions designed to improve your relationship with credit and prevent you from making the same mistakes again;
- Making sure all your assets and documents are properly reported to the Trustee;
- Staying in contact with your Trustee and making sure your contact information is up to date.
Whichever choice you make, you will need the help of a Licensed Insolvency Trustee.
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Licensed Insolvency Trustees: Who they are, and why you need one
It is impossible to file for Personal Bankruptcy or submit a Consumer proposal without the help of a Licensed Insolvency Trustee.
These knowledgeable professionals were once known as Bankruptcy Trustees.
But this moniker is somewhat misleading.
After all, they do more than facilitate bankruptcy.
They can also act as an intermediary known as a Proposal Administrator if you choose to opt for a Consumer Proposal over Bankruptcy.
They can negotiate with creditors on your behalf and help you to come up with a repayment arrangement that is manageable for you and satisfactory to them.
If, on the other hand, you decide that bankruptcy is the best option for you, they can ensure that the paperwork is absolutely unimpeachable and support you in meeting your obligations during the all-important first 9 months of your bankruptcy.
They can help ensure that your bankruptcy claim results in an automatic discharge rather than seeing the inside of a courtroom.
Perhaps more importantly, Licensed Insolvency Trustees are the only people who can make you aware of, and facilitate, all of your options when it comes to managing your debts.
Believe it or not, non-profit debt counselors are not able to advise on all options available to you in managing your debts.
All they can help you to do is set up a debt management plan with your creditors.
While this may be useful in many cases there are some creditors (such as the CRA) that do not allow debt management plans.
Tax debts, however, can be included in a Consumer Proposal or Bankruptcy Claim.
So, which is the best fit for you?
When it comes to Consumer Proposals Versus bankruptcy, the right choice for you will depend largely on your circumstances.
Let’s take a look at what kinds of circumstances lend themselves to each solution.
When Should I Choose a Consumer Proposal?
A Consumer Proposal is a great option for those who, for whatever reason, are unable to establish a debt management plan but want to avoid bankruptcy.
Consumer Proposals are certainly less well known than Personal Bankruptcy, but they can be tremendously helpful in allowing you to manage your debts.
Under a Consumer Proposal, a portion of your debt can be written off (exactly how much will be negotiated by your Proposal Administrator).
Furthermore, any interest, fees and charges are frozen.
No more wasting a fortune every month on unnecessary interest payments.
A Consumer Proposal is the right way to go if…
You want to protect your investments
Some investments are not protected in the event of bankruptcy.
For instance, if you have been paying into a Registered Retirement Savings Plan (RRSP), anything contributed in the 12 months prior to filing can be seized when declaring bankruptcy.
Your RRSP is protected under a Consumer Proposal, as are other investments such as stocks, cryptocurrencies, precious metals, fine art, wine etc..
You have more than $10,000 equity in your home
When filing for bankruptcy in Canada, your principal residence is exempt from seizure only if your equity does not exceed $10,000.
Thus, if you have more equity than this in your home, you will likely find a Consumer Proposal better suited to your needs.
You want to learn to get by without needing credit
Because a Consumer Proposal can remain on your credit report for up to 8 years from the point of arrangement, credit can be very difficult to come by.
Harder, in fact, than it is for the recently bankrupt (at least those who are bankrupt for the first time).
However, this needn’t necessarily be a bad thing.
You might just find that being unable to get access to credit gives you the push to be more disciplined with your finances- ensuring that you budget properly and make saving a priority.
When Should I Choose Bankruptcy?
We tend to think of bankruptcy as a last resort to be avoided at all costs.
But as we have seen, it can be highly beneficial.
Unlike a Consumer Proposal, bankruptcy waives all of your debt or a significant proportion of it.
This means that your disposable income is not subsumed by repayments and your finances are once more your own.
This means that you will have more to set aside every month in savings, to prevent you from becoming over-reliant on credit again.
However, that’s not to say that if you should find yourself needing car credit or a mortgage that you won’t be able to get them, eventually.
Bankruptcy is a fresh start, meaning that you’ll need to rebuild your credit rating from scratch.
Get into the right habits, however, and you will be able to get credit again.
Credit counselling can be a tremendous boon to help ensure that the bad habits that drove you to bankruptcy do not persevere in your post-bankruptcy life.
What is Credit Counselling?
Credit Counselling is a mandatory part of the bankruptcy process in Canada.
All bankrupts need to complete two mandatory Credit Counselling sessions to help them to get their personal finances off to a better start.
After all, what’s the point of a clean slate if you’re just going to make all the same mistakes again?
Credit Counselling comes in two stages:
First Stage: Within 60 days of filing for bankruptcy you will be expected to arrange your First Stage Counselling with a Credit Counsellor. They will provide advice about the bad planning and spending habits which can lead to insolvency, and help you to identify the warning signs that precipitate financial difficulties.
Second stage: Whereas the first stage deals in very generalised advice, the second stage is more about you. It’s about helping you to identify things you’re doing right and wrong in terms of money management. It can also help you to pinpoint the exact circumstances that led to your insolvency and prevent you from making the same mistake. If your counselor identifies that an underlying mental health issue is a major contributing factor, they will be able to refer you to a specialist who can help you to address these specific issues.
With the help of your counsellor, you will establish an infrastructure for better money management that will help you to improve your relationship with your finances.
Still not sure which option is right for you?
As we can see, there are significant advantages and potential caveats for both Consumer Proposals and bankruptcy.
And if you’re still not sure which option is best suited to your needs, don’t worry.
That’s where we come in.
Our licensed and highly knowledgeable team of professionals can work with you to help you to identify the best option to suit your unique circumstances.
Since we first opened in 1999 we’ve helped hundreds of thousands of Canadians from all walks of life to make the right choices and liberate themselves from the shackles of debt.
If you’d like to know more about our services, call us today on (877)879-4770 to arrange a risk-free, zero-obligation and 100% confidential callback.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?