Consumer proposal or bankruptcy, how to choose?

Proposition de consommateur ou faillite

Debt generates a lot of anxiety and tends to make the debtor’s life a real ordeal. Fortunately, some legal solutions can free you from your financial problems and give you a new balance. Consumer proposal and bankruptcy are two options regulated by the Government of Canada, both of which are designed to pay off your debts and free you from your creditors.

To make the best choice that fits your situation, you need to understand how these two processes work and what the difference between the two is.

What is the difference between a consumer proposal and bankruptcy? 

They are two separate legal processes that allow you to free yourself from your debts and stop collection measures.  Declaring bankruptcy or filing a consumer proposal requires the intervention of a licensed insolvency trustee who will help you make the best choice according to your income and assets.

 What is the consumer proposal?

This is a legal process that aims to reduce and consolidate your debts. It is an agreement with your creditors in which you pay part of your debt, without interest, through new payment terms. 

It is a negotiation in which your insolvency trustee intervenes so that you can get rid of most of your debts after a period of up to 5 years while reducing the total value of your debt. However, certain unsecured debts cannot be part of the agreement (fines, penalties, alimony, fraud, etc.). 

What about bankruptcy?

Bankruptcy is a solution for people who can no longer pay their debts because the monthly amounts far exceed their income. It is a legal procedure that allows the debtor to repay his/her debts by selling his/her assets under the Bankruptcy and Insolvency Act. 

Personal bankruptcy allows you to be discharged from all debts, except those provided for in article 178 of the law such as traffic tickets, alimony debts, student loans under 7 years, etc. However, it is important to know that in addition to the seizure of assets, there is a monthly payment to be paid which will be established by the trustee according to the directives of the Superintendent of Bankruptcy.

The consumer proposal is often seen as a life-saving alternative to bankruptcy. It is more flexible and gives you the opportunity to ensure monthly payments that respect your budget while bankruptcy payments are non-negotiable and depend solely on your income.

The main differences are :

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

It is therefore important to consult a trustee to find out which solution best suits your financial situation based on the type of debt you have.

The consumer proposal to rebalance your finances

The consumer proposal has become a much 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 (not including the mortgage)
  • You are insolvent (your debts are greater than $ 1000 and you are unable to pay them back) 
  • You reside or own property in Canada 

How does it work? 

If you meet these criteria, you can consult an insolvency trustee who will guide you through this process. He/She will assess your financial situation to verify the feasibility of your proposal. He/She will then file the application to the Office of the Superintendent of Bankruptcy.

At that point, you will stop paying your creditors and the legal proceedings against you will cease. You will be required to attend two financial counseling sessions to help you better manage your finances.

The proposal will then be presented to the creditors who will have 45 days to respond.  They may invite you to a meeting of creditors or a vote will be taken to accept or reject the proposal.

If the proposal is refused, legal proceedings and payments will resume. You will then be able 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 but without touching your secured debts such as your mortgage. This negotiation allows you to benefit from several advantages:

  • No interest
  • Only one debt to pay
  • Debt reduction up to 70%
  • Cessation of all contact with creditors
  • A single monthly payment that fits your budget
  • Protection against the risk of seizure
  • Conservation of property
  • Fixed administration fees included in the monthly amounts 
  • Your RRSP and life insurance will not be affected

A consumer proposal is more flexible because it makes sure that your monthly payments respect your budget, unlike a bankruptcy where payments are determined solely on the basis of your income.

However, it affects your credit report negatively by indicating an R7 rating for 3 years after the end of the repayment period or 6 years after the filing of the application. In addition, your creditors have the right to reject your proposal.

Bankruptcy as a debt relief solution

Bankruptcy is a solution provided by the Bankruptcy and Insolvency Act that allows you to get rid of some of your debts by surrendering some of your assets.

Steps required to declare bankruptcy

Like a consumer proposal, if you are thinking about declaring bankruptcy, you must first make an appointment with a trustee to assess your situation. If bankruptcy is your only alternative, your trustee will fill out the necessary forms to make the bankruptcy official. 

Your seizable assets will be liquidated to collect the necessary amount. Certain assets remain unseizable such as furniture, alimony, certain benefits, etc. During the bankruptcy, you will have to make monthly payments to your trustee. He/she will represent you before the creditors and ensure the equitable distribution of your monthly payments.

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

The advantages and disadvantages of personal bankruptcy

 When you file for bankruptcy, you benefit from certain advantages:

  • Protection against seizure
  • Reduction of monthly payments
  • Possibility to keep your property
  • Release of your debts
  • Cessation of creditor harassment
  • Duration between 9 and 21 months
  • Creditors cannot object to your bankruptcy

Nevertheless, you should be aware that you risk the seizure or liquidation of some of your assets. Your RRSP of 12 months or less and your life insurance can be seized and you will not be able to contribute to your RRSP during the entire period of bankruptcy.

The declaration of bankruptcy will show an R9 on your file that will remain there for up to six or seven years even after your discharge. In addition, the cost of bankruptcy depends on your income. These monthly payments are not fixed and increase according to your income.

How to make the right choice according to your financial situation

Once you understand the differences between a consumer proposal and bankruptcy, it’s time to choose the option that best suits you. Anyone who has more than $ 1000 in debts and is unable to pay them back can declare bankruptcy. All you need to do is own property or reside in Canada and be insolvent. This is, of course, a last resort solution, but one that remains accessible at all times.

The consumer proposal, on the other hand, concerns anyone who is capable of assuming part of their debts and who wishes to respect their financial obligations. These two solutions are quite restrictive but the consumer proposal remains legally less severe. It allows you to keep your assets and affects your credit file less.

If you are overwhelmed by your monthly expenses and no longer able to repay your debts on time but you have a stable income, you can choose the consumer proposal. Thanks to a lower interest rate and less strict payment terms, you will be able to regain your financial equilibrium.

If these options are not right for you, consider debt consolidation.

Know that you have another alternative which is debt consolidation. This is a financial operation that allows you to borrow a single amount from a financial institution that will be used to pay part of your debts. This solution will allow you to lighten your debts and you will have only one creditor to repay. However, debt consolidation does not include secured loans and meets certain criteria: 

  • Stable revenues
  • The guarantee of being able to repay your debt
  • Owning assets 
  • Debt-to-equity ratio of less than 40
  • A good credit rating

Need help managing your financial problems?

Both bankruptcy and consumer proposals are administered by a trustee in bankruptcy whose activities are regulated by the federal government of Canada. If you have financial problems, don’t hesitate to contact us to benefit from a free consultation.

Our team will guide you to help you get rid of your debt problems and direct you towards the best solution. With more than 25 years of experience, Groupe Serpone will accompany you throughout the entire legal process and will put all its resources at your disposal.