This article is the first in a series that will help you answer the question: “What’s better for me: a consumer proposal, or personal bankruptcy in Canada?” Of course the answer will be different for everyone, but it’s important to consider the differences between the two types of procedures. One of the most significant differences is in income reporting.
If you file bankruptcy in Canada, you are required to report your income to the trustee each month. If your income exceeds limits set by the government, you are required to pay a portion of that surplus income to the trustee, who will then distribute it to your creditors. Even worse, if your surplus income each month averages more than $200 over the pre-set limit, your bankruptcy is automatically extended for an extra year, and you are required to make those surplus income payments to the trustee for an extra year. If you have high income, bankruptcy can be very expensive.
For example, if you get paid bi-weekly or weekly, there are a few months each year where you get an extra paycheque each month. In those extra paycheque months, your income is higher, which may trigger the surplus income rules.
Or, if you occasionally work overtime or get bonuses, your income increases, which can increase the length of your bankruptcy.
The obvious solution is to file a consumer proposal. With a consumer proposal there is no monthly income reporting requirement. At the start of the proposal your consumer proposal administrator shows the creditors what your income is in a typical month (generally based on recent pay stubs, or last year’s income tax return). A reasonable payment, based on your current income, is then negotiated with your creditors.
If your pay increases in the future (perhaps due to you getting a raise, or working more hours, or finding a new job) the payment in your consumer proposal does NOT increase. It’s fixed. That’s in direct contrast to a bankruptcy: in a bankruptcy if your paycheque increases, your payments increase.
So, if you expect your income to increase in the future, a consumer proposal may be a better option for you than a bankruptcy.