Consumer proposal vs. bankruptcy: What are the differences?

Is debt taking over? While debt can feel overwhelming, there are ways you can improve your financial outlook! The most well-known debt relief option in Canada is filing for bankruptcy, but it isn’t the only form of debt repayment for Canadians. Licensed Insolvency Trustees (LITs) offer another debt solution called a consumer proposal. Both options can provide relief to individuals experiencing financial troubles, but what’s your best option? To help you make an informed decision, we’ve broken down their differences below.

Your most frequently asked questions:

• What’s a consumer proposal?
• What's bankruptcy?
• What assets can I keep?
• How much will I have to pay?
• How long do they last?
• What’s the filing process?
• What debt is discharged?
• How is my credit score affected?
• Which debt solution is best for me?

What’s a consumer proposal?

A popular bankruptcy alternative, a consumer proposal, is a legal repayment agreement negotiated with creditors to settle your unsecured debt (credit cards, income tax debt, payday loans, etc.). They’re a great option if you can pay all or some of what you owe but need to change your payment arrangements and/or have equity in assets you’d like to keep.

What’s bankruptcy?

Personal bankruptcy should be considered if you’re overwhelmed by debt, can’t make your payments when they’re due or are struggling to meet your financial obligations. Bankruptcy is a debt solution under the Canadian Bankruptcy and Insolvency Act and allows you to clear almost all your debt, such as income tax debt, credit cards, overdue utility bills, lines of credit, and loans. While bankruptcy grants you immediate protection from creditors, it may affect your assets and credit rating, and you’ll still be required to pay some debt.

While both bankruptcy and consumer proposals offer a solution to alleviate your debt, they differ in terms of the assets you can keep, repayment structure, duration, filing process, and impact on your credit rating. Let’s find out which option is best for your financial situation!

What assets can I keep?

In most cases, you can keep the assets most important to you during a consumer proposal or bankruptcy. However, if you have equity in assets that you want to keep, you’ll have to pay that equity to your LIT for the benefit of your creditors. For example, if you own a car worth $10,000 and still owe $4,000 on it, your equity in the car is $6,000. To keep the car—depending on your province—you would need to pay your creditors a portion of that $6,000.

One advantage of a consumer proposal is that you can repay that equity over five years. In a bankruptcy, you’re normally required to repay the equity over the length of your bankruptcy—which is shorter than a proposal—so your monthly payments will be higher.

How much will I have to pay?

The amount you’ll be required to pay is based on a few factors, including how you choose to file.

With a consumer proposal, you’re required to pay back a percentage of your debt through either interest-free lump sums or fixed monthly payments. Your LIT will assess your financial situation to determine what you can afford to repay and then will submit the repayment terms in a proposal to your creditors. If your creditors accept your proposal, you’ll have up to five years to pay back the agreed upon amount. The remaining debt is discharged or “forgiven” at the end of your proposal.

In a bankruptcy, all of your unsecured debt is included and the amount you pay is determined by a set of guidelines from our regulator—the Office of the Superintendent of Bankruptcy Canada (OSB). The guidelines are based on factors like your household income, how many dependents you have, and any equity you wish to repay. Whether you’ve been bankrupt before may also change the terms of your bankruptcy.

How long do they last?

Both consumer proposals and bankruptcy provide some flexibility with payment terms. The length of your consumer proposal is determined by you and your creditors—most commonly five years. A benefit of a consumer proposal is that, if able, you can pay it off earlier than negotiated—without any extra costs or penalties.

Bankruptcy has a predefined length set by federal legislation. Your bankruptcy can range from nine to 36 months depending on your income, and previous bankruptcies.

With both options, you must complete all your responsibilities—like making your payments and counselling sessions—to receive your discharge or certificate of full performance. Failing to do so could extend the length of your file.

What’s the filing process?

Only a LIT can administer a consumer proposal or bankruptcy on your behalf. For a consumer proposal, you’ll work with your LIT to draft a proposal to your creditors. For the proposal to be accepted, your creditors must vote in favour of the terms presented by your LIT. If the majority of creditors—based on dollar amount owed—vote in favour of your proposal, your proposal is deemed approved. If your creditors are unhappy with the proposal, your LIT may renegotiate the terms or explore other options with you, like bankruptcy.

Learn more about how to file a consumer proposal.

If you’re insolvent—meaning you can’t repay your debts as they become due—you have the right to file bankruptcy. If you decide to claim bankruptcy, your LIT will walk you through the process and responsibilities of being bankrupt and submit your file to the OSB. While your creditors are legally required to stop pursuing collections or stop you from filing, they could object to you completing your bankruptcy if they believe you were dishonest or obtained your credit improperly.

Learn more about how to file for bankruptcy.

What debt is discharged?

While most unsecured debt is settled (or discharged) in both a consumer proposal and bankruptcy, some debt you’re still required to pay. This debt often involves obligations that are seen as essential for societal or legal reasons, such as:

• Child and/or spousal support payments

• Fines, penalties and restitution orders imposed by a court

• Student loans in certain circumstances

Some creditors, like those for spousal/child support or student loans, are entitled to file a claim in a consumer proposal. This means funds would be paid to them by the LIT via your proposal. Once the proposal is completed, you would then be responsible for paying any remaining balance.

If you own a home or a car that you plan to keep, you’ll need to continue making payments throughout your file. These are secured debts, which aren’t included in a consumer proposal or bankruptcy.

How is my credit score affected?

The OSB reports all consumer proposal and bankruptcy filings to both credit reporting agencies in Canada. A consumer proposal is reflected on your credit report for five years, or three years after completion. A bankruptcy stays on your credit report for six to seven years following your discharge.

During a bankruptcy and consumer proposal, you're required to attend two financial counselling sessions to provide you with tools and resources to help you re-establish your credit rating following your filing.

Which debt solution is best for me?

There’s no such thing as a one-size-fits-all debt solution. Before making any decisions on how to deal with your debt, do your research and learn about all your options. We offer free, no-judgment consultations to help you explore your unique financial situation and determine the best path forward for you. Talk with one of our debt solutions specialists today.