Consumer Proposal vs Personal Bankruptcy

Consumer Proposal vs Personal Bankruptcy

Personal bankruptcy and consumer proposals are two methods of dealing with unmanageable levels of debt. Both have pros and cons, which are worth considering before making a decision. While both solutions can help you get out of debt, they have different effects on your credit score, assets, and monthly payments. In a bankruptcy, you may lose some of your assets, but all of your debts will be eliminated. A consumer proposal is an agreement between you and your creditors to pay back a portion of what you owe. Your monthly payments will be reduced, and you may have to keep your assets.

Is A Consumer Proposal Better Than Bankruptcy?

A consumer proposal is often a better option than bankruptcy if you want to keep your assets, such as your house or car. A consumer proposal can also help you avoid credit score damage and protect your job. If you have a steady income and can make monthly payments, opt for a consumer proposal instead.

You can keep your assets: A consumer proposal allows you to keep your assets, such as your house or car. However, in bankruptcy, you may lose some of your assets.

Your monthly payments will be reduced: A consumer proposal allows you to make smaller monthly payments than bankruptcy. This is because the total amount you owe will be reduced.

You may avoid credit score damage: A consumer proposal will not damage your credit score as much as a bankruptcy.

You can protect your job: In some cases, a consumer proposal can help you keep your job. This can allow you to make smaller monthly payments and avoid some of the other adverse effects of bankruptcy.

Key Differences: Bankruptcy VS Consumer Proposal

Here's a deeper detail of bankruptcy vs consumer proposal to better understand their key differences:

• Qualification:

Bankruptcy: To qualify for bankruptcy, you must owe more than $1,000 and be unable to pay your debts.

Consumer proposal: You can only file a consumer proposal if you owe less than $250,000.

• Duration:

Bankruptcy: A bankruptcy stays on your credit report for up to 10 years.

Consumer proposal: A consumer proposal stays on your credit report for up to five years but can be paid off early.

• Assets:

Bankruptcy: You may lose some of your assets in bankruptcy.

Consumer proposal: You can keep all of your assets in a consumer proposal.

• Cost:

Bankruptcy: Calculated based on income and assets.

Consumer proposal: Negotiated settlement which starts at 30% of the debt.

• Credit score:

Bankruptcy: A bankruptcy will damage your credit score for up to seven years from completion.

Consumer proposal: A consumer proposal will damage your credit score for 3-6 years.

Who’s Eligible to Claim Bankruptcy Or A Consumer Proposal?

Only individuals can file for bankruptcy or a consumer proposal. Businesses cannot file for these forms of debt relief.

Claiming Bankruptcy in Canada: Individuals who are unable to repay their debts may be able to file for bankruptcy. This is a legal process that will eliminate some or all of your debt and give you a fresh start. However, the process can be complex, so it's important to understand the steps involved.

Filing a Consumer Proposal: Any person who owes less than $250,000 and cannot repay their debts may be able to file a consumer proposal. This legal process will allow you to repay a portion of your debt and avoid bankruptcy. Your creditors must accept the proposal.

Bankruptcy VS Consumer Proposal: Cost Difference

Bankruptcy Payment: Bankruptcy payments vary based on a person's income, assets, and province. This means that a bankrupt person may have to pay $200 per month, while another bankrupt person may have to pay $1,500 per month. The average monthly payment for bankruptcy is $800. The higher the income and assets, the higher the monthly payment.

Consumer Proposal Payment: The monthly payment for a consumer proposal is based on your ability to repay your debt. You will negotiate a payment amount with your trustee that is comfortable for you, then the trustee will discuss it with your creditors. When a certain amount is approved, the proposal is filed, and you will make monthly payments to your trustee until the debt is repaid in full.

How Long Does Each Bankruptcy Option Last?

Length of Bankruptcy: A first-time bankrupt will be automatically discharged from bankruptcy after nine months if they have no surplus income. A second-time bankrupt will be automatically released after 24 months if they have no surplus income. However, if a bankrupt has surplus income, they may be required to make payments for up to five years. A bankrupt person can also apply to the court to be discharged early.

Length Of Consumer Proposal: A consumer proposal can last for up to 60 months (five years). If you can repay your debt in full within this time frame, you can apply to the court to be discharged from the proposal early.

Assets Affected By Bankruptcy Or Consumer Proposal

If Declaring Bankruptcy in Canada: You will be required to surrender most of your assets. This includes your home, car, furniture, and other valuable possessions. You are allowed to keep a certain amount of assets, but the total value of these assets cannot exceed $5,000.

If Filing a Consumer Proposal in Canada: When you file for a consumer proposal, an automatic order is created to stop all legal proceedings against you. This includes lawsuits, wage garnishments, and bank seizures. You are not required to surrender your assets.

Credit Rating Impact: Bankruptcy Vs Proposal

Personal Bankruptcy: The impact of personal bankruptcy in Canada on your credit rating will be a notation of "Bankrupt" on your credit report for six years. You will receive an R9 which means "bad debt - bankruptcy" and significantly lower your credit score. It will remain in your credit report for six years from the date of your bankruptcy discharge.

Consumer Proposal: The impact of a consumer proposal on your credit rating is less severe than personal bankruptcy. You will receive an R7 which means a settlement with your creditors has occurred and will be on your credit report for three years.

The decision between consumer proposal vs bankruptcy should not be based on your credit rating impact but on the total amount of debt that you have. Bankruptcy is the best option if you have a lot of debt and cannot repay it. On the other hand, a consumer proposal is the best option if you want to repay your debt over time and keep your assets.

Monthly Reporting And Duties

Bankruptcy Duties: Once you declare bankruptcy in Canada, you will be required to provide your trustee with monthly statements of your income and expenses. You will also be required to attend two credit counseling sessions. You will also be required to surrender your financial statements, tax returns, and other documents that the trustee requests.

Consumer Proposal Duties: You are required to make your payments to the trustee as outlined in your proposal. You are not required to report your monthly income and expenses. However, you may be required to provide financial information if your creditors request it.

What If My Income Changes?

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.

Is My Tax Refund Affected?

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.

What Happens When Settlement Is Completed?

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.

Which Option Is Right For Me?

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!