Consumer Proposal vs Personal Bankruptcy

WHICH ONE IS BETTER:
A Consumer Proposal or a Bankruptcy?

This is one of the most common questions that we get asked when we meet with someone.

A bankruptcy and a consumer proposal are options under the Bankruptcy and Insolvency Act (BIA) that provide debt relief to individuals in Ontario, Canada. Both provide immediate legal protection from creditors and get rid of debt, however there are many differences between the two debt relief options. Here is a summary comparing the main differences of the two options.

Detailed Comparison of a Bankruptcy and a Consumer Proposal

Cost

Cost of a Consumer Proposal: Monthly payments under a consumer proposal are fixed and do not change month to month, as they could in a bankruptcy. Once the proposal has been accepted by the proven creditors, the monthly proposal payments remain the same for the term of the proposal.

Cost of a Bankruptcy: Monthly bankruptcy payments could vary month to month if your income is over the government limit. A general rule of thumb is the more you earn, the more you will pay. This is a result of the Directive (under the BIA) titled Surplus Income. Under this Directive, any income over a prescribed limit is called surplus income. Fifty percent of surplus income is paid as the monthly surplus income payments. For example, if in one month you are $1,000 over the limit (so a surplus income of $1,000), that month’s bankruptcy payment (surplus income payment) will be $500.

The uncertainty of the monthly bankruptcy payments is one of the reasons why a consumer proposal is a more popular option with its fixed monthly payment.

Length

Length of a Consumer Proposal: The maximum length that a consumer proposal can be filed for is 60 months (5 years).

Length of a Bankruptcy: The length of a bankruptcy is determined by two main factors. The first factor is a person’s income (specifically if they are required to make surplus income payments) and the second factor is if the person has a previous bankruptcy filing. A bankruptcy can be as short as 9 months and up to 36 months.

Credit Report Impact (Credit Rating Impact)

Credit Impact of a Consumer Proposal: Reported as an R7 on a credit report. An R7 represents that the person has made some type of settlement with their creditors. The consumer proposal is reported for the lesser of 3 years after your last payment or 6 years from the date of filing.

Credit Impact of a Bankruptcy: Reported as an R9, which is the lowest rating on a credit report. A first-time bankruptcy will remain on your credit report for 6 years after your discharge date (Equifax). A second-time bankruptcy will remain for 14 years after your discharge.

Duties (What Am I Required To Do?)

Duties in a Consumer Proposal: Straightforward. Make monthly proposal payments and attend two (mandatory) credit counselling sessions.

Duties in a Bankruptcy: Four main duties, they are:

• Make monthly bankruptcy payments for trustee fees
• Report a monthly budget with copies of pay cheques to trustee (used to determine if required to make surplus income payments). Note: if required to make surplus income payments, you do not pay the a separate trustee fee (it is one or the other)
• Provide tax documents so that trustee can file tax return(s)
• Attend two mandatory credit counselling sessions

Impact on Assets

Filing a Consumer Proposal: Not impacted, you retain ownership. There is no surrendering of assets including tax refunds and/or HST credits.

Filing a Bankruptcy: Non-exempt assets are surrendered to trustee (or alternatively, purchased from trustee if do not want to surrender). You will lose any tax refunds and under some circumstances your HST credits.

Other

Consumer Proposal: Will know within 45 days if your proposal has been accepted by creditors.

Bankruptcy: Creditors (or trustee) can oppose your discharge from bankruptcy up to date of discharge. This could result in uncertainty until date of discharge.

Is a Consumer Proposal A Better Way to Deal with Debt?

It is not a simple decision. Which one should you file for immediate debt relief? A consumer proposal or a bankruptcy? Each has its own benefits and disadvantages. The following are some factors you may want to consider:

1. Proposal payments remain the same (can fluctuate in a bankruptcy).
2. Monthly payments in a proposal are often smaller since they are spread over a longer term. This makes the payments more manageable.
3. Proposal process is simpler. Once accepted just make monthly proposal payments.
4. In a bankruptcy, you lose tax refunds and some assets.
5. Bankruptcy results in the lowest credit report rating.

Conclusion: The Right Debt Solution for Me Is…?

A personal bankruptcy and a consumer proposal are two debt relief options under the Bankruptcy and Insolvency Act that are meant to help you get out of debt and give you a fresh start. However, as discussed above, each is different from one another, and the right option is different person to person. To determine the best debt relief option for you, we recommend that you speak with an Ontario licensed insolvency trustee such as Chande.

The process starts with contacting us by email, phone or completing the submission form just below. Chande Debt Solutions will guide you through the process from beginning to end and explain all the advantages and disadvantages so that there are no surprises. At the end of the process, your debts are wiped out! Want to get started? Contact us for a free no obligation consultation.

Blog: Bankruptcy vs. Consumer Proposal: What’s the difference?