Consumer Proposal versus Bankruptcy
What is a Consumer Proposal?
A Consumer Proposal is a legally-binding contract between a person and his or her creditors. In this agreement, the individual agrees to pay a reduce amount of his or her debt in order to receive a full settlement of the outstanding debt. A consumer proposal is often a good option for someone who is unable to pay his or her debt in full, but who does have the ability to pay a portion over a longer time period.
In Canada, a Consumer Proposal can only be filed through a Proposal Administrator. This is an individual who is licensed by the Federal Government to handle such situations. Our Bankruptcy Trustee in Hamilton can handle your consumer proposal situations and ensure that the debt management solution that you choose is the right one for you.
What is Bankruptcy?
Bankruptcy is a legal process that is controlled under the Bankruptcy and Insolvency Act. Bankruptcy provides an individual with a solution to his or her ongoing debt obligations. It is used by someone who has insufficient income (after reasonable living expenses are deducted) and few, if any, assets of value.
Bankruptcy is often the last solution that a person in financial difficulty will consider. However, it is also the only debt management solution that completely eliminates your debt. If you have insufficient income, no assets and things are unlikely to change, bankruptcy may likely the best option for you.
In Canada, a bankruptcy can only be filed through a Trustee in Bankruptcy, who is an individual that licensed by the Federal Government.
Comparing the Features of a Consumer Proposal to a Bankruptcy
- The Bankruptcy Act defines which assets you are entitled to keep should you file for bankruptcy. Since these assets are exempt, you do not have to hand them over to the Trustee or your creditors. These exempt assets include RRSPs (other than the contributions that you have made in the 12 months prior to your bankruptcy), a vehicle up to $5,650 in value, home furnishings and appliances up to 11,300, personal items (such as clothing and miscellaneous items) up to a value of $5,650 and tools of the trade up to $11,300 in value. You can keep some non-exempt assets if you make an arrangement with the Bankruptcy Trustee. Non-exempt assets that you do not want to keep will be sold by the Trustee.
- With a Consumer Proposal, you retain ownership of your assets. This includes your house, RRSPs and vehicles. However, you must commit to paying your creditors a fixed monthly amount for a period of time. In many consumer proposal situation, you will pay back about of 30% of your debt.
- Surplus income is a term that only applies to bankruptcy situations. The cost of a bankruptcy depends on the amount of your income during the bankruptcy process. If your income increases during the process, your cost of your bankruptcy may also increase. Surplus income does not apply to Consumer Proposal situations. Once your creditors have accepted your proposal, the amount you are required to pay does not change. Even if your income increases, the cost of your Consumer Proposal DOES NOT increase.
Protection from Creditors
- Both bankruptcy and consumer proposal provide similar protection from creditors. Once you file a Consumer Proposal or bankruptcy, you receive protection from creditors. This means that your creditors cannot call or take other actions to collect their debts. A Consumer Proposal or a Bankruptcy also prevents creditors from starting legal actions against you and stops any legal actions that are already in process.
Impact on Credit Score
- When you file for a bankruptcy for the first time, it remains on your record with the credit bureau for 7 years after you have been discharged from bankruptcy.
- A Consumer Proposal remains on your records with the credit bureau for 3 years after it is completed.
Use of a Secured Credit Card
- A secure credit cards can be available to an individual who files a consumer proposals or bankruptcies. These cards can be used for emergencies or for work. After six months, you can apply for one of these of cards. You will still have to pay the amount of credit you require upfront but using a secured credit card will allow you to start rebuilding your credit score.
How Long Does Bankruptcy Last?
A typical bankruptcy will last between nine and 21 months, depending on your circumstances. If you have filed for bankruptcy previously, the bankruptcy process may last longer, up to 36 months.
How Long Does a Consumer Proposal Last?
A Consumer Proposal is usually paid over 60 months. This is to give you the financial ability to meet your living expenses and repaying a portion of your debts under the proposal. You do, however, have the option of paying off the proposal more quickly if your situation changes. For example, if you received a pay raise then you can use some of this money to pay off the proposal earlier. You cab also offer to pay to pay your proposal via a one-time lump sum payment if possible.