What’s the Difference Between Consumer Proposals and Bankruptcy?

Consumer Proposals and Bankruptcy: Is There a Difference?

One of the first steps towards paying off your debt is to explore all of your options.

And through this process, you might have come across two options – a Consumer Proposal and bankruptcy.

But what’s the differences and similarities between the two?

In order to decide which debt solution is more suitable for your needs, you need to settle on one of these.

This is where Bankruptcy Canada comes in – we can help you to understand these differences and similarities so you have the information you need to take the next step.

Let’s start, however, by defining what each of them are so that you have a better understanding:

A Consumer Proposal

A Consumer Proposal is a type of formal agreement that’s made between you and your creditors with the assistance of your Licensed Insolvency Trustee (who helps to define the terms of the repayment).

As part of the agreement, you’ll knowingly agree to pay all or part of your debt.

Giving you a level of protection that prevents wage garnishments and harassment from debt collectors, it’s a viable option for those struggling to keep up with payments.

Bankruptcy

Another way of managing debt and finding a solution is to file for bankruptcy.

A structured legal process, with the help of a Licensed Insolvency Trustee, you’ll be able to ease the pressure from creditors and be discharged from your debt in as little as 9 months.

However, by opting for this choice, keep in mind that the LIT will have control over your assets, will monitor your progress throughout the process and will thoroughly investigate your financial affairs.

The progress you’ll have to undertake will be in completing certain duties.

These include regularly filing monthly reports of all of your expenses and income, as well as two crediting counseling sessions.

So what are the differences between the two options?

Who Can Claim Them

Bankruptcy: when claiming bankruptcy in Canada, the following people can file for it:

  • Those who are insolvent – you owe more in repayments than you own.
  • Those who have owe more than $1,000 in debt.

Consumer Proposal: in order to file a Consumer Proposal, your debt cannot exceed $250,000 (excluding the cost of your mortgage).

Keep in mind that all of your creditors must accept your proposal before it’s granted.

Typically, you’ll need more than 75% of them to accept it.

 

How Long The Process Takes

Bankruptcy – as mentioned, when filing for bankruptcy, you could expect to be discharged from debt in as little as 9 months.

But this will depend wholly on whether it’s your first time filing for it, and how much income you receive.

Done on a case-by-case basis, it’s good to seek the advice of your LIT who can provide you with more information surrounding the process.

Consumer Proposal – in comparison to bankruptcy, a Consumer Proposal is an agreement that’s specific to each individuals’ financial situation.

And because of this, the length of time it can take to finish varies hugely; ranging from as little as 4 weeks to 2 years.

However, if you have surplus income, then you can pay off your debts early without accruing any penalty charges.

 

The Costs Associated With Both Options

Bankruptcy: As mentioned above, it will take approximately 9 months for the discharge process.

This would be based on paying the minimum fee associated with filing ($200) and will be based on your income.

Consumer Proposal: how much you’ll have to pay back through a Consumer Proposal will vary.

However, the cost of it will be taken from what the creditors receive.

And with debts being cut up to 80% will no additional fees, it can be easy to work out exactly how much you’ll have to repay over that set period of time.

 

Tax Refunds

Bankruptcy: when you declare bankruptcy in Canada, it’s vital to know that you’ll lose all of your tax credits and/or any tax refunds you accumulated.

Consumer Proposal: through filing a Consumer Proposal, you’ll be able to retain all of your tax credits and refunds.

 

Monthly Duties and Reporting

Bankruptcy: when you file for bankruptcy, you not only have to supply copies of your pay stubs to your trustee, but you will have to create and complete a monthly budget listing all of your expenses and income.

Once this is gathered, your trustee will discuss the possibility of making surplus income payments to help repay the debt faster.

Consumer Proposal: unlike with filing bankruptcy, with a Consumer Proposal, you don’t need to complete monthly budgets or report on any changes within your income.

 

The Impact on Your Credit History 

Bankruptcy: once you’ve filed for personal bankruptcy under R9, it will be put on your record for six years after you’ve repaid all of your debt.

Plus, any late payments you make will be reported by credit bureaus for at least 7 years after.

Although there are ways that you can improve your credit rating after bankruptcy, it’s important to note the effect it can have on your credit history when comparing the two options.

Consumer Proposal: once you’ve filed for this under R7, it will appear on your credit rating for either three years after it’s completed or six years from when you first filed your Consumer Proposal.

Throughout this process, you can start to rebuild your credit.

 

Voting Process

Bankruptcy: unlike a Consumer Proposal, there is no voting required. Once it’s filed, creditors have no option to stop the process, despite being able to request an examination (in certain circumstances).

Consumer Proposal: any unsecured creditors have 45 days to vote for or against your consumer proposal. Alternatively, they can put forward a counter offer.

 

Assets

Bankruptcy: you’ll have to turn over any assets (that are non-exempt in the agreement) to your trustee.

Consumer Proposal: you can keep the majority of or all of your assets when you filed a proposal.

 

Similarities

Both options are legally binding processes that are directly administered by a Licensed Insolvency Trustee.

So no matter which option you’re edging towards, it’s important to meet with them to understand any fees, what’s involved, etc.

There are two main similarities between the two options.

Firstly, virtually all debts can be forgiven under both personal bankruptcy filing and a Consumer Proposal, as well as interest being halted.

Not only will this include credit card debt, but any student loans, income tax debts, etc.

Secondly, after they are both electronically filed with the Federal Government, creditors will be notified of the filing by the trustee within 5 business days and the individual will be protected.

Both matters of public record, they can be accessed by anyone at any time.

In the case that the debts are joint, then your spouse/partner will also be liable for the repayments.

When A Consumer Proposal is a Better Option 

The main reasons why people tend to opt for a Consumer Proposal over a bankruptcy are not only because the terms are determined upfront but also that:

 

  • You decide specifically how much you can afford to repay.
  • You don’t run the risk of losing any assets or tax refunds.
  • It’s a straightforward process that can be very efficient.

 

Contact Bankruptcy Canada Today 

Do you want to find out more about Consumer Proposals and Bankruptcy?

Experts in debt relief services, Bankruptcy Canada is your first port of call every time.

Simply get in contact with us today by either calling us on (877) 879-4770 or by emailing us by using our online form.

Please post a follow up comment below:

(Note: Comments are reviewed before posting.)