Consumer proposal vs bankruptcy: which debt solution is better?

Consumer proposal vs bankruptcy: two different forms of debt relief

How does a consumer proposal differ from bankruptcy? Both are effective debt solutions that provide immediate relief from debt as well as legal protection from creditors. But there are many important differences between a consumer proposal and bankruptcy. Understanding each solution can relieve a lot of the stress that comes with dealing with debt.

Both options require the expertise of a Licensed Insolvency Trustee (LIT). You can speak with an LIT free of charge to understand how each process works, and which one would be most beneficial for your finances.

What are the main differences between a consumer proposal and bankruptcy?

One of the main differences between a consumer proposal and bankruptcy is the impact on your assets. In bankruptcy, you surrender assets in exchange for the elimination of your debts. In a consumer proposal, you pay back a portion of your debts with no impact on your assets.

But there are other important differences too: the duration of the agreement, the cost, the impact on your credit score, as well as minimum debt requirements. Here are the key differences between a consumer proposal and bankruptcy.

Consumer proposalBankruptcy
RequirementsMaximum of $250,000 in unsecured debt (excluding mortgage)Minimum of $1,000 of unsecured debt
CostA negotiated settlement, usually starting at 20% of your debt, divided into monthly paymentsMonthly payments based on your average monthly income, in accordance with government regulations
DurationUp to 5 years, no penalty for early termination9 months or 21 months based on income
ReportingNo monthly reporting duties requiredMonthly reporting on budget and income required
Impact on assetsKeep all assetsSurrender non-exempt assets
Impact on creditR7 rating remains on credit for 3 years after completion or 6 years after filing, whichever comes firstR9 rating remains on credit 6 to 7 years after completion

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What do a consumer proposal and bankruptcy have in common?

Whether you choose to file a consumer proposal or bankruptcy, both options offer you protection from your creditors and the courts. Collection calls stop, interest charges are frozen, and your Licensed Insolvency Trustee deals with your creditors on your behalf, ensuring that your rights as a debtor are protected, in accordance with the Bankruptcy and Insolvency Act of Canada.

Both a consumer proposal and bankruptcy are financial recovery solutions designed to help you achieve debt freedom. This is the basis on which you’ll be able to plan a secure and healthy financial future. An important part of the process is the financial education that you receive along the way.

The financial recovery process is a journey. One step in the consumer proposal and bankruptcy process is the completion of two credit counselling sessions, which we make as helpful and as personalized as possible. An accredited credit counsellor will help you create a fully functioning budget that includes all of your monthly expenses, debt obligations and savings goals. You’ll also explore tools and resources that will help you maintain healthy credit and debt management habits.

Which debts can be included in a consumer proposal or bankruptcy?

Both a consumer proposal and bankruptcy include most debts that are unsecured, or without collateral. Examples of unsecured debts are:

  • Credit card debt;
  • Bank loans;
  • Payday loans;
  • Tax debt;
  • Store credit cards;
  • Student loans, if seven years have passed since you were last a student;
  • Medical bills.

Secured debts, such as a mortgage or car loan, cannot be included in a consumer proposal or bankruptcy. A secured debt is debt that is backed by an asset, such as a mortgage debt or a vehicle loan, and remains separate from the consumer proposal or bankruptcy agreement.

When is a consumer proposal a better debt solution than bankruptcy?

Because each situation is different, the only way to know if a consumer proposal is a better debt solution than bankruptcy is to speak with an LIT who can assess your financial situation and help you weigh both options.

However, a consumer proposal is a less serious debt forgiveness program than bankruptcy, and is more beneficial to both debtors and creditors. In a consumer proposal, your LIT negotiates with your creditors on a new debt settlement amount. In a bankruptcy, your creditors will receive much less and the impact on your credit score is much greater.

Here are the top three reasons why you should consider a consumer proposal over bankruptcy:

1. You can keep your assets

If you have sizable assets like a home or vehicle, a consumer proposal is often the better option. A consumer proposal protects your assets and keeps them separate from the agreement your LIT negotiates with your creditors. So, you will not have to surrender any of your assets, including your home, vehicles, tax refunds, investments and home equity.

2. Monthly payments are affordable and flexible

Consumer proposals allow you to repay only a portion of your debt over an extended period. Many proposals use the maximum amount of five years which keeps monthly payments low.

3. A consumer proposal has less impact on your credit rating

The two major credit reporting agencies in Canada, TransUnion and Equifax, treat a consumer proposal differently than a bankruptcy. Both options affect your credit rating, but the consumer proposal has a less damaging effect than bankruptcy and will be removed from your credit report much earlier. A bankruptcy remains on your credit report for six to seven years after completion, whereas the consumer proposal remains on your report 6 years after filing or 3 years after completion.

4. There are no reporting duties

When your LIT determines your monthly payment amount for a consumer proposal, this amount stays the same throughout the agreement. Whereas, in bankruptcy, your monthly payment amount can fluctuate based on your income.

When is bankruptcy a better debt solution than a consumer proposal?

People are often attracted to the idea of paying back a portion of their debts and spacing out payments over a longer timeframe. But there are times when bankruptcy is the better option.

If you are dealing with job loss, for example, it can be much harder to get a consumer proposal approved. If household income is low, bankruptcy can offer a relatively quick solution to unmanageable debt.

Here are the top four reasons why bankruptcy may be the better solution:

1. Bankruptcy has no debt limits

A consumer proposal can only be filed for non-mortgage debt up to $250,000. Bankruptcy has no limit to the amount of debt that can be included, only a minimum of $1000.

2. The bankruptcy process takes less time

When you file for bankruptcy, you are usually discharged within nine months. However, the process can potentially take up to 21 months, depending on your income, and up to 36 months if it’s your second bankruptcy. A consumer proposal typically takes three to five years. This means a bankruptcy can get you back to rebuilding your credit sooner, allowing for a quicker route to controlling your financial future.

3. You do not need to repay a portion of your debts

If you can’t afford to repay any of your debts, bankruptcy is the better option. While you won’t need to make any further payments to your creditors, you may need to surrender some of your assets to help repay your creditors. However, with a consumer proposal, you will be expected to repay some of your debts over a period of three to five years.

4. You won’t lose everything

It’s a common misconception that you will lose everything in a bankruptcy. You won’t. Depending on where you live, each province has a list of what assets are exempt from seizure when you declare bankruptcy. Examples of exemptions include food and fuel, clothing, furnishings, appliances, medical aids, a car, your home, and tools of the trade that you need for work. Sometimes the exemptions include a dollar limit and sometimes they don’t.

Finding out if a consumer proposal or a bankruptcy is the best option for you

There are many factors that go into deciding whether the consumer proposal or bankruptcy is the best option. It really depends on a close assessment of your overall financial situation.

Scheduling a free initial consultation with a BDO Licensed Insolvency Trustee will allow you to explore all your debt relief options, not just a consumer proposal or bankruptcy.

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