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Consumer Proposal vs. Bankruptcy in Canada: What Is the Best Option for You?

When you’re struggling with overwhelming debt, it’s important to understand the options available to you. One option is a Consumer Proposal, while another is Bankruptcy. Both can provide debt relief, but they have distinct processes and outcomes. The Bankruptcy and Insolvency Act (BIA) safeguards everyone involved in Consumer Proposals or Bankruptcy, including debtors, lenders/creditors, and Licensed Insolvency Trustees (LITs) overseeing the process. By comparing the benefits and drawbacks of a Consumer Proposal vs Bankruptcy, you can determine which might be the best fit for your situation.

What Is a Consumer Proposal?

A Consumer Proposal is a formal deal made between someone who owes money (the debtor) and the people they owe (creditors), managed by a Licensed Insolvency Trustee (LIT).

Consumer Proposals stand as the top Bankruptcy alternative for a compelling reason: they are the sole Government-approved debt settlement program in Canada. One of the key advantages of a Consumer Proposal vs Bankruptcy is that it allows you to address your debts without enduring the financial repercussions of Bankruptcy.

A Consumer Proposal lets you pay back a portion of what you owe through a set payment plan, usually lasting up to five years. The main difference with this and a Debt Consolidation is that a Consumer Proposal not only merges multiple debts into one sum but also reduces your overall debt balance and eliminates interest fees.

With a Consumer Proposal, you can potentially decrease and repay up to $250,000 in unsecured debt. However, secured debts (those backed by collateral) and specific student loans cannot be included in a Consumer Proposal. Unlike Bankruptcy, a Consumer Proposal lets you keep your belongings, like a house or car, as long as you keep up with the agreed payments.

Consumer Proposal key features

  • Repayment Plan: With assistance from a Licensed Insolvency Trustee, you suggest a feasible plan to pay back creditors. This plan details how much you’ll repay and for how long.
  • Asset Protection: In contrast to Bankruptcy, assets like homes, vehicles, and savings are usually not taken as part of the Consumer Proposal process. This lets you keep ownership and control of your belongings.
  • Creditors’ Vote: After a proposal is sent, creditors get 45 days to vote on whether to accept it. If most creditors (by the amount owed) agree, the proposal becomes legally binding for all creditors, even if some voted against it.
  • Credit Impact: While a Consumer Proposal will have a negative impact on your credit score, it is generally less severe and of shorter duration compared to Bankruptcy. When you submit a Consumer Proposal in Canada, it will result in an R7 rating on your credit report. An R7 rating shows that you have started a proposal and are making payments towards your debts. As per Canada.ca, your Consumer Proposal filing will remain on your credit report for at least three years after you finish your proposal. You can begin rebuilding your credit shortly after completing the repayment plan.

What Is Bankruptcy?

Bankruptcy is a legal process designed to provide Canadians with a fresh financial start. It involves selling assets to pay off debts or getting rid of most debts altogether.

In Canada, you can file for Bankruptcy if you owe at least $1,000 in unsecured debt. The usual timeline for completing a Bankruptcy case is nine to 21 months, which varies based on your income. Usually, a personal Bankruptcy is seen as a final option for people who can’t repay their debts in other ways, like through a Consumer Proposal.

Bankruptcy key features

  • Asset Liquidation: In Bankruptcy, assets that aren’t protected may be sold to pay creditors. However, some assets, like essential household items and work tools, might be safe from seizure under provincial laws (see asset exemptions by province).
  • Debt Discharge: When the Bankruptcy process is finished, most unsecured debts are forgiven, giving you relief from burdensome financial obligations.
  • Credit Impact: Bankruptcy can seriously hurt your credit score. Usually, the R9 rating (the lowest score) will be removed after six or seven years for the first Bankruptcy and after 14 years for subsequent bankruptcies. Rebuilding credit after Bankruptcy is tough and usually takes a lot of hard work over time.
  • Income Contributions: Sometimes, Canadians going through Bankruptcy have to make extra payments from their earnings if they earn above a certain limit. This money goes towards repaying creditors.

Choosing Between a Consumer Proposal vs Bankruptcy

Deciding whether to go for a Consumer Proposal or Bankruptcy relies on different factors, such as your financial status, assets, income, and future plans. If you qualify, a Consumer Proposal has several key advantages over Bankruptcy. Still, it’s crucial to talk to a Licensed Insolvency Trustee to assess your options and figure out the best path forward.

Here are some things to think about when making this choice:

  • Capability to Pay Off Debt: If you can afford to pay back some of what they owe gradually and want to avoid selling off assets, a Consumer Proposal could be a good choice.
  • Asset Ownership: If you are worried about safeguarding your belongings, like a house or car, you might favor a Consumer Proposal since it lets you keep ownership and control over your possessions.
  • Credit Impact: Although both choices affect credit, a Consumer Proposal typically has a milder and shorter-term impact compared to Bankruptcy. If you are worried about your credit, you may prefer a Consumer Proposal.
  • Desire for a Fresh Start: If you have high debt and want to clear most of your debts and start fresh financially, Bankruptcy might be the best option.

In an episode of the Debt Matters podcast, Julie Drane, a Licensed Insolvency Trustee, talks about the differences between a Consumer Proposal and Bankruptcy and how she helps figure out the best plan for moving ahead.

Managing financial difficulties and heavy debt can be overwhelming, but knowing the differences between a Consumer Proposal vs Bankruptcy will help you make smart choices about your money future. Whether you are considering a payment plan with a Consumer Proposal or wiping away debts with Bankruptcy, it’s important to get advice from a licensed expert. This helps in understanding options and finding a way to ease debt and achieve financial stability. By carefully considering the advantages and disadvantages of each choice and looking at your own situation, you can take steps toward managing your finances and building a brighter financial future.

Allan Marshall & Associates is available for in-person or phone consultations. Dial (888) 371-8900 to book your free consultation today. We’ll discuss your options thoroughly, ensuring you can decide with confidence.

Juliana (Julie) Drane Licensed Insolvency Trustee

Juliana (Jule) Drane, Licensed Insolvency Trustee

Julie Drane began her career in the insolvency industry in 1997 with Canada Trust and Citi Financial. In 2001, that work led to an opportunity to work with a corporate trustee in London, Ontario. Much of this work was corporate bankruptcy and restructuring and led Julie to achieve her goal to become a Licensed Insolvency Trustee.