Consumer proposal vs. bankruptcy – what is the difference, and which one is the best choice for you? If you want to find out the answer, read on!

For Canadians struggling with debt, both filing for a consumer proposal and filing for bankruptcy can be a way out. But how can you tell which one is right for your situation? We’re breaking it down.

We’ll look at:

• What is a consumer proposal?
• What is bankruptcy?
• Consumer proposal vs. bankruptcy – main differences
• Bankruptcy or consumer proposal – which one is best for you?

Consumer Proposal

A consumer proposal is a form of insolvency filing where you make a settlement offer to your creditors. That’s where the name comes from — it is a proposal to creditors from you, the consumer.

In your proposal, you offer to settle your debts for less than you owe, but more than your creditors would receive if you filed for bankruptcy, instead.

The majority of your creditors must accept your proposal for it to be approved.

Generally in a consumer proposal, your assets are not sold off to pay your debts. A consumer proposal is only available for unsecured, non-mortgage debts between $8,000 to $250,000. If you are carrying more debt than that, you might consider another type of proposal, or filing for bankruptcy. You also must be able to demonstrate your ability to repay a portion of your debt.

Bankruptcy

In personal bankruptcy, you assign your assets in exchange for the elimination of your debts. Every province has certain exceptions for what you can keep but, depending on the amount of debt you owe, some assets may be sold.

You can file for bankruptcy if you owe at least $1,000 and are not able to pay your debts. Bankruptcy only deals with secured debts, such as personal loans, credit cards, and tax debt. It doesn’t erase most secured loans, such as a car loan or mortgage, although those assets may be repossessed if you cannot meet those payments.

To be discharged from a bankruptcy, you must meet a schedule of payments, set out by a Licensed Insolvency Trustee.

Consumer Proposal vs. Bankruptcy – Main Differences

Filing for a consumer proposal and for bankruptcy are two different things. The main differences are:

• In a consumer proposal, you can only file if you owe less than $250,000 in non-mortgage debt. In a personal bankruptcy, there is no limit.
• A consumer proposal must be accepted by the majority of your creditors. A bankruptcy does not need approval.
• Filing for a consumer proposal leaves you with an R9 rating on your credit report while you are in the proposal; it is upgraded to an R7 once it is paid off. The R7 stays on your credit report for three years after completion.
• Filing for bankruptcy leaves you with an R9 credit rating while in the bankruptcy and for seven years after it is discharged (it is never upgraded to a better rating throughout that time).
• A consumer proposal generally does not affect your secured assets, like your mortgage or car – although this depends on your personal situation.
• A consumer proposal allows you to rebuild credit faster, particularly if you pay it off quickly.

Bankruptcy or Consumer Proposal – Which One is Best for You?

Whether you choose to file for bankruptcy or for a consumer proposal can depend on your circumstances.

Questions to consider include:

• How much total debt are you carrying?
• How much unsecured debt are you carrying?
• How much are your secured assets worth?
• Can you demonstrate the ability to repay a portion of your debt?

It can difficult to answer these questions on your own. The best way to go about deciding which insolvency option is for you – or if there is an alternative debt consolidation method that may work – is by contacting a debt counsellor, such as DebtCare Canada, for a free consultation.

Having an Advocate on Your Side

Both a consumer proposal and bankruptcy must be filed through a Licensed Insolvency Trustee (LIT, or formerly known as a Trustee in Bankruptcy). However, if you’re filing for insolvency, it’s also important that you have an advocate on your side.

While Licensed Insolvency Trustees administer the consumer proposal or bankruptcy, they are not equipped to be this advocate for you. A) They represent both you and the creditor, so they are not entirely on your side. And B) they earn their money based on the size of your filing.

It’s best to have a debt counsellor – like our experts at DebtCare Canada – on your side during an insolvency filing to ensure you are represented at the table during the filing process. We can make sure you are protected and getting the best deal possible.

At DebtCare, we will help you decide whether filing for bankruptcy or for a consumer proposal is right for you and be your advocate throughout the entire process. We perform an independent review of your financial situation and make practical recommendations that will work for you.

Contact us today for a free consultation. Call 1-888-890-0888 or visit www.debtcare.ca.