Consumer Proposal vs Personal Bankruptcy
When your debt has reached unmanageable levels, personal bankruptcy and consumer proposals are two solutions available. Both come with benefits and drawbacks, which are essential to consider before making an informed decision. While both solutions can help you get out of debt, they affect your credit score, assets, and monthly payments differently.
This article will look at what bankruptcy and consumer proposals are, their similarities and differences, and have an in-depth look at which of the top options is the best for your situation. Bankruptcy vs. consumer proposal – Which is suitable for you? Let’s find out.
What is a Consumer Proposal?
A consumer proposal is a legally binding, formal agreement between you and your creditors. The proposal is administered by a Licensed Insolvency Trustee, who will review your financial situation and help you negotiate the terms of the repayment plan. The agreement will include how much of your debt you can repay, at which rate, and over which period.
A consumer proposal will allow you to reduce the debt you have to repay by up to 80%. This agreement will protect you from legal action, such as wage garnishments, stop collection calls and any interest on your debt from the day you file the consumer proposal.Ask us about a consumer proposal
What is Bankruptcy?
Bankruptcy also is a legal process overseen by a Licensed Insolvency Trustee. They will be assigned to your bankruptcy claim, take control of your assets (there are some exceptions), oversee your affairs, and monitor the progress of your bankruptcy duties. These duties include two mandatory credit counselling sessions and monthly reports on your income and expenses.
Once these duties are completed, you will be discharged from your debt after 9 or 21 months.
What Do a Consumer Proposal vs Bankruptcy Have in Common?
The most significant difference between a consumer proposal vs bankruptcy is their impact on your assets. While in a consumer proposal, your assets are protected, you have to surrender most of your assets in exchange for the discharge from your debts in bankruptcy.
But there are a lot more differences to consider, so we have compiled a comprehensive list of the essential differences between bankruptcy and consumer proposal:
|Requirements||Maximum of $250,000 of unsecured debt||Minimum of $1,000 of unsecured debt|
|Cost||A settlement negotiated with your creditors, typically starting at 20% of your debt, in monthly payments||Monthly payments based on your average monthly income, in accordance with government regulations|
|Duration||Up to 5 years, without penalty for early termination||Depending on income, 9 or 21 months|
|Reporting||No reporting required||Monthly reporting on income and expenses required|
|Impact on assets||Keep all assets||Surrender all non-exempt assets|
|Impact on credit||R7 rating on your credit report
Remains for 3 years after completion or 6 years after filing, whichever comes first
|R9 rating on your credit report
Remains for 6-7 years after completion
Which Debts Can be Included in a Consumer Proposal or Bankruptcy?
Most unsecured debts, meaning without being backed by an asset, can be included in both consumer proposals and bankruptcy. Examples of unsecured debts are:
- Credit card debt
- Tax debt
- Bank loans
- Student loans (if seven years have passed since you ceased being a student)
- Payday loans
- Store credit cards
- Medical bills.
Secured debts, such as a mortgage or car loan, which are backed by an asset, cannot be included in a consumer proposal or bankruptcy. These debts will remain separate.
When is a Consumer Proposal a Better Debt Solution Than Bankruptcy?
The only sure way to determine if a consumer proposal is better than bankruptcy is to speak with a Licensed Insolvency Trustee. They can review your financial situation and weigh both options so you can make an informed decision.
Typically, however, a consumer proposal is a less restrictive and less severe debt solution and is generally more beneficial for you and your creditors. In a consumer proposal, the LIT negotiates the debt settlement amount with your creditors, while in bankruptcy, your creditors receive far less money and your credit score is impacted far more severely.
Here are the four top reasons why a consumer proposal may be a better option than bankruptcy:
You Can Keep Your Assets
One of the most significant benefits of a consumer proposal is that you don’t have to surrender assets, such as your home, vehicles, tax refunds, investments or home equity. So if you own sizeable assets like a home or vehicle, a consumer proposal is often the better option.
Monthly Payments are Affordable and Flexible
You only have to repay a portion of your unsecured debt in a consumer proposal, and it also allows you to do so over an extended period. As many proposals use a maximum of five years, monthly payments will be low.
A Consumer Proposal Has Less Impact on Your Credit Rating
Many people are worried about their credit score. While both a consumer proposal and bankruptcy will impact your credit rating, the consumer proposal has a less damaging effect and will be removed from your credit report far earlier. Whereas bankruptcy will remain on your report for six to seven years after completion, a consumer proposal will be removed from your report six years after filing or three years after completion, whichever comes first.
There Are No Reporting Duties
The monthly payment amount of your consumer proposal will remain the same for its entire duration, regardless of any changes to your income. In comparison, in bankruptcy, your monthly payment will fluctuate if there is a change in your income.
