Consumer proposal vs. bankruptcy — what’s the difference?

At first glance, they can appear similar. Both clear your debt, stop collection action, and can harm your credit. But when we get into the nitty-gritty, there are several big things that set them apart.

1. Assets

Bankruptcy: When you file for personal bankruptcy, your assets are on the line. There may be allowable exceptions, like a car beneath a certain value, but anything over that can be taken. Each province in Canada has specific exceptions.

Consumer Proposal: When you file for a consumer proposalyour assets aren’t touched. Instead, an agreement is made with your creditors to pay an amount of money in lieu of the full payment, and if they accept your debt is cleared, collection action stops, and your assets cannot be seized. But you have to prove that it is more lucrative for your creditors to accept your consumer proposal than it would be for them if you declared bankruptcy.

2. Cost and Payment Schedule

Consumer Proposal: A consumer proposal payment schedule is designed for you. You make a proposal to your creditors, usually a percentage of your total unsecured debt, and then you create a schedule to pay back that percentage. These are usually fixed, monthly payments that are made over a term of 48 to 60 months (four to five years). You also must pay the Licensed Insolvency Trustee (LIT) who files your consumer proposal a portion for his fee.

Bankruptcy: Bankruptcy payments vary as they are based on your income. The more money you make, the more you’ll have to pay. A first-time bankruptcy can be completed in as little as nine months. If you have surplus income (if your household income is over the allowed amount) it may be extended up to 21 months. You are also required to pay the LIT a portion for his fee.

3. Credit Rating Impact

Bankruptcy: If you claim bankruptcy in Canada, you will receive an R9 credit rating. This is the worst rating you can have. It will stay on your credit report for six to seven years after you are discharged, depending on your province. If you are discharged after nine months, then the credit rating might stay on your record for seven to eight years total.

Consumer Proposal: With a consumer proposal, you will receive an R7 credit rating. It will remain for three years after you complete your payments. So, if you complete your payments in five years, the R7 credit rating will remain for eight years total (five years, plus three years after it’s completed).

4. Monthly Duties

Consumer Proposal: There are no monthly requirements with a consumer proposal, besides making your payments on time. You do not need to report any changes in your income. You have to attend two credit counselling sessions.

Bankruptcy: You are required to complete a monthly budget for income and expenses and supply copies of your pay stubs to your Licensed Insolvency Trustee (LIT). You also have to attend two credit counselling sessions.

5. Tax Refund

Bankruptcy: You will lose all tax refunds or tax credits you are owed.

Consumer Proposal: You keep all tax refunds or credits you are owed.

6. Eligibility

Consumer Proposal: Your total debt cannot exceed $250,000 (excluding a mortgage) and you must be able to afford to repay a portion of your debts. You are not guaranteed to be granted a proposal just by filing one. It must be accepted by the majority of your creditors. You need to prove that they would be better off with this arrangement than if you filed for bankruptcy.

Bankruptcy: Any Canadian resident who owes more than $1,000 in debt and is insolvent is eligible to file for personal bankruptcy.

When you’re choosing between filing for a consumer proposal or filing for bankruptcy, there is no clear winner. They both have far reaching consequences and will take years to recover from.

You also need to consider the bigger financial picture and all your forms of debt. Both a bankruptcy and a consumer proposal can cover unsecured credit and debt, such as credit cards, unsecured bank loans, lines of credit, payday loans, and unpaid bills.

But they won’t deal with secured debt, like your mortgage, secured car loan, or lease. They also won’t include debts like spousal or child support, court-imposed fines, and student loans that are less than seven years old. You will still have to pay those debts.

If you’re in a position where you’re considering filing for either one, make sure you have explored all of your other options. There could be another debt management solution that works better for you, without the same repercussions. And if you do decide to file, make sure that you seek independent representation besides your LIT.

Remember, LITs make money off of your consumer proposal or bankruptcy. You need someone who represents you — and only you — when you’re going through the process.

At DebtCare, we provide just that. We can represent you when filing for a consumer proposal or bankruptcy, and we can also make sure you have eliminated all other debt consolidation strategies.

Contact us today for a free consultation. Call 1-888-890-0888.