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Consumer Proposal versus Bankruptcy

What is Consumer Proposal?

Consumer Proposal is an option for someone who is unable to pay their debts in full, but who does have the ability to pay a portion of their debts. It is effectively a legally binding contract between an individual and their creditors that will allow the individual to significantly reduce their debts and eliminate the interest.

In Canada, a Consumer Proposal can only be filed through an Administrator that is licensed by the Federal Government.

What is Bankruptcy?

For many people bankruptcy is the last resort as it is not clearly understood. The reality is that bankruptcy might be the best or only solution for you based on your specific circumstances.

It is a legal process under the Bankruptcy and Insolvency Act, that generally provides for the total elimination of all your unsecured debts.It normally applies where a person has insufficient income ( after reasonable living expenses) and few, if any assets of any value, to meet their ongoing debt obligations. In practice, if you are in this situation with insufficient income and no assets, and things are unlikely to change, then a bankruptcy is probably the best option for you.

In Canada, a bankruptcy can only be filed through a Trustee in Bankruptcy, an individual licensed by the Federal Government

Key Features of a Consumer Proposal versus a Bankruptcy

Ownership of Assets:

  • The Bankruptcy Act defines certain assets that you are entitled to keep in the event that you file for bankruptcy. These assets do not have to be handed over to the Trustee for the benefit of your creditors. Exempt assets include RRSPs (other then contributions in the 12 months before your bankruptcy), a vehicle up to a value of $5,650, household furniture and appliances up to a value of $11,300, personal effects (clothing and miscellaneous items) up to a value of $5,650 and tools of the trade up to a value of $11,300.If you have some non-exempt assets that you need to keep you may be able to make an arrangement with the Trustee to keep them. If you do not want to keep your non-exempt assets, then the Trustee will sell them
  • Under a Consumer Proposal, you retain ownership of all of your assets, including your house, RRSPs and vehicles. In exchange for this right and benefit, you must commit to pay your creditors a fixed monthly amount for a certain period time. In most cases, your proposal will offer to pay back a total of 30% of your debts

“ Surplus Income”

  • This is a technical term applicable only to a bankruptcy. Simply put, the cost of your bankruptcy depends on your average income during the bankruptcy. If your income increases during the term of your bankruptcy, your cost of bankruptcy may increase. Surplus income rules do not apply to a Consumer Proposal. Once your creditors have agreed to your proposed settlement then that amount does not change. If your income increases, the cost of your Consumer Proposal DOES NOT increase and you can keep your increased income.

Protection from your Creditors

  • Protection under both of these options is similar. Once you file a Consumer Proposal or a bankruptcy, you get complete protection from your creditors. They can’t call, they can’t collect their debts. A Consumer Proposal or a Bankruptcy prevents creditors from starting a legal action; and even if a legal action has already been commenced, a Consumer Proposal or Bankruptcy stops that process.

Impact on Credit Score

  • For someone who files a bankruptcy for the first time, the bankruptcy will be on record with the credit bureau for 7 years after you have been discharged.
  • A Consumer Proposal is on records with the credit bureau for 3 years after it is completed.

Use of a Secured Credit Card

  • While you are in bankruptcy, if you apply for new credit over $500, you have to volunteer the fact that you are bankrupt. Secure credit cards are available to people who file proposals who might need money for emergencies or for their work. After you are out of bankruptcy, you do not have to volunteer that information.
  • If you apply for new credit while you are doing a Consumer Proposal you do not have to volunteer that fact

How Long Does a Consumer Proposal Last?

A Consumer Proposal is usually done over 60 months to allow you the financial flexibility of both meeting your daily living expenses and repaying a portion of your debts under the proposal. However you have the option of paying off your proposal quicker if your circumstances change. If your received a pay raise you could use some of the increase to pay off the proposal earlier which would be to your benefit. You could also offer to pay to pay your proposal through a one time lump sum payment.

How Long Does a Bankruptcy Last?

A bankruptcy can last anywhere from nine to twenty one months depending on your circumstances. If you have filed for bankruptcy previously then it may last up to thirty six months.


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