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 debt relief resources available for Canadians in debt are consumer proposals and filing for personal bankruptcy.
While each of these debt relief options is designed to provide financial relief, they both have different requirements and one option can offer more benefits than the other depending on your situation.
Learn more about the differences between a consumer proposal vs bankruptcy and which option is best suited for your situation.
Consumer Proposal vs Bankruptcy
A consumer proposal and bankruptcy are both designed to relieve you of your financial troubles. However, there are significant differences between the two that you should understand before choosing one to help you deal with your debt.
What Is A Consumer Proposal?
A consumer proposal is a legally binding agreement between you and your creditors. The process is facilitated by a Licensed Insolvency Trustee (LIT) who will review your finances and help you create a new debt repayment plan that you can present to your creditors. Your trustee will negotiate with your creditors to have your outstanding debt and/or interest rate reduced in an effort to shrink your loan payments.
Your creditors can either accept or reject your proposal. If they accept it, you’ll make your payments according to the new agreement.
The goal of a consumer proposal is to reduce the amount of debt you owe and provide you with protection against actions taken by your creditors. For instance, consumer proposals can stop calls from collection agencies, wage garnishments, and potential litigation from creditors.
What Is A Bankruptcy?
Bankruptcy is also a legally binding agreement between you and your creditors. It is designed to alleviate your debts.
A trustee will be assigned to your case and will take over control of your assets, with some exceptions. They will also ensure that you adhere to your bankruptcy requirements, including attending two crediting counselling sessions and filing monthly income and expense reports.
Consumer Proposal vs Bankruptcy: A Side-By-Side Comparison
The following chart provides a side-by-side comparison between a consumer proposal and bankruptcy:
| Consumer Proposal | Bankruptcy | |
| Type of debt | Unsecured debt not exceeding $250,000 | Unsecured debt with no limit to the debt amount |
| Cost to file | Approximately $1,500 | At least $1,800 – $2,250 for first-time bankruptcies |
| Duration | Up to 5 years | – Between 9 – 21 months for first-time bankruptcies – Between 24 – 36 months for second-time bankruptcies |
| Income and expense reporting | Not required | Required |
| Impact on assets | Keep all assets, including house and car. | Assets may be seized, though there are many exemptions depending on the province |
| Impact on credit score | R7 rating, which remains on your credit report for 3 years after completion or 6 years after filing | R9 rating, which remains on your credit report 6 to 7 years after completion |
Consumer Proposal vs Bankruptcy: What Debts Can Be Included?
A consumer proposal and bankruptcy both include most unsecured debts, such as the following:
- Credit card debt
- Personal loans
- Payday loans
- Tax debt
- Medical bills
- Student loans (if you’ve been out of school for at least 7 years)
Secured debts cannot be included in a consumer proposal or bankruptcy, such as a mortgage or auto loan. That means any debt that is collateralized by an asset of value will not be included.
Requirements: Consumer Proposal vs Bankruptcy
Depending on your financial situation, you may be eligible for a consumer proposal and/or bankruptcy.
Bankruptcy Requirements
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.
Consumer Proposal Requirements
On the other hand, a consumer proposal limits the amount you can owe to $250,000 (eligible debts). You must also be able to repay a portion of your debt as part of the proposal. In order to qualify for a consumer proposal, the majority of your creditors must also accept the deal.
Consumer Proposal vs Bankruptcy: Can You Keep Your 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, you get to keep your house and car unless you voluntarily give it up to repay debt.
The opposite is true when you file for bankruptcy, where you may suffer property loss and your assets may be surrendered to achieve an absolution from debt, including any tax refunds or credits you are owed. 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.
However, these exceptions 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.
Consumer Proposal vs Bankruptcy: How Much Will It Cost?
There are various costs to consider when filing a consumer proposal or bankruptcy. Here are some of the costs associated with each debt relief option.
Consumer Proposal
- Filing Costs – There’s an initial Trustee fee of $1,500.
- Monthly Payments – 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.
Bankruptcy
- Base Cost – There is a base cost of at least $1,800 – $2,250 for first-time bankruptcies.
- Surplus Payments – If your income increases during your bankruptcy, you’ll be required to make surplus payments for up to 21 months.
