Consumer Proposal vs Bankruptcy
With the economy in its current state, many Canadians have found themselves indebted and unaware of what resources they have available to restructure their debt and rebuild their credit. The two most popular resources available for debtors are the negotiation of a consumer proposal, and filing for personal bankruptcy. Each one of these options has different requirements, but both are designed for financial relief. Read on to learn more about each one.
Requirements: Who Is Eligible For What?
Bankruptcy is the traditional choice for those who need a quick form of financial relief. The main requirement is that you owe at least $1,000, with no set maximum, and must be unable to make payments as they are due. On the other hand, a consumer proposal limits the amount you can owe to $250,000 unless you have a mortgage, in which case it might be considered separately. You must also be able to repay a portion of your debt immediately once the consumer proposal is granted.
One other difference is that while most people who file for bankruptcy are granted this form of relief, there is nothing to guarantee your consumer proposal will be accepted since your creditors will be the ones to determine whether to grant it or not.
If you find you are eligible for both options, the best choice is to try to negotiate a proposal first, since it won’t affect your credit history as badly as filing for bankruptcy. If the consumer proposal is not granted, then explore the other option. In either case, your decision should be based upon research and the consultation with a professional so you do not get tied into an agreement that will work against you instead of in your favor.
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How Much Will It Cost?
How much you pay depends on which option you have picked. If your consumer proposal is accepted, you will have fixed monthly payments that will remain the same until the full amount of the proposal is covered.
On the other hand, when you file for bankruptcy, your payments are variable, which means they may be different from one month to the next, depending exclusively on your total income. In a nutshell, the higher your income, the higher your payments will be, although it will remain proportional to what you can actually afford. Because of this when you file for bankruptcy you will have to complete a monthly budget that includes your income and expenses which in turn will help determine your payment. You will also be asked for proof of income, so be prepared to attach copies of your pay stubs and receipts to your monthly budget documentation.
What About My Assets?
When you negotiate a consumer proposal, and it is granted by your creditors, you will not have to surrender any of your assets. This is one of the positive aspects of this type of debt restructuring as it allows you to keep your hard earned property without any losses.
The opposite is true when you file for bankruptcy, where you will suffer property loss and your assets must be surrendered to achieve an absolution from debt, including any tax refunds or credits you are owed (click here to see what you can keep during bankruptcy). There are certain exemptions as to which assets should be surrendered, including your clothing, furniture, and in some cases a vehicle that is considered necessary for the execution of your job, but these vary by province so make sure you contact a professional to determine what you can or can’t keep. Luxury items, such as recreational vehicles, are usually at the top of the list of assets that must be surrendered, as well as any inheritance received during the time you are in bankruptcy.
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What Will Happen To My Credit Rating?
In both cases, your credit rating will be negatively affected, since you were unable to pay your debt without having to resort to extreme measures. The difference resides in how badly your rating is affected by either option.
In the case of a consumer proposal, you will be given an R7 rating, which is not a good rating, but indicates that you were willing to negotiate with your creditors and were able to settle to the satisfaction of both parties. This will leave the door open to future credit offerings and will take less time to remove from your credit report.
When you file for bankruptcy, you will receive an R9 rating, which is the worst credit rating you can have in Canada, and which will remain on your credit report for anywhere for 7 years.
Your credit rating will not affect your ability to open a bank account and no bank should refuse to do it for this reason. If this happens to you, the bank is breaking the law and should be reported. The only aspect of your financial life that will be negatively impacted by bankruptcy is the possibility of acquiring credit, which may limit your ability to purchase a home, new vehicle, or get a credit card for the duration of the bad credit rating on your personal report.
Trying to negotiate and restructure debt can be an emotionally trying time for all parties involved, especially the debtor, but with some work and time, you will soon find the amount of stress will be significantly reduced and you can go on with your life as you normally would, looking forward to a clean slate and a bright future.
Keep in mind that no matter which financial relief option you choose, you should always consult a professional, who will be able to explain the fine print of each option and help you determine which option is the better one for your particular circumstances. Consulting a professional may also give you an edge during negotiations, allowing you to achieve a more favorable deal than you would get if you acted on your own. Always do your research and check the laws that apply directly to your province as many terms and exemptions can change from one area to the other. Above all, try to comply with the final terms of your agreement as strictly as possible to prevent further negative actions against you and your property.
Finally, once you have been discharged from your bankruptcy or proposal and your debt burden has been either eliminated or significantly reduced, many lenders will find you to be an attractive candidate for a loan. Look into loans after bankruptcy for more information.