Cost Differences Between Consumer Proposals and Bankruptcies

Analyzing the Cost Differences Between Consumer Proposals and Bankruptcies

In the world of financial distress, two major solutions often come into the limelight: Consumer Proposals and Bankruptcies. Both hold their unique pros and cons, and each is suitable for different circumstances. However, the cost differences between consumer proposals and bankruptcies are a critical factor that often sways the decision of financially crippled individuals or businesses. Let’s dive deep into this topic and unearth the economic implications of the two.

Understanding Consumer Proposals

A consumer proposal is a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). It’s a feasible option for individuals who do not have the capacity to pay their debts in full but can afford to pay a portion of the money owed.

The Process

The process starts with a detailed consultation with a LIT about the financial status of the debtor. The LIT crafts a consumer proposal that offers a repayment plan, which is then forwarded to the creditors for approval. If the creditors reject the proposal, the debtor has to either modify the proposal or opt for another debt-relief avenue, like bankruptcy.

Unraveling Bankruptcy

Bankruptcy, on the other hand, is a legal process initiated by the debtor to relieve themselves from the burden of insurmountable debt. Depending on the bankruptcy chapter suitable for the debtor’s situation, a repayment plan can be set up or the debtor’s assets can be liquidated to repay the debt.

Cost Differences Between Consumer Proposals and Bankruptcies

In the battle of cost differences between consumer proposals and bankruptcies, consumer proposals usually come out on top as the more affordable option.

Consumer Proposal Costs

In a consumer proposal, the LIT collects a mandatory fee from each monthly payment made by the debtor. This fee is included in the monthly payments, eliminating the worry of managing multiple payments each month. Importantly, a consumer proposal comes with no upfront costs or filing fees.

Bankruptcy Costs

Contrarily, bankruptcy involves various costs like filing fees and legal fees. The total cost of bankruptcy largely relies on the debtor’s personal income and assets.

Eligibility for Consumer Proposals and Bankruptcies

Eligibility is a critical factor when considering the cost differences between consumer proposals and bankruptcies.

Consumer Proposal Eligibility

To be eligible for a consumer proposal, an individual must be 18 years or older with total debt less than $250,000, excluding the mortgage. The individual must be insolvent, have stable monthly income to repay a part of their unsecured debt, and must consult with a LIT before filing a consumer proposal.

Bankruptcy Eligibility

For bankruptcy, insolvency is a must.

Impact on Assets

The impact on assets is another crucial aspect to consider while analyzing the cost differences between consumer proposals and bankruptcies. In a consumer proposal there’s no requirement to surrender assets. In contrast, personal bankruptcy might lead to the loss of significant assets, exempting only those under legal protection.

Inclusion of Debts

Consumer proposals cover most unsecured debts, with an expectation to pay back approximately 20-40% of your unsecured debts. Personal bankruptcy allows you to discharge specific debts without repayment.

Switching from Consumer Proposal to Bankruptcy

Yes, you can switch from a consumer proposal to bankruptcy. However, cancelling a consumer proposal has its own repercussions. For instance, if you cancel your proposal, you are barred from filing another proposal in the future.

Credit Report Impact

Both consumer proposals and bankruptcies will lead to a decline in your credit scores. A consumer proposal stays on your credit report for up to three years after its successful completion, while bankruptcy can stay for up to seven years.

Consumer Proposal vs Bankruptcy

The better debt solution between a consumer proposal and bankruptcy depends on the individual’s financial situation. For some, a consumer proposal might be a better fit, while others might find bankruptcy more advantageous.

Consumer Proposal vs Debt Consolidation

Debt consolidation is another option considered by some individuals. However, it has been observed that opting for a debt consolidation loan often leads to an increase in overall debt.

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