When is Bankruptcy a Better Debt Solution Than a Consumer Proposal?
Despite being the harsher alternative between the two, there are times when bankruptcy is the best option, if not the only one.
Especially if you have lost your job or are dealing with unexpected circumstances, the approval for a consumer proposal may be challenging, if not impossible, to achieve, leaving bankruptcy as a relatively quick solution to unmanageable debt.
Here are four reasons why bankruptcy might be the better solution.
Bankruptcy Has No Debt Limits
Unlike a consumer proposal with a limit of $250,000 of unsecured debt, bankruptcy does not limit how much debt can be included as long as it is more than $1,000.
The Bankruptcy Process Takes Less Time
The bankruptcy process takes less time than a consumer proposal, which generally takes three to five years. Depending on your income and if it is your first bankruptcy, this will allow you to be discharged within 9 or 21 months; if it is your second bankruptcy, it would be up to 36 months. This shorter duration allows you to start rebuilding your credit sooner.
You Do Not Need to Repay a Portion of Your Debts
If your debt has become so overwhelming that you can’t afford to repay any of your debts, bankruptcy is the better solution. The downside of not having to make any further payments to your creditors is that you will have to surrender any non-exempt assets to your LIT to repay for parts of what you owe.
You Won’t Lose Everything
Contrary to the common belief that if you file bankruptcy, you will lose everything, this is not the case. Every province has a list of assets exempt from seizure in the case of bankruptcy. Some exceptions include food and fuel, appliances, furnishings, clothes, tools of the trade or even your car or home. Some of these exceptions have dollar limits.
Consumer Proposal vs. Bankruptcy: Deciding Between the Two
While both options are legally binding, there are distinct differences between the two debt solutions that are critical to deciding which is best for you. Bankruptcy is more severe than a consumer proposal and has more fluctuation in how much you must pay every month.
Cost Difference Between Bankruptcy and Consumer Proposal
The amount you have to pay monthly is a significant difference between bankruptcy and a consumer proposal. Where a consumer proposal sets a fixed negotiated monthly payment that will remain the same until the proposal is completed, bankruptcy payments are based on your income. So if you earn more than at the beginning of the bankruptcy process, your payments will also increase. Higher payments due to a higher income are also known as ‘surplus income payments.’
How Much Does a Consumer Proposal Cost, and Who Pays?
There are no upfront fees required to file a proposal. The Licensed Insolvency Trustee administrating your consumer proposal receives a fee set by law that will be included in your monthly payments.
How Much Does it Cost to File Bankruptcy, and Who Pays?
Unlike a consumer proposal, bankruptcy costs vary from case to case. There are filing and legal fees that must be paid before the bankruptcy is filed, but the total costs will factor in your income and assets, among other things. To better understand the cost of bankruptcy, we recommend speaking with a Licensed Insolvency Trustee to get a better picture.
How Much of My Debt is Cleared?
Several factors affect how much of your debt you can clear in a consumer proposal. For one, you can only include unsecured debt (meaning that a mortgage or car loan has to remain separate). Generally, you will need to prove enough income to be able to repay between 20-40% of the outstanding balances for your proposal to be accepted. Your total debt (excluding mortgage) also has to be below $250,000.
All debt included in the bankruptcy filing will be cleared, as long as it is at least $1,000, but you will have to surrender all non-exempt assets in return.
How Long Does Each Debt Solution Option Last?
A consumer proposal can be spread out over a maximum of 5 years or 60 months.
Depending on your income, a first-time bankruptcy can be completed in 9 months or, if you have surplus income payments to make, 21 months. If it is your second bankruptcy, this will be extended to 36 months.
What’s Worse? Credit Rating Impact of a Bankruptcy vs Consumer Proposal
Bankruptcy will lead to an R9 rating on your credit report, the worst rating possible. It will remain on your report for 7 to 14 years, depending on your circumstances.
A consumer proposal will have an R7 rating on your report, indicating that you have settled with your creditors. It will remain on your file for 6 years after filing or 3 years after the proposal is completed, whichever comes first.
How Soon Will Your Credit Score Improve?
You can begin rebuilding your credit while your consumer proposal is still active. Small credit lines are available that are designed for rebuilding credit and that you can use to re-establish a good payment history.
Comparing Monthly Reporting and Duties
When you declare bankruptcy, you are required to make monthly reports with all income and expenses, including copies of your pay stubs, which all have to be submitted to your LIT. These reports will be used to determine if you will be required to make any surplus income payments.
You are not required to do any monthly reports in a consumer proposal. Regardless of any potential changes to your income, your payments will remain the same for the duration of the consumer proposal.
What Happens if My Income Changes?
In bankruptcy, if your income increases, you will be required to make surplus income payments, while in a consumer proposal, your monthly payments will not change once the proposal is accepted, even if you earn more.
