9 Reasons to File a Consumer Proposal instead of Personal Bankruptcy

Filing a consumer proposal can have significant advantages compared to filing personal bankruptcy when you are feeling overwhelmed with debt.

Based on our experience helping individuals deal with their obligations, these are the most common considerations that cause people to file a consumer proposal instead of filing personal bankruptcy.

1. The “Bankruptcy” label – Some people do not want to file personal bankruptcy even if personal bankruptcy is the best option for them to deal with their debts. A consumer proposal is not “bankruptcy.”

2. Rigid and unrealistic terms – If you have to make significant surplus income payments or have considerable equity in retained assets (such as a house), the required payments to complete your bankruptcy on time may not be realistic. Although a consumer proposal might cost more than personal bankruptcy, the consumer proposal allows the payments to be spread over five years and gives you the option to pay it off early. A bankruptcy cannot be shortened by being paid off early.

3. You can only do a less burdensome “first bankruptcy” once – No one expects to experience financial difficulty more than once in a lifetime. Unfortunately, it is becoming more common for Licensed Insolvency Trustees to provide advice to individuals who are experiencing issues with debt more than once.

   A second, third or fourth personal bankruptcy proceeding is a much longer process than a first bankruptcy, and the length of time that it stays on your credit report is substantially longer. If you are experiencing financial difficulty for the first time, especially if you are young, filing a consumer proposal may be a better option, so you can save this “first personal bankruptcy option” for later in life if necessary.

4. Consumer Proposals leave a smaller mark on your credit report – If you have filed personal bankruptcy one or more times previously, a consumer proposal can have a significantly better impact on your credit report as compared to another bankruptcy.

   For example, if you file a second bankruptcy, you will be in bankruptcy for at least 24 months (36 months if you are required to make surplus income payments). This bankruptcy will also be recorded on your credit report for 14 years after you have completed this bankruptcy. That means this second bankruptcy would be on your credit report for a total of 16 to 17 years, depending on if you are required to make surplus income payments.

   A consumer proposal is only recorded on your credit report for three (3) years after you have completed the consumer proposal, even if you had filed personal bankruptcy before. A consumer proposal is on your credit report for a maximum of 8 years, as compared to 16 – 17 years for a second bankruptcy. These timelines change periodically; for further details, refer to Equifax.ca and Transunion.ca.

5. Public shaming – If you have more than $15,000 of equity in assets, filing personal bankruptcy would require that a notice of your bankruptcy be published in a local newspaper. A consumer proposal does not have any requirement for publishing notices.

6. Impact on future earnings – An increase in your future income does not impact the payments under an approved consumer proposal. When you file personal bankruptcy, if your average monthly income increases, your payment may increase.

   Something to consider before choosing a consumer proposal is that if your income goes down after the consumer proposal is accepted, the payments in your consumer proposal do not change without creditor approval. If you are not able to maintain the payments on your consumer proposal, you will likely default on your proposal.

7. Windfalls are taken from you in a bankruptcy – If you become entitled to a windfall (like an inheritance or lottery winning) after your consumer proposal is approved, there is no impact. You can choose to continue to pay your consumer proposal on the approved terms or use the windfall to accelerate the completion of your consumer proposal. In bankruptcy, if you become entitled to a windfall while an undischarged bankrupt, you must report that windfall to the Trustee and turn over or transfer the windfall to the Trustee for distribution to your creditors.

8. A lot less reporting – You do not have to file monthly income and expense reports in a consumer proposal. In contrast, in personal bankruptcy, you must report your income monthly or periodically as the Trustee requires.

9. Professional exposure – Some individuals who are licensed professionals are required to report themselves to their professional organization if they file for bankruptcy but not if they file a consumer proposal. This is not the case for all professionals, as some organizations refer to an “insolvency proceeding” that would capture both consumer proposals and personal bankruptcies. If you are a professional, you need to refer to your professional body’s rules and regulations to determine the actual requirements.

While these points are significant considerations in determining whether to file a consumer proposal instead of personal bankruptcy, the bankruptcy option can sometimes be the least expensive and quickest way to resolve your financial difficulty and get you back on your feet. Thankfully, both options provide for the discharge of most unsecured debts. Check out our article that answers ‘Is a consumer proposal worth it?‘ for more info.

Licensed Insolvency Trustees are the professionals for this

These are heavy issues to consider and there’s a reason why professional standards are required to advise people in such a vulnerable and stressful position.

Powell Associates Ltd. is a Licensed Insolvency Trustee. We are experienced, hands-on insolvency practitioners who understand the personal impacts of major financial stress;

• You won’t be stuck in an assembly line process.

• You will expect and receive prompt responses and resolution of issues from our supportive and experienced team.

• We will review your debt solution options, including filing a consumer proposal or personal bankruptcy.

• We help Canadians with overwhelming debt get fresh financial starts.

Once you file a consumer proposal or personal bankruptcy, we deal directly with your creditors on your behalf. Your unsecured creditors are required to stop contacting you or continuing legal proceedings against you. Contact us for a free, no-obligation consultation.

We offer free consultations to review your financial situation and practical debt resolution options. Contact us to discuss your situation over the phone, a video chat, or in-person in Saint John, Moncton, Fredericton, Charlottetown, Dartmouth, or Miramichi.