Personal bankruptcy and consumer proposals are the top two insolvency options available in Canada that provide debt relief. While both solutions resolve debt problems and provide legal protection from creditors, there are differences. In a bankruptcy, you surrender assets to your creditors in exchange for the elimination of your debts whereas a consumer proposal is a legal settlement agreement that allows you to keep your assets. A consumer proposal can result in lower monthly payments than in a bankruptcy.
When is a consumer proposal better than bankruptcy?
You’ve got more debts than you can handle so you’re trying to decide if you should file a consumer proposal or just go bankrupt. Every situation is different, but here are five reasons why a consumer proposal is better than bankruptcy.
- A bankruptcy can be expensive if your income is high, or is expected to increase.
- In a bankruptcy you lose your tax refund and possibly other assets.
- A consumer proposal is much simpler than bankruptcy.
- Consumer proposal terms are determined up front.
- A consumer proposal is proactive. You decide what you can afford to pay.
For more information on these 5 reasons, watch our short video below:
Comparing the key differences between consumer proposal and bankruptcy
To understand more about the differences between a consumer proposal and bankruptcy we compare bankruptcy vs consumer proposal.
First time bankruptcy
Maximum $250,000 unsecured debt excluding home mortgage
Minimum $1,000 debts
Generally starts at 30% of debt
Based on income and assets
Up to 5 years
Can be paid off early
9 months or 21 months based on income
Keep all assets including tax refund
Surrender assets except those exempt by law
TransUnion: earlier of 3 years from completion or 6 years from filing
Equifax: 3 years from completion
7 years from completion
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 (meaning you owe more than you own and are unable to pay your debts as they come due) 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.
A consumer proposal is not considered bankruptcy. This can be an important distinction if you have a professional designation that is impacted by filing bankruptcy. If you file a consumer proposal you can answer no to any question that asked if you are bankrupt or have filed bankruptcy.
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.
If you file bankruptcy a second time, the length of your bankruptcy will be a minimum of 24 months, or 36 months if you have surplus income. This is why many people consider filing a consumer proposal as an alternative to filing bankruptcy twice.
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. Here is a list of bankruptcy exemptions in Ontario.
If Filing a Consumer Proposal: You will not lose any assets and you are not required to surrender anything.
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 for the shorter of 3 years after you complete your payments or 6 years after you file.
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 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 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.
What happens at the end of your filing?
In both cases, your debts are eliminated.
At the completion of your bankruptcy, you will receive a discharge, legally releasing you from all debts covered under your Bankruptcy. This means that you are no longer liable for payments and you are legally protected from your creditors.
If the consumer proposal has been successfully filed, accepted by your creditors, and then paid through completion, a certificate is given indicating the full performance of the proposal to you and the Official Receiver. You will then be relieved of all the debts that were included in the proposal.
Conclusion – Which option is right for me?
Both a consumer proposal and bankruptcy are debt management solutions that are meant to resolve debt problems. Both options provide protection from creditor actions, can stop a wage garnishments and eliminate unsecured debt.
However, they are significantly different from one another. Every case needs to be examined in order to determine whether bankruptcy, a consumer proposal, or even an alternative avenue, is the most viable option. Aspects such as surplus income, assets owned, total amount of debt and the costs associated all need to be taken into consideration.
The first step to resolving your debt issues begins with contacting a professional who will help you explore the options available to you and determine the best way to move forward. At Hoyes Michalos, we have helped countless Ontarians manage their debts and are well-equipped to support you through consumer proposals, personal bankruptcy and a variety of other solutions. We are available to answer questions over the phone, by e-mail or in person. Simply call us at 1-866-747-0660 or contact one of our offices today and start on the path to a new beginning.