What Happens to My Tax Refund?
All tax refunds and/or tax credits will be applied against your bankruptcy obligations, while in a consumer proposal, you can keep all refunds and credits.
Qualifications & Considerations
It is important to note that not everybody qualifies for a consumer proposal. Especially if your monthly income is too low or unstable, it might not be able to support a repayment plan under a consumer proposal, and bankruptcy may be the only option remaining.
How Do You Qualify For a Consumer Proposal?
There are six criteria you must fulfil to qualify for a consumer proposal:
- You have to be 18 years old.
- Your total debt, excluding a mortgage, has to be less than $250,000.
- You must be insolvent, meaning you can’t repay your current debts with your income and assets.
- You must consult a Licensed Insolvency Trustee to determine your consumer insolvency and that you qualify for a consumer proposal.
- Your household income must be high enough to support the required monthly payments.
- If you have failed to complete a previous consumer proposal, you will not be eligible to file another one.
How Much Debt Must You Have to File For Bankruptcy?
First of all, to be able to file for bankruptcy, you have to be classified as insolvent. The Bankruptcy and Insolvency Act states that a person is considered insolvent if their liabilities to their unsecured creditors amount to more than $1,000 and they are unable to repay these creditors.
Generally, a consumer proposal might be a better option if you can repay at least 20% of your unsecured debt with monthly payments.
Can You Switch From a Consumer Proposal to Bankruptcy?
It is possible to switch from a consumer proposal to bankruptcy. However, it is critical to note that this comes with quite severe consequences. The most significant one is that you will not qualify for any other consumer proposals in the future as you will have failed to complete the current one.
It also would significantly impact your creditworthiness as you would have both ratings on your file. This is why exploring all available options, such as renegotiating your repayment plan, is crucial. If your financial issues are only temporary, you can defer up to two payments without cancelling the proposal. Both alternatives will have less impact on your credit report than bankruptcy.
How Many Times Can You File a Consumer Proposal?
If you complete a consumer proposal, you will be eligible to file another one in the future. However, you must complete a proposal to qualify for a new consumer proposal. In some cases, you can revive a cancelled proposal within 30 days. Beyond this period, you must go through court to revive it.
You also cannot have two consumer proposals at the same time.
Can you File Bankruptcy After a Consumer Proposal?
You can qualify for bankruptcy if you become insolvent after completing a consumer proposal. Consumer proposals do not affect your ability to file for bankruptcy in the future.
What Happens at the End of Your Filing?
Your debts will be eliminated in both cases.
Once your bankruptcy is completed, you will receive a discharge, legally releasing you from all debts covered under your bankruptcy. This release means you are no longer liable for payments and are legally protected from your creditors.
After you have completed all consumer proposal payments, a certificate will indicate the completion of your proposal to you and the official receiver. It will relieve you of all debts included in the consumer proposal.
Obtaining Loans and Credit Cards
Whether you file for a consumer proposal or bankruptcy, lenders will consider you a high credit risk. Obtaining an unsecured credit card or a personal loan will be very difficult. Secured loans, such as a car loan or a secured credit card, will be available even after filing.
Can You Get a Loan or Credit Card if You File for Bankruptcy?
While it can be challenging, there are credit-building options available that you can obtain shortly after bankruptcy. These accounts are primarily small credit lines between $150 and $500 and often require a security deposit. They may have higher borrowing costs, annual fees or high-interest rates. Another option is a prepaid/secured credit card, where you have to make a deposit that is considered collateral for the amount.
Can You Get a Loan or Credit Card if You File a Consumer Proposal?
Unsecured loans and credit lines will be challenging to obtain while on a consumer proposal like bankruptcy. If you want to start re-establishing your credit with a good payment history, you may want to look into a secured credit line or a loan secured by an asset such as a car. Once you have completed your proposal, obtaining new credit lines will become more accessible, and you can accelerate the recovery of your credit score.
Owning a Car or Home and Renting
When filing for bankruptcy, your car and home ownership can take a significant hit, and a consumer proposal will also impact your ability to secure new financing. The good news, however, is that as your credit score recovers, these obstacles will become smaller.
What Will Happen to Your House or Car?
If you enter a consumer proposal, neither your house nor your car will be affected, as you are not required to surrender or liquidate any of your assets as long as you can consistently make your monthly payments.
On the other hand, in the case of bankruptcy, you will have to rely on exemptions. The primary home exemption in Ontario only applies if the available equity in your home is $10,000 or less. If it is above this, the LIT has to sell it to access the funds and apply them to the owed debts. You can keep one vehicle if its value is below the exemption amount. Any additional vehicles or if your vehicle is worth more than the exemption will be liquidated.
Can You Buy a House or Car?
