March 7, 2024

Consumer proposal or bankruptcy: 5 key differences

Have you ever heard about a consumer proposal and wondered how it differs from bankruptcy? Find out the key differences here.

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Consumer proposal or bankruptcy: 5 key differences

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When most people think of needing professional debt relief help, they think of declaring bankruptcy. While bankruptcy may be the best-known form of legal debt relief, it is not the one most used. Not by a longshot. 

Filing a consumer proposal is far more common than declaring bankruptcy. 

Statistics Canada reported that consumer proposals handled over three quarters (79.4%) of consumer insolvencies in December of 2023, while bankruptcies only accounted for 20.6%. 

So why are consumer proposals more common? And what makes them different from bankruptcy? 

What is a consumer proposal?

A consumer proposal is a formal agreement between you and your creditors that enables you to repay only part of your debt. 

A consumer proposal allows you to do three things. 

  • Reduce the amount you need to pay back overall 
  • Lower your monthly payments 
  • Keep all your assets 

Licensed Insolvency Trustee (LIT) is the only person who can file a consumer proposal for you. You can’t do it yourself. The Trustee acts as an intermediary between you and your creditors and renegotiates your unsecured debts so that you repay a reduced amount over a specific period of time.

Despite being much more common than bankruptcy, most people have never heard of a consumer proposal. A 2023 BDO Affordability Index found 51% of Canadians were not at all familiar with what a consumer proposal is.

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.

What is personal bankruptcy?

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. It is therefore more serious and closely monitored than a consumer proposal.

Again, bankruptcy can only be filed on your behalf by a Licensed Insolvency Trustee.

There are many important differences between a consumer proposal and bankruptcy. We’ll explain them according to five main differentiators: how they affect your assets, how long they take, your obligations when going through each, their impact on your credit, and their cost.

1. How does a consumer proposal or personal bankruptcy affect my assets?

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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2. What are your monthly obligations for each?

You may be wondering what you need to do each month during either a consumer proposal or bankruptcy.

For a consumer proposal, the only obligation is to make your payments. You will exit the proposal process at the date agreed upon between you and your creditors if you make your monthly payments on time and in full.

There are more monthly obligations for those in bankruptcy. Like a proposal, there are monthly payments to make, but there are also other requirements.

In bankruptcy, you must also create a monthly budget of income and expenses. You must also give your Licensed Insolvency Trustee copies of your pay stubs.

Surplus income payments

If your income is above a certain threshold, you will also be required to make surplus payments each month as part of the bankruptcy. This threshold can vary depending on factors such as the number of dependents you have.

If your pay increases above the threshold during your bankruptcy, the court will then force you to make these payments.

For a consumer proposal, your monthly payments stay the same even if your income increases.

3. How long does a consumer proposal or bankruptcy last?

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. 

4. How long does a consumer proposal or bankruptcy stay on my credit report?

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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5. How much does a consumer proposal or bankruptcy cost?

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.   

Consumer Proposal vs Bankruptcy: which one is right for me?

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.

Do you have more questions?


March 7, 2024

Consumer proposal or bankruptcy: 5 key differences

Have you ever heard about a consumer proposal and wondered how it differs from bankruptcy? Find out the key differences here.

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