There are two insolvency options in Canada under the Bankruptcy & Insolvency Act that allow consumers to eliminate overwhelming debt: a bankruptcy and a consumer proposal. The choice to file a consumer proposal or bankruptcy in Ontario is based on your personal situation at the time of filing. However, what if your finances change? What if your income improves subjecting you to surplus income? What if you can no longer afford your proposal payments? We look at when you can switch from a bankruptcy to a proposal or from a consumer proposal to a bankruptcy in Canada.
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Can you switch from a consumer proposal to bankruptcy?
The short answer is yes but it’s important to explore why, and whether this is the right solution. Cancelling a consumer proposal is as important a decision as filing was the first time. Presumably you originally chose to file a consumer proposal because it was the right answer at the time.
If you can’t keep up with your proposal payments due to a change in circumstances, you have three options:
- You can reschedule, postpone or defer up to two payments. If your cash flow problem during the proposal is temporary, this might be enough. However, if you fall three months behind on your payments, your proposal is automatically annulled. This means that your proposal is cancelled and your creditors can pursue you for the full amount plus interest.
- You can amend the terms of your original proposal. It is not uncommon for life to change while in a proposal. You may have switched to a lower paying job or become divorced for example, putting a permanent strain on your finances. It is possible in this case to submit a new amended proposal to your creditors to lower your monthly payment for the remaining term of the proposal. However, this is a risky strategy, because if the creditors reject your proposed amendment the proposal is automatically annulled.
- You can switch and file bankruptcy. If you are no longer able to make your proposal payments, switching to bankruptcy may be your best option. It is possible to include in your bankruptcy new debt incurred since the start of your proposal, and your trustee can explain this option in more detail.
Can you switch from a bankruptcy to a consumer proposal?
Conversely it is also possible to file a consumer proposal when currently bankrupt. Again the reasons for doing so are often a change in circumstances. You may have received an unexpected promotion with a pay increase that will generate additional surplus income payments in your bankruptcy. Or you may expect to come into a windfall because of an inheritance. No matter the reason, any additional income or monies you come into while bankrupt become a potential asset of the estate while bankrupt.
As before, you have several options when your circumstances change while bankrupt:
- You can continue with your bankruptcy and make any required new surplus income payments.
- You can file a consumer proposal while bankrupt. If you decide to file a consumer proposal you will need to meet with your trustee to determine what terms to offer your creditors. When filing a consumer proposal, you must disclose your current situation, so if your income has increased, or you are expecting to receive a lump sum of money, you must disclose that to the creditors, which will impact what they will want to receive in a proposal. They will still expect to receive their share of what they would be getting if you were to complete your bankruptcy. However, with a proposal you can keep whatever assets you may inherit or can extend the payment terms of surplus income is the issue.
Can I switch Licensed Insolvency Trustees?
If you are in the middle of a bankruptcy or a consumer proposal, no, you cannot switch trustees during either procedure.
If you filed a bankruptcy or proposal with another Licensed Insolvency Trustee, it is very common to switch to a different trustee for your second filing.