Consumer Proposal vs Bankruptcy – Which is Better for You?

When debt accumulates, finding a way out becomes a top priority for many Canadians. Today, we compare and contrast two of the critical choices that individuals facing overwhelming debt must make: consumer proposal vs. bankruptcy. These two debt management strategies are not one-size-fits-all solutions. For Canadians seeking a path toward financial recovery, navigating the intricacies of debt relief is crucial. 

This article explores the similarities and differences, offering insights into which option might better suit your financial situation. We uncover the key factors that should influence your decision-making process, ensuring you’re equipped to move toward a debt-free future.

Let’s dive in, starting with an examination of consumer proposals and bankruptcy.

Consumer Proposal vs Bankruptcy – Side-by-Side Comparison

Let’s take a quick look at some of the similarities and differences when discussing a consumer proposal vs bankruptcy.

	Consumer Proposal	Bankruptcy
Stops Wage Garnishments?	Yes	Yes
Stops Harassing Phone Calls?	Yes	Yes
Offers Asset Protection?	Yes	Some
Can I Keep Tax Refunds?	Yes	Not All
How Long Until Discharged?	60 Months	9, 21, 24, or 36 Months
How Long on Credit Report?	Max 6 years, or 36 months from final completion; whichever comes first.	6 to 14 years past the date of discharge
Is There Monthly Reporting?	No	Yes
Are Monthly Payments Consistent?	Yes, can be designed around your situation	No
Is a Licensed Insolvency Trustee Required?	Yes	Yes

Let’s take a more detailed look at some of these important questions to better understand the two processes.

Consumer Proposal vs Bankruptcy – Similarities and Differences

Consumer proposals and bankruptcy filings are insolvency proceedings that can only be initiated by a Licensed Insolvency Trustee (LIT). Individuals facing financial challenges in Canada should be aware of some key differences between these debt management approaches. Let’s discuss these nuances to gain a better understanding of how each option works.

Understanding Consumer Proposals

In Canadian insolvency, a consumer proposal serves as a structured debt relief tool. This mechanism offers Canadians a structured plan to repay a portion of their debts, typically at reduced amounts and under more favourable terms.

Initiating a consumer proposal requires the debtor (you) to collaborate with a Licensed Insolvency Trustee. LITs are trained and licensed professionals with expertise in managing insolvency proceedings. Licensed Insolvency Trustees assess the debtor’s financial circumstances and work with creditors to negotiate a proposal.

One of the primary benefits of a consumer proposal is its ability to reduce the total debt burden, general to a significant degree. It provides relief from collections and wage garnishments, offering Canadians a chance to regain their financial footing while protecting their assets. For individuals experiencing economic turbulence, consumer proposals can be an effective means of achieving debt relief and a fresh start.

Exploring Bankruptcy

Personal bankruptcy in Canada is a legal process designed for individuals unable to meet their financial obligations. It’s a structured way to resolve overwhelming and unmanageable debt situations.

The process begins with a debtor filing for bankruptcy through a Licensed Insolvency Trustee. The LIT plays a pivotal role in guiding the individual through the process. They evaluate the debtor’s assets, assess their financial situation, and facilitate the distribution of assets to creditors.

Bankruptcy offers relief from harassing collections but has significant implications, including a negative impact on credit scores. While bankruptcy is often viewed as a last resort, it can be a viable option for Canadians experiencing severe financial distress, offering a path to rebuild their financial lives.

Consumer Proposal vs Bankruptcy – Factors to Consider

Several factors come into play when deciding between a consumer proposal and bankruptcy. Your future goals and personal financial circumstances, including debts, assets, and income, should influence and guide your choice between these two options.

Each option has distinct advantages and limitations. Therefore, it’s crucial to weigh these factors carefully before making a decision between the two. Consulting a Licensed Insolvency Trustee is essential for tailored financial advice based on your unique situation.

Consumer Proposal vs Bankruptcy –  What Debts Can Not Be Written Off?

While both consumer proposals and bankruptcy can eliminate unsecured debts, some obligations cannot be discharged through these processes.

Debts that typically cannot be discharged in a consumer proposal or bankruptcy include the following:

• Child and Spousal Support
• Student Loans (unless you’re out of school for more than seven years)
• Other Provincial Student Loans (apprenticeship loans, etc.)
• Court Fines and Penalties
• Debts Incurred After Bankruptcy
• Secured Debts
• Debts Associated with Fraud, Embezzlement, or Misappropriation.

It’s essential to understand which debts will persist after choosing either option. Knowing these limitations can help you determine the right path for your situation.

Consumer Proposal vs Bankruptcy –  What Happens to My Assets?

There are notable differences between consumer proposals and bankruptcy regarding your assets. Consumer proposals often allow you to retain ownership of all your assets, including your home, vehicle, and investments. This option enables you to negotiate with creditors for manageable repayment terms.