Consumer Proposal vs Bankruptcy: Impact On Credit
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.
- Consumer Proposal – In the case of a consumer proposal, you will be given an R7 rating, which remains on your credit report for 3 years after completion or 6 years after filing.
- Bankruptcy – You’ll receive an R9 rating, which remains on your credit report 6 to 7 years after completion.
Consumer Proposal vs Bankruptcy: When Should I Choose Consumer Proposal?
A consumer proposal is not as severe as bankruptcy. If you can still afford to make some type of payment toward paying down your debt, a consumer proposal might be a better choice than bankruptcy.
Here are some key reasons why a consumer proposal might be a more suitable option for you:
You Have A Lot Of Valuable Assets
Since a consumer proposal allows you to keep your assets, you may want to choose this route, especially if the value of your assets is significant. A consumer proposal will protect your assets against repossession and keep them separate from any agreement arranged with your creditors. That means your house, home equity, automobiles, investments, and tax refunds will be safe.
Consumer Proposal Payments Are More Affordable and Flexible
Consumer proposals let you pay back only a portion of your debt to your creditors over an extended term. With up to 5 years to complete your proposal, you have lots of time to repay your debt.
Your Credit Score Won’t Be Hit as Hard
When you file for bankruptcy, your credit report will reflect an R9 rating, which is the worst rating and will cause the biggest hit to your credit score.
When you file a consumer proposal, on the other hand, you’ll be subject to an R7 rating. While this will also negatively impact your credit score, it won’t have as significant an effect. Plus, an R7 rating will be removed from your credit report a lot sooner than an R9.
A bankruptcy stays on your credit report for 6 or 7 years after completion, depending on the credit bureau. A consumer proposal can be removed from your credit report in as little as 3 years after completion. That means you can start rebuilding your credit sooner with a consumer proposal.
You Don’t Have to Report Your Income and Expenses
With a consumer proposal, there’s no need for monthly income and expense reporting. Once your trustee calculates your monthly payment amount, this figure won’t change. Conversely, you’ll need to report your income and expenses in bankruptcy, since your monthly payment amount can change based on fluctuations with your income.
Consumer Proposal vs Bankruptcy: When Should I Choose Bankruptcy?
In some cases, you may have little choice but to opt for bankruptcy. For instance, if you’ve lost your job and have a low household income, bankruptcy might be a better solution to your debt.
Here are the main reasons why you may want to file for bankruptcy:
There Are No Debt Limits
You can only file a consumer proposal if you have unsecured debt less than $250,000. But if you have more than that, bankruptcy may be the better option since there’s no limit to the amount of debt you can include.
Bankruptcy Can Be Discharged Within Months
The process of bankruptcy takes less time than a consumer proposal. In fact, you can be discharged from your bankruptcy in as little as 9 months if this is your first time filing and you don’t have a surplus income. A consumer proposal, on the other hand, can take up to 5 years.
There Are No Debt Payments Required
If you file for a consumer proposal, you’ll likely still need to continue making payments to your creditors, though at a lower amount. But with bankruptcy, you’ll be alleviated of your debts and will no longer have to make repayments. If you can’t afford to pay your debt, bankruptcy is probably a better option.
Just keep in mind that some of your assets may be seized to help pay back your creditors.
Not All Assets Are Seized
Many people mistakenly think that you’ll automatically lose everything you own when you file for bankruptcy, including your house and car. But that’s not necessarily the case. There are many assets that are exempt from being seized, depending on the province you live in.
Some exemptions from repossession include:
- Clothing
- Furniture
- Appliances
- Food
- Tools needed for work
- Medical aids
- Automobiles (up to a certain value)
- Homes (if you don’t have much equity)
Additional Reading
Consumer Proposal vs Bankruptcy FAQs
How long does bankruptcy last?
What will happen if I start earning a higher income in a consumer proposal vs bankruptcy?
What will happen to my tax refund in a consumer proposal vs bankruptcy?
Consumer Proposal vs Bankruptcy Final Thoughts
Trying to negotiate and restructure debt can be an emotionally trying time for all parties involved, especially the debtor. However, with the right financial relief option, you can start anew. 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.
