Most people know about bankruptcy. In fact, there are many myths surrounding bankruptcy that can make the world of debt relief more intimidating than it needs to be. Consumer proposals are even less understood, but are the leading type of formal debt relief in Canada. During a free consultation, an LIT can explain all of your debt repayment options and help you decide if a consumer proposal or bankruptcy is right for you.
But first, what are they and how do they work?
A consumer proposal is a common alternative to bankruptcy. It is a formal agreement between you and your creditors that enables you to repay only part of your debt.
The LIT acts as an intermediary between you and your creditors and they will renegotiate your unsecured debts so that you repay a reduced amount over a specific period of time.
It’s important to note that a consumer proposal can only reduce your unsecured debts, like credit cards, lines of credit and personal loans that are not secured by an underlying asset, like your home or vehicle.
A personal bankruptcy is a legal process that provides immediate relief from unmanageable debt. Declaring bankruptcy is a formal solution for people who are unable to pay back their unsecured debts.
When you file for bankruptcy, you may be required to surrender some of your assets as payment to your creditors though. It is therefore more serious and more closely monitored than a consumer proposal.
There are many important differences between a consumer proposal and bankruptcy. We’ll explain them according to four main differentiators: how they affect your assets, how long they take, their impact on your credit, and their cost.
The biggest difference between a consumer proposal and bankruptcy is the impact on your assets. A consumer proposal allows you to renegotiate your unsecured debts (credit cards, lines of credit, etc.) and keep your assets and secured debts, like your mortgage and car loan, separate.
If you file for bankruptcy, your unsecured debts are eliminated but certain assets may be seized to reimburse your creditors. Filing for bankruptcy doesn’t mean you will lose everything though. Each province has a list of assets that are exempt from seizure.
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A consumer proposal offers more flexibility in its duration. In other words, it can last longer and help keep your monthly payment low. As an agreement between you and your creditors, your LIT will work with you to determine the length of time it will take for you to complete payments, up to a maximum of five years.
Bankruptcies are generally shorter in length than consumer proposals. You can complete the process in as few as nine months for a first-time bankruptcy. If you are required to make surplus income payments, the process is extended an extra 12 months.
A consumer proposal and bankruptcy will both have an impact your credit. However, a consumer proposal is the less serious one. After filing a consumer proposal, your credit report will indicate an R7 rating for either three years after you complete your payments or six years after you initially file, whichever comes first.
After filing for bankruptcy, your credit report will indicate an R9 rating, which is the lowest rating you can have. Depending on certain circumstances, a first-time bankruptcy will remain on your credit report for six to seven years from the date you are discharged.
As part of the financial recovery process, for both the consumer proposal and bankruptcy, you must complete credit counselling that will help you rebuild your credit and teach the essentials of sound money management.
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There are costs and fees associated with both a consumer proposal and bankruptcy. These costs are incorporated into your monthly payment.
With a consumer proposal, however, the total cost is the amount that your LIT has negotiated with your creditors, usually a portion of your outstanding debts, usually anywhere between 30-80 % of your total debt load. Any administration fees are taken from this amount.
Throughout the consumer proposal, your monthly payment never changes and the monthly payments are generally lower than in bankruptcy because they can be spread out over a longer period of time.
The cost of a bankruptcy is based on your income. The higher your income, the more you will be required to pay in surplus income payments. Your monthly payments for a bankruptcy may also change. If your income increases, so will your monthly payments. .
There are important differences between a consumer proposal and bankruptcy that must be considered.
One is not necessarily better than the other as everyone has a different situation. Making the right decision depends on a variety of factors that only a Licensed Insolvency Trustee can help you understand.
If you are experiencing financial difficulty, you can schedule an initial consultation with a Licensed Insolvency Trustee free of charge. They will explain all of your debt relief options and help you decide on the right course of action.