Consumer Proposal vs. Bankruptcy: Understanding the Differences

Consumer Proposal vs. Bankruptcy: Understanding the Differences

Financial distress can trigger a search for significant debt relief options, and among the most considered are filing for a consumer proposal or declaring bankruptcy. Although both routes offer a way out of severe financial difficulty, they come with different processes, implications, and outcomes. Understanding the key differences between a consumer proposal and bankruptcy is crucial for individuals looking to make informed decisions about managing their debt.

What is a Consumer Proposal?

A consumer proposal is a legally binding process facilitated by a licensed insolvency trustee. It allows individuals to settle their unsecured debts by paying back a portion of what they owe over a specified period, which cannot exceed five years. The process involves drafting a proposal that offers to pay creditors a percentage of the debt owed, extending the payment term, or both. Once the majority of creditors, measured by dollar value, accept the proposal, all parties are bound by its terms, and the individual is protected from debt collection actions on the debts included in the proposal.

What is Bankruptcy?

Bankruptcy, on the other hand, is a legal proceeding that provides individuals with a fresh start by eliminating most of their debts. It is governed by federal law and also involves a licensed insolvency trustee, who administers the bankruptcy estate. The trustee liquidates non-exempt assets to pay creditors and provides the debtor with protections against collection actions. Bankruptcy typically results in a discharge of most unsecured debts, although certain debts like alimony, child support, and student loans under seven years old are not eliminated.

Key Differences Between Consumer Proposal and Bankruptcy

• Impact on Assets: In a consumer proposal, you generally retain all your assets, including those that would be lost in a bankruptcy. Bankruptcy might require surrendering certain assets to the trustee to be distributed to creditors.
• Credit Rating Impact: Both options negatively affect your credit rating, but a consumer proposal typically has a less severe impact than bankruptcy. A proposal is recorded on your credit report for three years after the last payment, while a first-time bankruptcy stays on your record for a minimum of six years after discharge.
• Costs: The costs associated with filing a consumer proposal can be lower than those of bankruptcy, as the proposal allows you to negotiate the repayment amount. Bankruptcy costs include trustee fees, asset liquidation costs, and mandatory contributions based on income.
• Payment Structure: Consumer proposals offer a structured payment plan without interest, allowing for easier budget management. In contrast, bankruptcy may require variable payments if your income increases, known as surplus income payments.
• Public Record: Both processes are a matter of public record, but finding the details of a consumer proposal can be more difficult than finding bankruptcy filings.

Conclusion

Deciding between a consumer proposal and bankruptcy depends on individual circumstances, including the level of debt, income, and the ability to retain assets. It’s important to consult with a licensed insolvency trustee to explore all options and implications. Understanding the differences between these two debt relief strategies is the first step towards making an informed decision that aligns with your financial goals and situation.