In contrast, you may be required to surrender non-exempt assets to repay creditors if you file for bankruptcy. Your assets become vested with your Licensed Insolvency Trustee when you file, though there’s usually an option to repurchase these assets from the trustee. Asset exemptions in bankruptcy protect necessities like your primary residence and one vehicle up to specific equity limits. These exemptions differ from province to province.

Consumer Proposal vs Bankruptcy –  What About My Tax Refunds?

Tax refunds can significantly boost your financial position, so it’s crucial to understand how these options affect them. Consumer proposals typically protect your tax refunds, allowing you to use the funds to support your financial recovery.

However, any tax refunds owed to you may be seized in bankruptcy by the Licensed Insolvency Trustee for the year of filing and for prior years. The LIT will then use these funds to repay creditors.

Consumer Proposal vs Bankruptcy –  Which Offers the Lowest Monthly Payments?

Monthly payment amounts can be critical when deciding between a consumer proposal and bankruptcy. Bankruptcy payments depend on your income, as calculated by government standards. Your monthly payments may be higher if you have surplus income or previous bankruptcy history.

Consumer proposals typically involve lower monthly payments since they are based on what you can reasonably afford over a maximum period of 60 months. This option may be more attractive for individuals with limited disposable income.

For example, if a Licensed Insolvency Trustee is able to help you negotiate your debt down to $10,000 in a consumer proposal and the alternative is only paying $7,000 if you file for bankruptcy. Your consumer proposal monthly payment would only be $167, but your monthly payments for a first-time bankruptcy would be approximately $333.

In most cases, the monthly payments would be less with a consumer proposal than with bankruptcy but of course this depends on your specific situation.

Consumer Proposal vs Bankruptcy –  How Long Are They on My Credit Report?

Consumer proposals affect your credit score for a maximum of six years or three years after completion, whichever comes first, while bankruptcy has a more prolonged impact. Bankruptcy can stay on your credit report for six to fourteen years after discharge, depending on whether you have been bankrupt in the past.

Both options will negatively impact your credit score during their respective durations on your report, but a consumer proposal has a less severe impact than bankruptcy. After completing either debt relief option, your credit score can gradually improve if you pay bills on time, reduce debt, and rebuild your credit history.

Consumer Proposal vs Bankruptcy –  How Long Before They Are Discharged?

While a consumer proposal typically takes longer to complete, a bankruptcy can be discharged sooner. With a consumer proposal, you usually make payments over five years (60 months). Your debts are considered discharged once you complete all payments.

Depending on your situation, your first bankruptcy can last for as little as nine months or up to 36 months, depending on if you have been bankrupt in the past. Once you fulfill all your bankruptcy duties, your debts are discharged.

Consumer Proposal vs Bankruptcy –  How Do I File?

Filing for a consumer proposal or bankruptcy in Canada involves specific legal processes. Licensed Insolvency Trustees play a central role in both options, but consumer proposals involve more negotiation.

Steps in a consumer proposal:

1. Consult with a Licensed Insolvency Trustee.
2. Draft a formal proposal with the LIT.
3. LIT submits the proposal to creditors for approval.
4. If the majority of creditors accept, it becomes legally binding.

Steps in a bankruptcy Filing

1. Consult with a Licensed Insolvency Trustee.
2. The LIT helps file by submitting required documents to the Office of the Superintendent of Bankruptcy (OSB).
3. You must fulfill the necessary duties throughout the bankruptcy period (i.e., making surplus income payments if needed).

Both processes require careful consideration and the guidance of a Licensed Insolvency Trustee to ensure compliance with legal requirements.

Consumer Proposal vs Bankruptcy – Which is Better for Your Situation?

The choice of consumer proposal vs. bankruptcy hinges on your financial circumstances. If you want to avoid the severe impact of bankruptcy on your credit, keep your assets, and negotiate a manageable repayment plan, a consumer proposal might be your solution.

When your debts are overwhelming, and you have limited assets, bankruptcy may provide a new way forward. Your debts will be discharged sooner but at the cost of more severe credit repercussions.

Understanding the ins and outs of Canadian insolvency laws is essential when deciding between a consumer proposal or bankruptcy, especially when dealing with an insolvent financial situation. Seeking professional guidance is paramount as you navigate these complex debt resolution decisions.

Get Help Navigating Canadian Insolvency Laws

Let Powell Associates Ltd. be your ally, offering expert advice and ensuring you adhere to Canadian insolvency laws. Your path to financial recovery starts with an informed choice, so take that step today and regain control of your financial well-being.

As Licensed Insolvency Trustees, we offer a free initial consultation, including personalized assessments of your financial situation, in all cities in the Maritimes, including Dartmouth, Nova Scotia; Halifax, Nova Scotia; Moncton, New Brunswick; Saint John, New Brunswick; Charlottetown, Prince Edward Island; and Summerside, Prince Edward Island.