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Consumer Proposal vs. Bankruptcy: What You Need to Know

by:
Sandra Sherk

You have explored your options for dealing with your financial difficulties and have determined a Debt Consolidation Program or a Debt Consolidation Loan are not viable for you. You are now considering the options under the Bankruptcy and Insolvency Act – a Consumer Proposal or a Bankruptcy.

Both are legally binding processes and are administered by a Licensed Insolvency Trustee (LIT). It is important that you meet with a LIT so that you can fully understand what is involved and make your decisions accordingly. You can speak with friends or family who may have filed one or the other, but it is important that you get advice about your situation.

Both are a matter of public record. If the debts are joint or co-signed, the other person is liable for the debt in both a Consumer Proposal and a Bankruptcy (unless it is a joint filing).

Actions against you by unsecured creditors stop once you file a Consumer Proposal or a Bankruptcy. Most wage garnishments will cease and collection calls will stop. Interest stops accruing once you file either one.

The following looks at how a Consumer Proposal differs from a Bankruptcy

REPAYMENT OF THE DEBT

In a Consumer Proposal (CP), you will reach an agreement with your creditors to pay only a percentage of the debt owed to them or extend the time you have to pay off the debts in full. The maximum time for a CP is 60 months. The amount you have to pay is based on your income and assets – you don’t choose the amount you pay back. For your creditors to accept the CP, they will want to receive more than they would recover if you filed a Bankruptcy. In a Bankruptcy, you sign over your assets (except those that are exempt by law) to the LIT and they are sold or transferred to pay your creditors.

ASSETS

In a Consumer Proposal you will retain your assets. In a Bankruptcy your assets are affected. These include equity in your home greater than $10,000, a car worth more than $6,000 (with no liens against it), investments, tax refunds and RRSP contributions made in the last 12 months.

COSTS

In a Consumer Proposal, the Trustee fees are included in the payment you negotiate with the creditors. If your CP has you paying $400 per month for 60 months, the Trustee fees are taken from those funds. In a Bankruptcy, the cost is determined by any Surplus Income you have (based on a standard made up of income and family size), any assets that you may want to retain and the monthly contribution to cover the administration costs. If there is no Surplus Income or assets, the Bankruptcy fee will be approximately $1,800.

DISCHARGE/COMPLETION

Your Consumer Proposal is completed once you have made the required payments for the required period of time. In a Bankruptcy, the discharge depends on factors such as whether it is a 1st Bankruptcy and whether you have to make Surplus Income payments. If it is a 1st Bankruptcy and you are not required to make Surplus Income payments, then the discharge is 9 months after filing. However, if there is Surplus Income, you will have to make payments for 21 months before you can be discharged.

CREDIT RATING

Both a Consumer Proposal and a Bankruptcy are considered an Insolvency and as such your credit rating will be affected. For a CP, your credit rating will show an R9 while in the proposal and then an R7 for 3 years after or for 6 years after you file a CP. A Bankruptcy stays on your credit file for 6-7 years after being discharged. However, a second Bankruptcy stays on your credit file for 14 years.

DEFAULTS

If you do not maintain your payments in a Consumer Proposal, the CP defaults and is void and you are unable to file another one. Collection action by your creditors can resume. If you do not complete the requirements of the Bankruptcy, you will not be discharged and eventually your creditors will resume collection activities.

The above are some of the differences between filing a Consumer Proposal and filing a Bankruptcy.

Again, it is important to stress that you can only file a Consumer Proposal or a Bankruptcy with a Licensed Insolvency Trustee. They will do a detailed assessment with you and explain the options available, the requirements and the ramifications. You need to know what is involved in order to make an informed decision.

If you have not looked at any of the options for dealing with your financial problems, then call Credit Canada at 1.800.267.2272 and book an appointment with one of our certified credit counsellors for a free confidential assessment.

Free Debt Assesment

Topics: Bankruptcy, Consumer Proposals

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