Myth vs Fact: Consumer Proposal vs Bankruptcy

Consumer proposals and bankruptcy are often confused with one another because they both involve a Trustee in Bankruptcy. In Canada, the government introduced legislation to protect people who have reached a breaking point with their debt. Over time that legislation has been amended and re-worked to simplify processes and to make the process fair for both creditors and those who owe money.

The Superintendent of Bankruptcy is an entity of Industry Canada, and is the individual who administers the Bankruptcy and Insolvency Act through appointed officers. These officers are Trustees in Bankruptcy. The Trustee in Bankruptcy’s role is to administer a consumer proposal or bankruptcy on behalf of the creditors and the people who owe money.

A bankruptcy and a consumer proposal are both powerful in that, once filed, all collection and enforcement action being made by unsecured creditors stops, interest stops, and in many cases the overall amount of debt is reduced.

That being said, a consumer proposal bears less strings than bankruptcy and should always be considered as option number 1 - bankruptcy is generally a last resort measure.

In a consumer proposal, a proposal is made to your creditors – basically you are offering them a sum of money to be repaid through the Trustee over a term of, typically, 5 years.

·         Your creditors have a specified amount of time to accept or reject the proposal.

·         If no one responds, the proposal is accepted.

·         If the majority creditor(s) accepts, the proposal is accepted.

·         If a proposal is accepted you make a single monthly payment to the Trustee for the term proposed. You can pay off the proposal at any time. You have no ongoing income reporting requirements to your Trustee.

In a bankruptcy your creditors don’t get a choice to accept or reject.

·         You make a monthly payment to the Trustee in Bankruptcy over 9 or 21 months in a first time bankruptcy, depending on your income. There are maximum income thresholds set out and if your income exceeds those thresholds the term of your bankruptcy payment extends from 9 to 21 months.

·         During your bankruptcy you have to report your income and any changes to your financial circumstances to the Trustee.

·         If you come into any significant sums of money you may have to pay surplus income to the Trustee.

A consumer proposal is removed from your credit report 3 years from the date it is paid in full. A bankruptcy remains for 6 years from the date of discharge.

Since the Trustee doesn’t represent you, going to one directly is never recommended. Any financial information you divulge can’t be taken back. Prior to meeting a Trustee you are best served to work with a financial representative who specializes in bankruptcy and consumer proposals – one who will represent you – to review and help you structure your financial information to be presented to a Trustee. Some may even help you negotiate the terms of your proposal or bankruptcy with the Trustee.

Both of these options are viable when it comes to debt relief - just make sure that you are not putting your financial affairs at risk by attending a Trustee before seeking real help.

For more information or to protect yourself before going to a Trustee, please call DebtCare Canada today at 1-888-890-0888. 

Consumer Proposal VS. Bankruptcy - How Are They Different

If you have been facing financial challenges you may have been exploring financial options to deal with debt. Two of these options include a consumer proposal and bankruptcy. We are often asked the differences between filing a consumer proposal vs. bankruptcy in Canada, which prompted us to write this article.

Before discussing the differences between filing a consumer proposal vs. bankruptcy it is important to understand that both are legal processes to deal with debt that are administered by a trustee in bankruptcy. The trustee in bankruptcy is an officer of the court appointed by the Superintendent of Bankruptcy who oversees the Bankruptcy and Insolvency Act and regulates the insolvency professionals who administer it.

The trustee in bankruptcy administers bankruptcies and consumer proposals; they do not represent you in the process. One of the trustee’s responsibilities is to make a fair deal that pays your creditors the most money possible. Trustees also earn more money based on the size of the consumer proposal that you file. The larger the payments you make under the consumer proposal they negotiate, the more money they make administering it.

A bankruptcy or consumer proposal is a viable method to use to deal with debt. Both will stop most collection action, will leave you with a single monthly payment, and will stop the interest accruing on unsecured debts.

When comparing the differences between filing a consumer proposal vs. bankruptcy the option you choose will generally depend on your income and assets. Those with minimal income, no assets and a significant amount of unsecured debt may be a better candidate for a bankruptcy. One big drawback with bankruptcy is that, if your income surpasses a certain level, your trustee may assess you as having surplus income. Having surplus income means that, if your income exceeds the threshold, not only will your monthly payment in bankruptcy increase but the trustee may also require that you remain bankrupt longer. The same applies to equity in assets, such as a home. If you have equity in your home the trustee will assess surplus income which will increase the amount that you have to repay in bankruptcy. This is why higher income earners or those with assets often opt for consumer proposals.

Many individuals don’t realize that in a bankruptcy or consumer proposal you can generally keep your assets, homes or cars included.

Consumer proposals involve offering your creditors a proposal that includes a sum of money that you will repay as a final settlement on your debts. Consumer proposals are based on your income, cash flow, and the ability to make a monthly payment over 4 to 5 years. Some benefits of a consumer proposal include:

·         It can be paid off early – a bankruptcy can’t.

·         It is a final agreement - bankruptcies will continue until your bankruptcy trustee discharges you. If your income increases, it could increase the amount you have to repay in your bankruptcy and the length of time that you are bankrupt.

·         You can rebuild credit sooner – consumer proposals are removed from the credit report 3 years after they are paid in full, bankruptcies stay for 6 years from the date you are discharged.

·         In the case of a higher income earner or individual who has assets, a consumer proposal will involve a smaller monthly payment than bankruptcy.

·         If the majority of your creditors accept the consumer proposal, your other creditors are automatically included whether they like it or not.

When investigating the differences between filing a consumer proposal vs. bankruptcy it is best to speak to an independent financial professional who can guide you through your options and represent you throughout the process. Bankruptcy trustees are shrewd negotiators and have experience filing these every day. Having your own representation can help to ensure that you get the best deal. The fact that a bankruptcy or consumer proposal may not be your only financial option is also important, which is why an independent and objective financial opinion will help you to make more informed financial decisions.

For more information about filing a consumer proposal vs. bankruptcy or if you need help with a financial problem, please contact DebtCare Canada at 416-907-2582 or visit www.debtcare.ca