You might have explored your options for dealing with your financial difficulties. In doing so, maybe you determined that a Debt Consolidation Program (DCP) or a debt consolidation loan are not viable options for you. Instead, you might now be considering options that fall under the Bankruptcy and Insolvency Act – like a consumer proposal or a bankruptcy.
Consumer proposal vs. bankruptcy: What's the difference?
A consumer proposal is an agreement between you and your creditors that allows you to pay back only a percentage of the debt that you owe, or extend the amount of time you have to pay. A bankruptcy eliminates most of your debts completely, however if you own significant assets you may need to surrender them as payment to your creditors.
What do consumer proposals and bankruptcy have in common?
Both a consumer proposal and filing for bankruptcy are legally binding processes which are administered by a Licensed Insolvency Trustee (LIT). If you are considering insolvency, it's important that you meet with a LIT so that you can fully understand the process, what's involved, and any fees. You can speak with friends or family who may have filed for one or the other before, but it is important that you get professional advice regarding your specific situation.
Filing for bankruptcy or doing a consumer proposal are both matters of public record. That means there will be a permanent public record regarding your bankruptcy or consumer proposal that can be accessed by anyone. If the debts are joint or co-signed, the other person is liable for the debt in both a consumer proposal and a bankruptcy as well, unless it is a joint filing.
How is debt repayment different between a consumer proposal and bankruptcy?
In a consumer proposal (CP), you will reach an agreement with your creditors where you pay only a percentage of the debt owed to them, or you can extend the time you have to pay off the debts in full. The maximum time for a CP is 60 months. The amount you pay is based on your income and assets – you don’t get to 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 for bankruptcy.
Are assets treated differently between a consumer proposal and bankruptcy?
If you do a consumer proposal, you can retain your assets whereas in a bankruptcy your assets may be affected. This includes any 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. In a bankruptcy, you sign over your assets (except those that are exempt by law) to the LIT and they are then sold or transferred to pay off your creditors.
What are the costs and fees of a consumer proposal versus filing for bankruptcy?
When doing a consumer proposal, the LIT's fees are included in the payment you negotiate with your creditors. For example, if your CP has you paying $400 per month for 60 months, the LIT's fees are taken from those funds. However, if you were to file for bankruptcy, the cost is determined by any surplus income you might have (based on a standard that includes 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.
How long does it take to complete a consumer proposal or bankruptcy?
A consumer proposal is completed once the client has made the required payments for the required period of time. In a bankruptcy, the discharge depends on a number of different factors, including whether it was the first time the client filed for bankruptcy and if they have to make surplus income payments. If the client has never filed for bankruptcy before and they do not have to make surplus income payments, most bankruptcies are discharged 9 months after filing. However, if the client has surplus income, they will have to make payments for 21 months before they can be discharged.
What is the impact on my credit rating if I file for bankruptcy or do a consumer proposal?
Both a consumer proposal and bankruptcy are considered insolvency, therefore both will impact your credit rating. If you were to do a consumer proposal, your credit rating will show as an R9 on your credit report while you are making payments. Once you have completed your consumer proposal, your credit rating will be an R7 for 3 years after completion, or 6 years after you filed your consumer proposal. If you were to file for bankruptcy, your credit rating will be an R9 for 6-7 years after being discharged. However, if it is your second time filing for bankruptcy, your credit rating will be an R9 for 14 years.
What if I default on my consumer proposal or bankruptcy payments?
If you do not maintain your payments on a consumer proposal, the CP defaults and is void and you are unable to file another one. Collection action by your creditors can also resume. If you do not complete the requirements of the bankruptcy, you will not be discharged and eventually your creditors will resume collection activities as well.
Insolvency should be a last resort
Those are just some of the differences between filing a consumer proposal and filing for bankruptcy. Again, it's important to stress that you can only file a consumer proposal or a bankruptcy through a Licensed Insolvency Trustee. However, you should avoid insolvency whenever possible due to the impact on your credit rating and future goals. That's why it's important to discuss all of your options for resolving your debt with an unbiased professional, like a certified credit counsellor, before seeing a Licensed Insolvency Trustee. They will do a full assessment with you and discuss all of your available options, as well as the pros and cons of each option.
If you would like to speak to a professional about your debt relief options, call Credit Canada at 1.800.267.2272 and book an appointment with one of our certified credit counsellors for a free and confidential assessment.