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What is the difference between a consumer proposal and bankruptcy?

These are two distinct legal processes that allow you to be relieved of your debts and halt collection actions. Both filing for bankruptcy and making a consumer proposal require the involvement of a Licensed Insolvency Trustee who will help you make the best choice based on your income and assets.

What is a Consumer Proposal?

It is a legal process designed to reduce and consolidate your debts. It involves an agreement with your creditors where you repay a portion of your total debt, without interest, through new payment terms.

This is a negotiation facilitated by your Insolvency Trustee, allowing you to eliminate most of your debts over a period of up to 5 years while significantly reducing your overall debt amount. Certain unsecured debts cannot be included in the agreement (such as fines, penalties, alimony, and debts incurred through fraud).

What about Bankruptcy?

Bankruptcy is a solution for individuals who can no longer afford to pay their debts because their monthly obligations significantly exceed their income. It is a legal procedure that allows the debtor to repay debts through the sale of assets, as stipulated by the Bankruptcy and Insolvency Act.

Personal bankruptcy allows you to be discharged from all debts, except those specified in Section 178 of the Act, such as fines, alimony debts, student loans less than 7 years old, and so forth. However, it is important to note that in addition to the seizure of assets, there is a monthly payment required, which will be determined by the trustee according to the directives of the Superintendent of Bankruptcy.

A consumer proposal is often considered a beneficial alternative to bankruptcy. It offers greater flexibility, allowing you to make monthly payments that align with your budget, whereas bankruptcy payments are non-negotiable and solely based on your income.

The main differences are:

• A fixed amount for a consumer proposal, while monthly payments for bankruptcy vary based on your income.
• Protection of your assets in a consumer proposal versus the risk of seizure if you declare bankruptcy.
• Retention of tax refunds when you file a proposal versus their loss during bankruptcy.

Therefore, it is crucial to consult with your trustee to determine which solution best suits your financial situation, considering the types of debts you have.

Consumer Proposal to Rebalance Your Finances

The consumer proposal has become a highly sought-after alternative to avoid personal bankruptcy.

Eligibility Criteria

To file a consumer proposal, you must meet certain requirements:

• Your debts are less than $250,000 (excluding your mortgage).
• You are insolvent (your debts exceed $1,000 and you are unable to repay them).
• Reside or own assets in Canada.

How Does It Work?

If you meet these criteria, you can consult an Insolvency Trustee who will guide you through the entire process. The trustee will assess your financial situation to determine the feasibility of your proposal. Subsequently, they will file the application with the Office of the Superintendent of Bankruptcy.

From that point, you will cease making payments to your creditors, and any legal proceedings initiated against you will be halted. You will also be required to attend two financial counselling sessions, which will assist you in better managing your finances.

The proposal will then be presented to your creditors, who have 45 days to respond. They may call you to a meeting of creditors where a vote will be held to accept or reject the proposal.

If the proposal is rejected, legal proceedings and payments will resume. You will then have the option to modify the proposal and try again, or consider other alternatives such as debt consolidation or bankruptcy.

If the proposal is accepted, your creditors and your trustee will negotiate the new payment terms.

Advantages and Disadvantages of a Consumer Proposal

A consumer proposal allows you to renegotiate your unsecured debts without affecting your secured debts, such as your mortgage. This negotiation offers several benefits:

• No interest
• Only one debt to pay
• Debt reduction of up to 70%
• Cessation of all contact with creditors
• A single monthly payment that aligns with your budget
• Protection against seizure risk
• Retention of assets
• Fixed administration fees included in monthly payments
• Your RRSP and life insurance will not be seized.
• A consumer proposal offers flexibility, allowing you to ensure that your monthly payments align with your budget, unlike bankruptcy where payments are determined solely based on income.

However, it negatively impacts your credit file by showing an R7 rating for 3 years after repayment is complete or six years after the application is filed. Furthermore, your creditors have the right to object to your proposal. In such a case, you may try to find alternative negotiation terms, or the consumer proposal could simply be rejected.

Bankruptcy to End Your Debts

Bankruptcy is a solution provided by the Bankruptcy and Insolvency Act that allows you to eliminate a portion of your debts by surrendering certain assets.

The Steps of Declaring Bankruptcy

Similar to a consumer proposal, if you are considering declaring bankruptcy, you must first schedule an appointment with a trustee who will assess your situation. If bankruptcy is your only option, your trustee will complete the necessary forms to formalize the bankruptcy.

Your seizable assets will be liquidated to collect the necessary funds. Certain assets remain exempt from seizure, such as furniture, alimony, and certain benefits. During the bankruptcy process, you will be required to make monthly payments to your trustee. He/She will represent you before your creditors and ensure the equitable distribution of your monthly payments.

During this process, you will need to attend two financial counseling sessions to better establish and manage your budget. Bankruptcy can last between 9 and 21 months. Once you have completed all the steps of the bankruptcy, you will be discharged from your debts.

Advantages and Disadvantages of Personal Bankruptcy

When you file for bankruptcy, you gain several advantages:

• Protection against seizure
• Reduced monthly payments
• Ability to retain your assets
• Discharge from your debts
• End to creditor harassment
• Duration of 9 to 21 months
• Creditors cannot object to your bankruptcy

However, it is important to understand that some of your assets may be seized or liquidated. This includes RRSPs held for 12 months or less, as well as your life insurance, which can be seized. Furthermore, you will be unable to contribute to your RRSP throughout the bankruptcy period.

Declaring bankruptcy will result in an R9 notation on your credit file, which can remain for up to six or seven years even after your discharge. Additionally, the cost of bankruptcy is determined by your income. These monthly payments are not fixed and will increase based on your earnings.

How to make the right choice for your financial situation

Once you understand the differences between a consumer proposal and bankruptcy, it's time to select the option that best suits your needs. Anyone with over $1,000 in debt who is unable to repay it can declare bankruptcy. You simply need to own assets or reside in Canada and be insolvent. While it is certainly a last-resort solution, it remains available at any time.

A consumer proposal, on the other hand, is for individuals who can manage to pay a portion of their debts and wish to fulfill their financial obligations. Both solutions have their constraints, but a consumer proposal is legally less severe. It allows you to retain your assets and has a lesser impact on your credit file.

Therefore, if your monthly expenses are overwhelming, and you are struggling to repay your debts on time, yet you have a stable income, a consumer proposal might be suitable for you. With a reduced interest rate and more flexible payment terms, you can regain your financial stability.

If neither option suits your situation, consider debt consolidation

Be aware that debt consolidation is another available alternative. This financial operation allows you to borrow a single amount from a financial institution to pay off a portion of your existing debts. This solution can alleviate your debt burden, leaving you with only one creditor to repay. However, debt consolidation does not cover secured loans and is subject to specific criteria:

• Stable income
• The ability to guarantee repayment of your debt
• Ownership of assets
• A debt-to-income ratio below 40%
• A good credit score

Need assistance managing your financial challenges?

Both bankruptcy and consumer proposals are administered by a Licensed Insolvency Trustee (LIT), whose activities are regulated by the federal government of Canada. Therefore, if you have a solution in mind and wish to validate it, please contact us for a free consultation.

Our team is dedicated to guiding you through your debt challenges and directing you toward the most effective solution. With over 25 years of experience, Groupe Serpone will support you throughout the legal process and provide all necessary resources.

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