Consumer Proposals vs. Bankruptcy
On this page, we compare a consumer proposal vs bankruptcy as the two most common formal debt settlement options. Bankruptcy is just one form of debt resolution, and it is typically a last resort. Knowing your options can save you not only thousands of dollars but also give you peace of mind about your financial future. At Goth & Company, we want to ensure you have all the information you need to make the best debt management decisions for you. In this article, we explain the top debt relief options in Canada.
Consumer Proposal vs. Bankruptcy
What’s the difference?
For the majority of Canadians who find themselves with significant debt, consumer proposals and bankruptcy are the most common alternatives. Both legally binding procedures will eliminate your debts and guarantee creditor protection, giving you the opportunity for a fresh start. Let’s explore the differences.
A consumer proposal is a contractual agreement between you and your creditors that allows repayment of what is owed at a considerably lower rate, over an extended period of time. By law, a proposal can only be filed by a Licensed Insolvency Trustee. Your LIT will evaluate your finances and, based on what you can afford; they will put together an offer for your creditors.
Bankruptcy eliminates your debts through a process of surrendering your assets and surplus income. If you are looking to clear your debts as quickly as possible, this may be the best type of debt resolution for you. If this is your first time declaring bankruptcy, your debts can likely be absolved within 9 months from the time of filing. For those who are filing for bankruptcy a second time, or have a high income, clearing debt may take up to a maximum of 21 months.
Is a Consumer Proposal right for you?
Are your total debts are less than $250,000, not including a home mortgage or vehicle? Are you able to pay at least 30% of your debts? A consumer proposal might be a great fit for you.
- Your monthly payments will be an amount you can afford.
- You are not required to relinquish tax credit/refund(s).
- You are directly involved in creating the terms and conditions of your agreement.
- Monthly payments are fixed, so there are no surprises.
We know that one debt solution does not fit all, and a consumer proposal may not be the right answer for every situation. Because consumer proposals and bankruptcy work so differently, it is important to understand how each one works.
Consumer Proposal vs Bankruptcy: Eligibility Requirements
- A person who finds themselves insolvent (unable to pay their debts), and owes more than 1,000.00, is eligible to file for bankruptcy. If these conditions are met, the bankruptcy process comes into effect straight away. That person will receive immediate legal protection from creditors.
- A person looking to file a consumer proposal cannot have debts exceeding $250,000 – not including unsecured assets such as a vehicle or a home mortgage. That person must also have the financial ability to repay some of their debts. Each offer is unique and drawn up based on discussions between the person filing and their Licensed Insolvency Trustee to create an offer that creditors will accept, and their client can afford. In 95% of cases, the proposal will be accepted by a majority vote amongst creditors. Once accepted, the proposal is legally binding to all creditors, even those members of the minority who may have voted against the proposal.
Consumer Proposal vs Bankruptcy: The Resolution Process
- By declaring bankruptcy, that individual agrees to surrender their assets in exchange for debt freedom. If that person’s income is high or increases during the term of bankruptcy, they may be subject to the garnisheeing of surplus income.
- A consumer proposal is drawn up with the intention that a portion of what is owed will be repaid. The good news is, in most cases, the rate of repayment is approximately 30 cents to a dollar. Debts are also consolidated into a single fixed monthly payment. The monthly payment is decided through negotiations between creditors and your advocating Licensed Insolvency Trustee.
Consumer Proposal vs Bankruptcy: Terms & Conditions
- Of most legally recognized debt solutions, bankruptcy offers one of the shortest terms for repayment. In some cases, a person will be able to resolve their debts in 9 months or less. Individuals with a high income may be required to make surplus payments and, in those cases, the period of bankruptcy can extend up to 21 months.
- A consumer proposal offers a longer window for repayment. Your contract will outline the specific amount of time agreed upon for repayment, but every person can opt for up to 5 years. A longer-term = lower monthly payments. As a result, a consumer proposal is often the more financially friendly alternative.
