Choosing Between A Consumer Proposal and Bankruptcy

Posted in Consumer Proposals
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

bankruptcy-or-cp-updatedMore than half of insolvencies in Ontario are now a Consumer Proposal. That compares to just 42% three years after consumer proposals were introduced into the Bankruptcy & Insolvency Act. Now, three years later, the rate is 51% and the trend is still increasing. There are a lot of articles about the pros and cons of each option, but what makes an individual choose one over the other? The reasons can often be emotional as well as financial.

Your bankruptcy trustee will help you decide which is better for your situation – a bankruptcy or proposal – by asking you questions about your financial situation as part of your initial assessment. We look at some of the questions and who chooses a bankruptcy versus a consumer proposal.

Who Chooses Bankruptcy?

If you are eligible to file for bankruptcy or a consumer proposal, then it makes sense to choose what makes most sense for you. Individuals most often choose bankruptcy as the best alternative because:

  • They have little, or nothing, to lose. When compared to the alternative of continuing to try and meet debt payments the cost of bankruptcy, even if you have to make surplus income payments, can be much more attractive. There is no requirement to pay back a portion of your debts in bankruptcy. Your payments are based on income and what you own. If both of those are low, bankruptcy is often the cheaper alternative.
  • They want the process over quickly. In most circumstances a bankruptcy will be completed sooner than a proposal. Even knowing they might have to pay surplus income, some people would rather pay more now and have the process finished sooner. The relief of knowing you will soon put your financial concerns behind you can be an important consideration.
  • They want to downsize. While you don’t have to lose your home by filing bankruptcy you might choose to. Let’s say you own a large home or expensive car. Even if you have some equity in these assets you may decide that maintaining this lifestyle is what got you into trouble in the first place. People do decide to hand back their house or car, opting to rent or look for a cheaper alternative for a period of time until they are back on their feet financially.
  • Their income is uncertain. For a proposal to be successful you must know that you will have adequate income during the life of the proposal to be able to meet your payments. For those worried about maintaining their job, or family income, bankruptcy may be the preferred choice because there is less risk of failure.

Who Is Filing A Consumer Proposal?

As we mentioned, the rate of people choosing consumer proposals as an alternative to bankruptcy is increasing. Consumer proposals have been available as an option now for 6 years. In that time frame Trustees have gained experience understanding what creditors want, banks & lending institutions are more familiar with the option and are more likely to participate, and consumers themselves are becoming more aware of a consumer proposal as an alternative.

The reasons individuals prefer to make a proposal to their creditors follow much of the same thought process as those who file bankruptcy. It is just that their conclusions are different.

  1. They don’t want high monthly payments. If your income is high you will be required to pay extra into your bankruptcy based on your income. This can result in fairly substantial monthly payments. Individuals who would prefer a lower monthly payout plan opt for a consumer proposal to spread out those payments over a longer period of time. It is a little like extending the amortization on your mortgage. The cost of this choice is longer payments and slightly higher total payments over time, just like your mortgage. However for many, managing their monthly cash flow is very important to meeting the financial needs of their family.
  2. They have too much to lose. Even people with equity in their home or investments can find themselves in financial trouble. If their debts total more than the value of those assets then selling them off won’t solve their debt problems. Assuming they can maintain those assets (keep up with the mortgage) many will choose to file a consumer proposal. They pay out the value of their assets over a period of time (1-5 years) but get to keep what they have built.
  3. They want certainty & simplicity. In a bankruptcy you are required to report your monthly income and budget to your trustee. In addition your payments may vary based on your income. Not everyone want’s this extra work or complication of unknown payments. They choose a consumer proposal because it provides them with fixed monthly payments and no reporting requirements.
  4. They are committed to repaying what they can. For many, a consumer proposal provides the emotional satisfaction of knowing you have done what you could to solve your financial problems. While bankruptcy is nothing to be embarrassed about, there are those who just prefer any other option.

Either of these options will solve your debt problems and neither are anything to be ashamed of. If your debts are high enough that they are causing a financial burden for you and your family you need to do something about it. Consider what you are looking for, and choose the alternative that fits your needs. For more clarity on a number of debt terms click here for definitions.

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