A bankruptcy and a consumer proposal may be excellent options for someone who is experiencing financial troubles. A consumer proposal is a great option for people who have the ability to pay something to their creditors but need to change their payment arrangements, and they have equity in assets they want to keep. A bankruptcy is a great option for those who are overwhelmed by their debt, and perhaps they don’t have steady income, making it really difficult to afford payments they owe to creditors.
While both a bankruptcy and a consumer proposal can provide a financial fresh start, there are a few key differences.
- Assets you get to keep: In both a bankruptcy and a consumer proposal, you normally get to keep the assets that are most important to you. However, if you have equity in assets that you want to keep, you have to pay that equity to your trustee for the benefit of your creditors. An advantage of a consumer proposal is that you can spread the payments for that equity over a term of up to 5 years. In a bankruptcy, you are normally required to repay the equity over the term of your bankruptcy, which is shorter than in a proposal, so your payments will be higher.
- How much you pay back: Often times, creditors want to recover more of their outstanding debt when a person files a proposal, because the proposal takes longer. A Licensed Insolvency Trustee (LIT) will work with you to determine the amounts you are required to pay under either option. With a consumer proposal, you typically pay the same amount to your LIT every month for the term of the proposal (for example, up to 5 years) as negotiated with your creditors upfront. In a bankruptcy, the amount you pay could vary depending on a number of factors such as your income and whether you have been bankrupt before
- How long they last: You are in a consumer proposal for the length of time you and your creditors agree, up to 5 years. An excellent feature of a consumer proposal is that you could pay it off earlier than the negotiated term if you are able to do so, without any extra costs or penalties. Bankruptcy has a predefined length set out in the legislation, ranging from 9 to 36 months depending on a number of factors including your income levels, whether you have been bankrupt before, and whether you have completed everything required of you through the process.
- The filing process: To have a successful consumer proposal, your creditors must vote in favor of the proposal you filed through a process conducted by your LIT. If the majority of creditors (based on dollar amounts owed) vote in favor of your proposal, your proposal is deemed approved. If you are insolvent, you have the right to file a bankruptcy and your creditors cannot stop you. However, they could object to you completing your bankruptcy if they believe you were dishonest or obtained or used your credit improperly.
- The impact on your credit rating: For most credit reporting agencies, a consumer proposal stays on your credit rating for 3 years after you complete your proposal whereas a bankruptcy stays on your credit rating for 6 years after you are discharged from the process.
Consumer proposal vs. bankruptcy: Discharge of debts
While most unsecured debts are settled (or discharged) in a consumer proposal and bankruptcy, some debts survive and you are still required to pay them, such as the following:
- Child and/or spousal support payments
- Fines, penalties and restitution orders imposed by a court
- Any award by the court for intentional bodily harm, sexual assault or wrongful death
- Any debt or liability arising out of fraud, embezzlement, misappropriation or misconduct while acting in a fiduciary capacity
- Any debt or liability for obtaining property by false pretenses or fraudulent misrepresentation
- Liability for any dividend a creditor would have been entitled to receive when you fail to disclose the creditor to your trustee
- Student loans in certain circumstances
Some of these creditors are entitled to file a claim in the consumer proposal (spousal or child support, EI overpayments, student loans), which would result in funds being paid to them by the LIT as part of the process. The individual making the consumer proposal will then be responsible for paying the surviving balances due, less any payment received by the creditors through the consumer proposal.
If you own a home or a car you will need to make payments on your mortgage or car loan in order to keep them, as these are secured debts and secured debts are not settled in a consumer proposal or bankruptcy.
To explain, unsecured debt is debt that is not backed by an asset. Your mortgage is secured by your house, and your car loan is secured by your car. Unsecured debt can be included in your consumer proposal, and types of unsecured debts include (but are not limited to) credit cards, lines of credit, personal loans, income tax, and in some cases, student loans.
Consumer proposals commonly offer unsecured creditors settlement of debts by way of monthly payments, not by way of surrendering assets.
Consumer proposal vs. bankruptcy: How much you have to pay back
In a consumer proposal, you pay back a percentage of your unsecured debt in either lump sums or by way of fixed payments. There is no interest charges on your proposal payments. Your trustee will assess your financial situation to determine the amount of the debt you may be able to pay, and that amount is submitted in the proposal. If creditors accept, then you have up to five years to pay back the amount. The rest will be discharged at the end of your consumer proposal.
In a bankruptcy, the amount you have to pay is dependent on your family income level, any equity you have in assets, and whether you have been bankrupt previously.
Consumer proposal vs. bankruptcy: How does it affect my credit score?
The Office of the Superintendent of Bankruptcy reports all consumer proposal and bankruptcy filings to the different credit reporting agencies in Canada. A consumer proposal will be reflected on your credit report for three years after the completion of your consumer proposal.
While the consumer proposal is reported on your credit report, it does not necessarily prevent you from obtaining new credit before the consumer proposal is purged from your credit report. Each new creditor will determine its lending policies for people in a proposal, but generally it is difficult and more costly to obtain credit before the proposal itself has been completed.
Two financial counselling sessions are provided during the consumer proposal process to provide you with tools and resources to help you reestablish your credit rating following the filing of a consumer proposal.
When you file a consumer proposal, you will receive an R7 rating on your credit report. An R7 rating indicates that you are making payments on your debts. According to Canada.ca, your consumer proposal filing will be on your credit report for a minimum of three years after you complete your proposal; bankruptcies will remain on your credit report as an R9 for 6-7 years depending on your province and the credit reporting agency.
To explore your financial options and determine the best path forward for you, meet with a LIT for a free consultation.