March 7, 2024
Have you ever heard about a consumer proposal and wondered how it differs from bankruptcy? Find out the key differences here.
When people find themselves with serious debt issues, they often imagine that bankruptcy is their only option. But bankruptcy isn’t as common as you might think. In fact, most Canadians don’t need to declare bankruptcy.
Instead, most can resolve their debt issues with a consumer proposal. This option allows you to pay back a portion of your debt while keeping all your assets and avoiding the harsher consequences of bankruptcy.
So why do so many choose a consumer proposal over bankruptcy? And what are the key differences between the two?
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:
A 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.
They’re much more popular than bankruptcy in Canada, just look at the numbers: in the second quarter of 2024, there were 35,082 consumer insolvencies across the country according to the Office of the Superintendent of Bankruptcy. Of these, 27,337 (78%) were handled through consumer proposals. Bankruptcy was necessary for only 7,745 (22%).
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.
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.
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.
Do you think bankruptcy might be the right solution for you? Here is what you need to know if you are a homeowner.
Read moreConsumer proposals and bankruptcy each have different qualifications in terms of the level of debt you can have.
If your unsecured debt falls between $1,000 and $250,000, then you can file a consumer proposal. Anyone with unsecured debts over $250,000 cannot and will need to file for bankruptcy.
To be eligible for bankruptcy, you must have unsecured debts of at least $1,000. However, there is no maximum limit on the amount of debt required to qualify.
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.
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.
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.
As we’ve seen, both a consumer proposal and a bankruptcy have an impact on your credit. Upon the completion of a consumer proposal or bankruptcy, though, things can be different.
After successfully finishing a consumer proposal, individuals may find it comparatively easier to access credit or loans when compared to those who have undergone bankruptcy. Although a consumer proposal does impact your credit score, it is less severe than bankruptcy.
There are ways for those undergoing either process to begin to rebuild their credit.
Using a prepaid credit card is an option for someone who is going through bankruptcy or proposal, but this will not allow you to begin to rebuild your credit history.
A better option is a secured credit card, where you put down a deposit, which also becomes your credit limit.
If you deposit $500, that’s the maximum amount you can spend on the card. If you fail to make payments on your secured credit card, you will lose the deposit.
Secured credit cards can be used to reestablish your credit history and show you can use credit responsibly.
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.
Even during a consumer proposal or bankruptcy, you can start rebuilding your credit.
Learn moreThere 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.
March 7, 2024
Have you ever heard about a consumer proposal and wondered how it differs from bankruptcy? Find out the key differences here.