While it is not impossible, it will be very challenging to qualify for a secured mortgage or auto loan as you will be considered a high-risk borrower, whether you filed for bankruptcy or a consumer proposal. Both impact your credit score and will only slowly recover over time.
Even if you get approved, interest rates will likely be significantly higher. However, as your credit score recovers, terms offered by lenders will also improve.
Can You Rent an Apartment or House?
Most rental agreements these days involve a credit check, and a consumer proposal or bankruptcy will be a red flag to your prospective landlords. Thankfully, your credit score is usually only one factor they will consider. They will also look for stable employment, income, and a good payment history. Sometimes explaining the situation may also help you secure a rental agreement.
Public Records and Employment
Many employment background checks involve a credit check, so a bankruptcy or consumer proposal may impact your ability to find employment. Still, the effect is not as dramatic outside of industries that involve finances.
Are Consumer Proposals Public Record?
All insolvency records are public, whether it is bankruptcy or consumer proposals. The Office of the Superintendent of Bankruptcy Canada (OSB) is responsible for their administration, and members of the public can access them online against a fee and only with precise searches.
The OSB also files monthly reports to the Canadian credit bureaus TransUnion and Equifax, which will record them in individuals’ credit histories and include new filings and discharges from bankruptcy or the full performance of proposals.
Will Filing a Consumer Proposal or Bankruptcy Affect Your Ability to Get or Keep a Job?
While employers and government agencies are not allowed to discriminate against candidates based on a bankruptcy record, it can still impact your chances of securing a position, especially if it involves handling finances. Many employers also check your credit history when performing a background check, so it may still influence their decision.
Do Consumer Proposals and Bankruptcies Show Up on Background Checks?
If the background check includes a credit history check, consumer proposals and bankruptcies will show on your record if they have not expired yet.
The Process of Filing a Consumer Proposal vs Bankruptcy
Do You Need a Lawyer to File Bankruptcy?
While not required, a lawyer might be a reasonable consideration if your creditors are likely to dispute your debts or if you have assets like a home or vehicle you would like to protect.
Who Do You Contact For Help Filing a Consumer Proposal?
Licensed Insolvency Trustees are the only licensed professionals to administer consumer proposals and bankruptcies. An LIT will carefully evaluate your financial situation and determine if you qualify for a consumer proposal or if other debt solutions might be more suitable. Either way, contacting a Licensed Insolvency Trustee should be at the top of your list as they offer free consultations, which will help you determine which path is the best.
Choosing the right debt solution is a challenging and crucial decision that should be carefully considered. Both consumer proposals and bankruptcy can be practical tools to help you get out of debt, but they have distinct advantages and drawbacks.
If you have further questions about whether a consumer proposal or bankruptcy is the best solution, the experienced LITs of Risman Zysman are here to help. Our debt relief professionals are happy to help you review your finances, answer any questions, and help you determine the best debt solution.
Risman Zysman has over 45 years of experience providing quality debt solutions. Our team of professionals understands the fears and frustrations of individuals facing financial difficulty. At Risman Zysman, we present each client with a full range of options and guide them to make the right choices so they can move forward.
To find out how we can help you, call us at 416-222-4600 and get a free, confidential, no-obligation consultation today! Risman Zysman can help you on the road to financial recovery.
When you declare bankruptcy and your income changes, you are required to report the change to your trustee. If your income increases, your trustee may ask you to repay more of your surplus income. If your income decreases, you may be able to reduce your monthly payments.
Once your proposal terms are accepted and your income changes, you are not required to report the change to your trustee. Your monthly payments will remain the same unless you and your creditors agree to a change.
Bankruptcy: You will lose your task refund, and it will be used to pay back your creditors.
Consumer Proposal: You may keep your task refunds.
When your bankruptcy is completed, all of your unsecured debts are erased. As a result, you will receive a bankruptcy discharge, and you are no longer responsible for repaying your debts.
If you have filed a consumer proposal, you are no longer responsible for repaying the debt covered by the proposal. Once you have made all of the payments under the proposal, you will receive a consumer proposal discharge certificate. This will release you from any further responsibility for the debt.
Both consumer proposals and bankruptcy can help you get out of debt and rebuild your finances. The best option for you will depend on your circumstances.
There are many things to consider when you are deciding whether or not to declare bankruptcy or file a consumer proposal. You need to think about how each option will impact your credit rating and your financial future. Factors that need to be considered include your total debt, ability to repay, income, assets, and credit rating.
If you are struggling to make ends meet and are considering bankruptcy or a consumer proposal, contact a licensed insolvency trustee to get more information. At Risman Zysman Inc., we can help you explore your options and make the best decision for your financial future. Our team of licensed insolvency trustees can help you get debt relief and start rebuilding your finances. Contact us today!