When it comes to finding a debt relief solution many Canadians are faced with a choice.
A consumer proposal
While there are other debt relief options available, such as debt consolidation, debt management and debt settlement, the question of consumer proposal vs bankruptcy is often the most popular.
There are key differences between a consumer proposal and bankruptcy so it’s important to make sure you are aware of these before making any firm decisions.
If you’re struggling with debt it’s important to attend credit counselling sessions to find the best debt solution for your needs.
What is a Consumer Proposal?
When entering into any debt solution it’s important to be aware of exactly how it works and how it can impact your life.
A consumer proposal is one of the most common debt relief solutions in Canada as it allows people to reduce their debts to one affordable monthly payment and allows you to write off a percentage of unaffordable debt.
It’s a formal agreement between you and the people or companies you owe money to – also known as creditors.
To be eligible you must be at least 18-years-old and not owe more than $250,000 (excluding a mortgage). You must also be unable to repay your current unsecured debts in a reasonable length of time.
Consumer proposals are set up and managed by a Licensed Insolvency Trustee (previously known as a Bankruptcy Trustee). Licensed Insolvency Trustees are federally regulated professionals who provide advice and service to people and businesses with debt problems. It’s their job to help people make informed choices to deal with their financial difficulties.
Your Trustee will help you negotiate the terms of your debt repayment over a period of up to five years.
What debts can be included in a Consumer Proposal?
All unsecured debt can be included in a consumer proposal.
Unsecured debts aren’t backed by an asset or trustee. Take a mortgage, for example, the loan is secured by the property. That means it could be sold to cover costs if you fall behind on repayments.
Typical unsecured debts included in a consumer proposal are:
- Credit cards
- Personal loans
- Payday loans
- Income taxes
- Department store credit
- Bank overdraft fees
What is Bankruptcy?
Opting for bankruptcy is a serious decision and should only be used as a last resort for people with serious financial problems.
When debt problems reach a point where an individual can no longer cover the repayments, bankruptcy may be the only option.
Bankruptcy is a legal process that releases you of debt from your creditors. It’s covered by the Bankruptcy and Insolvency act in Canada. Under this act, any person who owes more than $1,000 to a secured creditor which they are unable to pay can apply to be declared bankrupt.
Like a consumer proposal, bankruptcy is managed by a Trustee who will not only help clear your debt and handle any additional surplus income payments, they’ll also do whatever is required to offer a fresh start.
All debt solutions can have an impact on your credit report if you declare bankruptcy it can have a serious impact. When you apply for bankruptcy, an R9 will be added to your credit report and lenders will be able to view that information. This can make borrowing money in the future more difficult.
Bankruptcy should only be considered as a last resort and shouldn’t be entered into before all other options have been explored.
What debt can be included in the bankruptcy process?
Bankruptcy can clear most types of unsecured debt. These include:
- Credit card balances
- Lines of credit
- Personal loans
- Arrears of income taxes and municipal house taxes
- Unpaid utility bills
- Retail store accounts
- Insurance premiums past due
- Medical bills
- Payday loans
However, not all unsecured debt will be discharged. The following are exempt by law:
- Student and apprentice loans less than 7 years old
- Child and spousal support
- Fines and most court-ordered restitution payments
- Court-awarded damages for sexual assault or intentionally inflicting bodily harm
- Debts from fraud, embezzlement or misappropriation
- Certain government overpayments – you should discuss this with your Trustee.
When it comes to secured debts, the asset will typically be sold to cover the cost of the debt. In some unique situations, some secured debts may remain. A good example of this may be your mortgage, especially if you are mortgaged for the majority of your house’s value.
What’s the difference between a consumer proposal and bankruptcy?
While a consumer proposal and bankruptcy are both legally binding there are key differences between the two.
Firstly, a consumer proposal isn’t as severe as a bankruptcy. When filing for a consumer proposal you agree to make a single, affordable, monthly payment towards your debt. You will make proposal payments for up to five years and at the end of the agreement, a percentage of your debt will be written off. Bankruptcy payments, on the other hand, can carry depending on your circumstances.
There are also big differences between a consumer proposal and bankruptcy when it comes to your assets. If you have an asset, such as a home, you are more likely to be able to keep this when filing a consumer proposal. Filing bankruptcy will often force you to surrender assets and the sale of big-ticket assets such as your home to go towards costs.
Your credit report will also be affected differently depending on whether you opt for a consumer proposal or bankruptcy.
Both options can make it difficult to obtain credit in the future, a consumer proposal will only say on your credit report for three years after your last payment while bankruptcy will remain on your report for between six and seven years after the date you’re discharged.
You should be aware, however, that if you find yourself filing for bankruptcy more than once, it will be reflected in your credit report for 14 years.
Given the long-term consequences of both solutions, it’s important to ensure that you attend credit counselling sessions and speak to an authorized debt specialist before making any firm decisions.
What happens at the end of a consumer proposal and bankruptcy?
One of the main similarities between a consumer proposal and bankruptcy is that in both cases, your debts are eliminated at the end of your filing.
When your consumer proposal has been successfully filed, your creditors accept, and all monthly payments are complete your consumer proposal will come to an end. You will receive a certificate to mark the competition of the arrangement. This will also be sent to the Official Reciever. You’ll then be relieved of all the debts that were included in the consumer proposal.
When you come to the end of your bankruptcy you will be discharged. This means you are legally released from the debts included in the bankruptcy. You will no longer be liable for payments and will be legally protected from your creditors.
How do I know if a consumer proposal or bankruptcy is right for me?
If you’re struggling with debt it’s important to speak with an expert to discuss your debt relief options.
At A. Fisher & Associates we will find out more about your financial situation and offer advice about the best solution for you.
Bankruptcy should always be the last resort so we’ll make sure we have offered support to make sure you’re aware of all your options and ensure it’s the right solution for you.
We can guide you through the consumer proposal process too if this is what you choose.
For more, call us on 416-842-0040.