Difference Between Consumer Proposal and Bankruptcy

Consumer proposals and bankruptcy are both common debt solutions in Red Deer and the rest of Canada. If you are trying to determine which debt-free solution will work best for you, you may be wondering what the difference is between these two common practices.

On the surface, there are 3 main differences between a consumer proposal and a bankruptcy:

1. You keep more of your assets in a consumer proposal.
2. A consumer proposal has a lesser impact on your credit score compared to a bankruptcy.
3. A consumer proposal can provide for lower and consistent monthly payments manageable in your budget.

In reality, there are many more differences between these two debt relief methods. Before deciding which solution is right for you, it is important to understand what each method offers.

What is a consumer proposal?

A consumer proposal is a formal settlement of what you owe to your creditors, handled by the Licensed Insolvency Trustee at Blanchard & Company Ltd. as provided for by the Bankruptcy and Insolvency Act. It will eliminate a percentage of the original amount owed and stop interest so you can actually afford to pay your outstanding debt based on your income and the amount you owe. A consumer proposal can reduce your principal to a small fractionof what you originally owed.

For your consumer proposal to be legally binding, the creditors who hold the majority of your debt must agree to the terms that we assist you in arranging. If they agree, and they typically do, you will then be required to strictly follow the terms outlined in your consumer proposal over a term of up to 5 years.

Length of Consumer Proposal

The length of a consumer proposal depends entirely on you and your personal circumstances. A proposal can last for as little as two months and as long as 5 years, depending on how quickly you are able to make repayments. If you are able to make extra monthly payments, you can reduce the overall length of your proposal.

Consequences of Submitting a Consumer Proposal

After completing your consumer proposal, a note will appear on your credit report that lets potential lenders know you have submitted a consume proposal. This note will stay on your record for 3 years and can make it difficult to be approved for additional credit.

Luckily, there are two mandatory financial counselling sessions provided as part of the proposal at Blanchard & Company Ltd. which will educate you on how to repair your credit quickly and efficiently. The upside of filing a consumer proposal is that you do not have to assign control of your assets to your Trustee. Instead, you get to keep your assets as long as you continue to make the payments outlined in your proposal.

What is bankruptcy?

Bankruptcy is the legal process of assigning your non-exempt assets over to a Licensed Insolvency Trustee (LIT) in order to eliminate your debt pursuant to the  Bankruptcy & Insolvency Act.  Thankfully in Alberta, the Civil Enforcement Act protects many of the assets of a bankrupt and they may not lose them.

Bankruptcy is intended to provide financial relief to consumers who find themselves in over their heads in debt while simultaneously treating creditors fairly. The Canadian insolvency process is also intended to teach debtors healthy and sustainable financial practices through financial counselling which they can apply to their financial decisions once they are discharged from bankruptcy.

To determine if you are eligible to declare bankruptcy in Canada, ask yourself the following 4 questions:

1. Have you lived in Canada for at least one year, conducted your business in Canada over the last year, or owned the majority of your property in Canada?
2. Do you owe $1,000 or more?
3. Are you unable to pay your debt repayment amounts when they are due?
4. Do you not have sufficient assets to convert into cash to pay off your debts?

Types of Debt Not Forgiven in Bankruptcy

Bankruptcy is intended to help borrowers who cannot repay their debts by eliminating some of it, but there are some types of debt that cannot be forgiven during bankruptcy filing.

1. Outstanding alimony and child support payments
2. Reaffirmed debts (if you want to keep a house or car and continue to pay the loan)
3. Tickets and fines issued by the court
4. Student loans (if you were in school less than 7 years ago)
5. Any debt arising from fraud

Length of Bankruptcy

The amount of time you will be in bankruptcy differs person-by-person. The minimum length of bankruptcy as determined by Canadian legislation is 9 months, but this only applies to consumers who have never filed for bankruptcy before. Only consumers who accurately complete all of their responsibilities as outline by their repayment plan can be discharged from bankruptcy, so bankruptcy proceedings will last as long as it takes for the consumer to complete these obligations.

Consequences of Filing for Bankruptcy

The specifications of a consumer proposal can vary by province, but a consequence of bankruptcy that is consistent across Canada is that you are required to surrender your non-exempt assets.  Assets that are exempt and cannot be taken in a bankruptcy include:

1. Clothing and personal effects ($4,000)
2. Household funishings & appliances ($4,000)
3. Equity in a vehicle above what is owed ($5,000)
4. Tools required to earn a living ($10,000)
5. Equity in a primary residence above what is owed ($40,000)
6. RESPs & RRSPs

Bankruptcy will also negatively impact your credit. A note will appear on your credit report for at least 6 years once you have been discharged, which is visible to all of your potential lenders. Creditors are less likely to lend you money if you have declared bankruptcy in the past; however, by actively rebuilding your credit, you will may be able to get a mortgage or other types of loans within that 6 year reporting period.

Trying to determine which method is best for reducing your debts can be difficult. Both solutions are legally binding but are beneficial in different ways.. Bankruptcy can have more of a negative impact on your finances and credit, but may be cheaper and quicker.  A consumer proposal, on the other hand, can help you keep your non-exempt assets but may be longer and more costly.  With that said, a consumer proposal can still relieve you of your debt at a fraction of the principal amount.

The suitability of both methods is determined entirely by your unique circumstances. Your income, living situation, and spending history all have an influence on which debt solutions will be most effective.

To make finding the right debt solution easy, get professional impartial advice from the Licensed Insolvency Trustee (LIT) at Blanchard & Company Ltd. Their team of experienced professionals offer FREE consultations to examine your financial situation and determine which solution will help you achieve financial freedom.

Schedule your FREE consultation today