Most people don’t want to go bankrupt. For that very reason they are often reluctant to contact a bankruptcy trustee. However a consumer proposal is a great alternative to bankruptcy. It provides you with the same creditor protection and the ability to eliminate your debts, with some very significant differences. First we will review why you would want to choose either a consumer proposal or personal bankruptcy. Then we will take a look at some of the key differences in how the process for each works.
Why Choose A Consumer Proposal?
- Your monthly payments can be lower. If you are required to pay surplus income in a bankruptcy, this calculation is mandated by the federal government. If your income is unusually high during your bankruptcy you could end up making signficant monthly payments. A consumer proposal allows you to spread these payments over a longer period of time, reducing the amount you pay monthly to something you can afford.
- You keep your assets. If you have equity in your home, have investments (including an RESP for your children) you may want to preserve those assets for your family. A consumer proposal allows you to ‘buy out’ the value of those assets over a period of time.
- You avoid bankruptcy. For some, this is very important. There may be technical reasons they need to avoid bankruptcy (perhaps they have been bankrupt before and the cost is now higher for a second bankruptcy) or the reasons may be purely emotional. Both are valid considerations and a consumer proposal provides many of the same benefits without having to file for bankruptcy.
- You have peace of mind. Many people feel they owe the money and want to repay what they can. A consumer proposal gives them a sense of satisfaction that they have done what they could.
Why Choose Bankruptcy?
- A bankruptcy can be shorter. In most circumstances, a bankruptcy will be over sooner than a typical consumer proposal. In most cases, you are eligible for an automatic discharge within 9 months. However this is extended if you have surplus income.
- You do not have enough income to support a proposal. This can happen if your income is too low, or you have high eligible expenses such as support payments or health expenses. You must be able to meet your proposal payments during the entire term of your proposal. If you miss 3 payments your consumer proposal is considered annulled, you lose the any creditor protection you received and your creditors can pursue you for your debts, including interest and penalties.
- You do not believe your creditors will vote in favour of your proposal. To be accepted creditors holding 50%+1 of the dollar value of your debts must agree to your proposal. If you have one large creditor who you think will not agree to your proposal, or you cannot offer enough to ensure your proposal will be accepted, bankruptcy may be the preferred solution.
While both a consumer proposal and bankruptcy are filed through a trustee in bankruptcy and administered under the Bankruptcy & Insolvency Act, there are some considerable differences in your requirements and how each are completed:
|Debts||Less than $250,000 (excluding your mortgage).||More than $1,000, no upper limit.|
|Who is Eligible||Individuals.||Individuals and companies.|
|Filing||Through a Bankruptcy Trustee acting as a Consumer Proposal Adminisitrator.||Through a Bankruptcy Trustee.|
|Approval||Voted on by your unsecured creditors within 45 days. Only accepted if 50% + 1 of dollar value of claims agree.||Automatic. No voting required.|
|Creditor’s Meeting||If 25% of creditors require. Meeting may be called to review proposal prior to acceptance where you can renegotiate terms.||Very rare. More based on creditor’s concern over procedure & legal issues.|
|Cost||Negotiated settlement.||Cost defined based on surplus income and value of assets.|
|Payments||Fixed, over the period of the agreement (not more than 5 years).||Payments and length of time can vary based on surplus income calculation.|
|Monthly Reporting||None.||Monthly budget statement required.|
|Tax Refunds||Your’s to keep.||Estate keeps tax refunds/credits due to you during bankruptcy.|
|Length||Typically 1 to 5 years.||Legislated. Minimum 9 months. Extended for second time bankrupts and those with surplus income.|
|Discharge||Upon completion of payments. Can be paid out and completed early.||After completion of all payments AND minimum legislated period. Creditors can also object.|
|Early completion option||Yes.||No.|
|Credit Rating||3 years after completion.||6 years after discharge.|
The information above is a lot to take in. Whether you should file a consumer proposal or bankruptcy is a choice you must make based on your circumstances and preferences. We recommend you talk to a Consumer Proposal Administrator about these differences. They can help you understand which will be of most importance for you and your family.