Consumer Proposal vs. Bankruptcy in Canada: What You Need to Know

When facing overwhelming debt in Canada, it’s essential to understand your options. Two significant debt relief mechanisms are available: consumer proposals and bankruptcy. Both can offer a fresh start, but they come with different implications and processes. Understanding the pros and cons of each can help you make an informed decision that aligns with your financial situation and future goals.

What is a Consumer Proposal?

A consumer proposal is a legally binding process administered by a Licensed Insolvency Trustee (LIT). It allows you to settle your debt for less than you owe by making an offer to your creditors. This process can result in a reduction of the total debt owed, lower monthly payments, and an extension of the payment period, up to a maximum of five years. Importantly, a consumer proposal also halts most wage garnishments and lawsuits related to your debt.

What is Bankruptcy?

Bankruptcy, on the other hand, is a legal proceeding that provides relief to individuals who are unable to repay their debts. When you declare bankruptcy, a Licensed Insolvency Trustee takes over your financial affairs, liquidates eligible assets, and distributes the proceeds to your creditors. This process discharges most, if not all, of your debts, offering a chance to start anew. However, bankruptcy can have a more significant impact on your credit score and future financial opportunities than a consumer proposal.

Key Differences

The choice between filing a consumer proposal and declaring bankruptcy depends on several factors, including the amount of debt, your income, and your assets. Here are some key differences to consider:

Assets: In a consumer proposal, you retain control of your assets, including your home and car, provided you continue to make payments on any loans secured by those assets. Bankruptcy might require you to surrender some assets to the trustee, depending on their value and the exemptions allowed by your province or territory.
Debt Repayment: A consumer proposal often involves repaying only a portion of your debt, while bankruptcy may involve liquidating assets to repay creditors.
Credit Impact: Both options will affect your credit score, but a consumer proposal generally has a less severe impact than bankruptcy. A proposal is listed on your credit report for three years after you complete your payments, whereas a first-time bankruptcy remains on your report for a minimum of six years after discharge.
Cost: The cost of filing a consumer proposal or bankruptcy varies. Bankruptcy fees include asset liquidation and trustee fees, while consumer proposal fees are typically included in the negotiated repayment plan and are paid over time.

Choosing the Right Option

Deciding between a consumer proposal and bankruptcy is a significant decision that depends on your unique financial situation. Here are a few steps you can take to help decide:

Assess your financial situation: Take a thorough inventory of your debts, income, expenses, and assets.
Consult with a Licensed Insolvency Trustee: An LIT can provide personalized advice and explain the specific implications of each option based on your circumstances.
Consider your future financial goals: Think about your goals and how each option might affect your ability to achieve them.

Ultimately, both a consumer proposal and bankruptcy can offer a path to financial recovery, but each comes with its own set of consequences and benefits. By carefully considering your situation and seeking professional advice, you can choose the path that best allows you to achieve a debt-free life.

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Consumer Proposal vs. Bankruptcy in Canada: What You Need to Know