Which Debt Solution Should You Choose?

Are you wondering what the best debt relief solution is to resolve your debt problems? Personal bankruptcy and consumer proposals are the top two insolvency options available in Canada. While both will resolve your debts, and provide legal protection from creditors, there are differences between them.

Compare bankruptcy vs consumer proposal based on these key factors:

Let’s start with a definition of bankruptcy vs consumer proposal:

A bankruptcy is a legal proceeding filed under the Bankruptcy & Insolvency Act to surrender your assets in exchange for which you will receive a discharge from your unsecured debts. Note: there are exemption limits.

A consumer proposal is a legal consumer credit proposal filed under the Bankruptcy & Insolvency Act where you make an offer to your creditors to settle your debts for less than you owe.

Who can claim bankruptcy or a consumer proposal?

Claiming Bankruptcy in Canada: Any person who is a resident in Canada, owes more than $1,000 in debt and is insolvent, is eligible to file a Canadian bankruptcy. Ideal candidates are those who need rapid financial relief and protection from creditors.

Filing a Consumer Proposal: Your total debt cannot exceed $250,000 (excluding a mortgage) and you must be able to afford to repay a portion of your debts. However, you are not guaranteed to be granted a proposal just by filing one. It must be accepted by a majority of your creditors.

Cost difference between bankruptcy and consumer proposal

Bankruptcy Payments: Bankruptcy payments vary as they are based on your income. The more you earn, the more you will be required to pay.  The higher payments as a result of a higher income is known as a surplus income payment.

Consumer Proposal Payments: The cost of a consumer proposal is based on a negotiated settlement between the debtor and the creditors.  Once you and your creditors agree to a proposal amount, a monthly payment is fixed and it will remain the same until your proposal is completed.

The big difference between a bankruptcy and a consumer proposal is the monthly payment.  A consumer proposal allows you to spread out the total cost over a longer period of time, reducing your monthly payment. This makes a consumer proposal more affordable in most people’s monthly budget.

How long does each bankruptcy option last?

Length of Bankruptcy: A first-time bankruptcy can be completed in as short as 9 months. If you are required to make surplus income payments your bankruptcy will be extended to 21 months. This increases the potential cost of your bankruptcy.

Maximum Term of a Credit Proposal: Consumer proposal payments can be spread out over a period of up to 5 years or 60 months.

What assets are affected by bankruptcy or consumer proposal?

If Declaring Bankruptcy in Canada: To be absolved of your debts, you are required to surrender certain assets.  You can keep exempt assets including most household belongings and a car below a certain dollar value.

If Filing a Consumer Proposal: You will not lose any assets and you are not required to surrender anything.

What happens if my income changes?

Filing Bankruptcy in Canada: If your income increases during your bankruptcy, your surplus income bankruptcy payments can increase.

Making a Consumer Credit Proposal: Once your proposal terms are accepted, your monthly payments do not change, even if you earn more.

What’s Worse? Credit rating impact of a bankruptcy vs consumer proposal

Impact of Personal Bankruptcy: If you claim bankruptcy in Canada, you will receive an R9 credit rating, which is the worst rating you can have. Depending on your circumstances, it will remain on your credit report for 7 to 14 years.

Impact of Proposal: If you make a consumer credit proposal through a consumer proposal, an R7 credit rating will appear on your report to indicate that you have made a settlement with your creditors. It will remain until 3 years after you complete your payments.

We do not recommend that you choose a bankruptcy or consumer proposal based on the impact on your credit score.  The decision to file a consumer proposal or bankruptcy should be based on whether you need relief from your debts and comparing the cost and impact of each option on your budget and assets.

Comparing monthly reporting and duties

Bankruptcy Duties: Once you declare bankruptcy in Canada, you are required to complete a monthly budget for all income and expenses, as well as supply copies of your pay stubs to your trustee. This information is used to determine if you are required to make surplus income payments.

Proposal Duties: In a consumer proposal, you have no monthly reporting tasks. You do not need to advise your trustee of any changes to your income.

In both options, you are required to attend two credit counselling sessions.

What happens to my tax refund?

Bankruptcy: If you declare bankruptcy in Canada, you will lose all tax refund(s) and/or tax credits which you are owed.

Consumer Proposal: In a consumer proposal, you keep all tax refund(s) or credits.

Filing for bankruptcy in Canada or choosing to make a formal consumer proposal to your creditors is a big decision.

To help you choose which option is best suited for your individual circumstances, simply call us at 1-866-747-0660 or email us at Hoyes Michalos & Associates today. Our experts can help you get relief from your overwhelming debts; all you have to do is ask.

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