Consumer Proposal vs Bankruptcy: Treatment of Assets
- The main concept behind bankruptcy is the idea of surrendering one’s own assets as a means to resolve the debt. Smaller assets, such as household belongings and personal vehicle of modest dollar value, are usually not affected.
- With a consumer proposal, you maintain control of your assets at all times.
Consumer Proposal vs Bankruptcy: Increases in Income
- During bankruptcy, an increase in wage or salary can result in increased surplus payments.
- Once accepted, the terms of a consumer proposal are not subject to change. Increased income will have no effect on monthly payments.
Consumer Proposal vs Bankruptcy: Credit Scores
- It probably goes without saying that bankruptcy results in the lowest credit rating, also known as a score of R9. This score will remain on that person’s report for anywhere from 7 to 14 years.
- Consumer proposals do have an impact on credit rating, but not as drastically. A consumer proposal is associated with an R7 rating, which remains on that credit report for up to 3 years after the proposal’s completion.
Consumer Proposal vs Bankruptcy: Monthly Obligations
- Any person who declares bankruptcy must submit monthly financial reports. These reports must include a breakdown of personal expenses and pay stubs from their employer. These numbers are evaluated by a trustee who determines if that individual should be making additional surplus payments.
- Monthly financial reports are not required for consumer proposals.
All persons who file for bankruptcy or a consumer proposal are required by law to attend two credit counselling sessions.
Consumer Proposal vs Bankruptcy: Tax Refunds
- A person who is bankrupt will likely lose their tax refunds/credits.
- Tax refunds/credits are not affected by consumer proposals.
Which one is right for you?
Despite their differences, consumer proposals and bankruptcy both guarantee protection from creditors and debt resolution. Every debt story is unique. Your personal income, assets, family circumstances, and future goals should be the primary deciding factors. A licensed professional will be equipped to help you navigate all the paperwork and numbers, and help you choose the best debt solution.
What is ‘Debt Settlement’ exactly?
Broadly speaking, debt settlement can take many forms. A consumer proposal, for instance, is a form of debt settlement. However, this is very different from the ‘debt settlement’ plans that are often advertised by small agencies.
Many companies offer attractive settlement plans, but there is no guarantee that your settlement will be accepted, and clients are often charged service fees. These types of debt settlements are considered informal and are not regulated by the federal government. As such, they cannot guarantee protection from creditors who wish to take legal action, garnishee wages, or hound you with collection calls. This can be especially problematic as many companies will wait several months to years to contact your creditors with a settlement offer. Any payments that might have been made towards debts are rerouted to the agency with the goal of accumulating a significant amount of money to offer as a settlement eventually. But this process can take years, especially since clients are typically required to pay various company fees, which are sometimes hidden.
What about debt consolidation?
While there are different forms of debt consolidation, the most common method is to fold smaller debts into a single loan. This eliminates the hassle of multiple monthly payments. Ideally, the interest rate will also be lower with a single loan.
There are significant advantages to this type of debt management:
- Your credit scores will not be negatively impacted.
- You will be in good standing with your creditors.
There are potential disadvantages to debt consolidation:
- It is possible that you may not qualify for the loan.
- You may not be able to afford a high monthly payment.
- You will have to pay interest – the rate depends on your credit score
Consolidating debt can be an excellent debt management strategy, but it is not a debt resolution. You still have debt, and you still pay interest. In the event that you are unable to make your payments, any assets leveraged in the acquisition of your loan may be at risk of repossession.
Consumer Proposal vs Bankruptcy vs Informal Debt Settlement
Taking the first step!
Are you struggling with your debt and unsure where to turn? At Goth & Company, you will talk with a Licensed Insolvency Trustee who will offer compassionate and educated advice. There is no cost. You are under no obligation. Call 1.780.435.5110 to connect with any one of our six conveniently located offices throughout Edmonton and Northern Alberta.