Consumer Proposal vs. Bankruptcy: What’s the Difference?

Consumer Proposal vs. Bankruptcy: What’s the Difference?

When individuals face insurmountable debt, they often find themselves choosing between two legal debt relief options: consumer proposal and bankruptcy. Both avenues offer a fresh start to those overwhelmed by financial obligations, but they differ significantly in their processes, impacts, and long-term effects. Understanding these differences is crucial in making an informed decision that best suits one’s financial situation.

What is a Consumer Proposal?

A consumer proposal is a legal process administrated by a Licensed Insolvency Trustee (LIT), aimed at reaching a settlement between the debtor and their creditors. The debtor proposes a plan where they agree to pay a portion of their debts over a specified period, which cannot exceed five years. Once the proposal is accepted by the creditors, the debtor is obligated to adhere to its terms, and upon completion, the remaining debt is forgiven. This option allows individuals to retain their assets, including a home or vehicle, provided they continue to make payments on those assets.

What is Bankruptcy?

Bankruptcy, on the other hand, is a legal procedure designed to provide relief to those who cannot meet their debt obligations under any circumstances. It involves surrendering non-exempt assets to a Licensed Insolvency Trustee, who then liquidates these assets to pay off creditors. Certain assets are protected under bankruptcy exemptions but vary by province or territory. Bankruptcy usually results in the discharge of most unsecured debts within 9 to 21 months for a first-time bankruptcy, depending on the individual’s income level and other factors.

Key Differences

The key differences between a consumer proposal and bankruptcy primarily revolve around asset retention, the impact on credit, and the process itself.

Asset Retention

In a consumer proposal, individuals are typically able to keep all of their assets, assuming they continue to make payments on any debts secured by those assets, like a mortgage or car loan. Bankruptcy may require the surrender of certain assets, although exemptions exist.

Impact on Credit

Both options will negatively impact your credit score, but to different extents. A consumer proposal is noted on your credit report for three years after your last payment, while bankruptcy remains for six to seven years after discharge. Therefore, a consumer proposal is often considered less damaging in the long term.

Process and Duration

The consumer proposal process often takes longer than bankruptcy, as it involves negotiating with creditors and can last up to five years. Bankruptcy, while initially swift, can extend up to 21 months or longer for repeat filers, depending on specific circumstances and income levels. The length of bankruptcy can also be influenced by whether surplus income payments are required.

Choosing Between Consumer Proposal and Bankruptcy

Deciding between a consumer proposal and bankruptcy should be done after thorough consultation with a Licensed Insolvency Trustee. This professional can assess your financial situation, explain the pros and cons of each option, and help determine which pathway offers the best resolution to your financial distress.

Ultimately, both consumer proposals and bankruptcy offer structured relief for those drowning in debt, but they cater to different scenarios and have varying long-term impacts. Understanding these nuances is essential for making an informed decision and paving the way to financial recovery.