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Bankruptcy vs Consumer Proposal: All you Need to Know

Comparing Bankruptcy vs Consumer Proposal

People who are struggling with debt can sometimes be overwhelmed by the situation. After all, when you’re faced with bills after bills after bills (and maybe even some calls from collection agents), it’s hard to focus and figure out what to do next. However, understanding your options is the key to finding a debt relief option that works for you.

Two solutions that have helped many people are consumer proposals and bankruptcies. However, whether these options are right for you will depend on your specific situation.

By comparing bankruptcy vs consumer proposal, you can understand the details of both options, including their potential pros and cons, and then use this information to figure out if either of these processes makes sense for you.

What is Bankruptcy?

To properly judge bankruptcy vs consumer proposal, you’ll need to understand both processes.

Bankruptcy is a legal process that is designed to eliminate a person’s debts so they can start over. If you are unable to meet your financial commitments, filing for bankruptcy may be an option for you.

In Canada, bankruptcies must be administered by a Licensed Insolvency Trustee. When you meet with a trustee, they will review your situation and let you know what options are available to you. If you decide to file for bankruptcy, the trustee will prepare the required paperwork and inform your creditors.

Bankruptcy is often the last option that is considered when people are having financial difficulties. However, in certain situations, it can be the right choice.

What is a Consumer Proposal?

The other half of the bankruptcy vs consumer proposal comparison is the consumer proposal. Much like a bankruptcy, a consumer proposal is a legal process that can only be administered by a Licensed Insolvency Trustee.

When you meet with a trustee, they will let you know what options are available to you. If you decide to file a consumer proposal, the trustee will prepare an offer to your creditors that make sense depending on your financial situation. In the majority of cases, a consumer proposal will result in you paying only a portion of the debt that is owed. Once you pay off the proposal, the remaining outstanding debt is eliminated.

After the trustee prepares the offer, it is sent to your creditors who will vote on whether they wish to accept it. If any creditor or combination of creditors that is owed the majority of the debt choose to accept the proposal, then all are bound by its terms. For example, if you owe $50,000 in debt and the creditors that are owed at least $25,000 accept the proposal, it becomes binding for all creditors, even for those that did not vote for it.

If the proposal is rejected, the trustee can modify it and resubmit.

Once a proposal is accepted, you are responsible for making the payments as outlined in the terms of the proposal. If you miss three payments, the proposal can be annulled and you will once again be responsible for the full debt.

Bankruptcy vs Consumer Proposal: The Similarities

When you look into the details of bankruptcy vs consumer proposal, it becomes clear that there are several similarities between these two processes.

The first similarity is that both consumer proposals and bankruptcies must be administered by a Licensed Insolvency Trustee. A trustee is a professional who has received specific training and who is licensed by the federal government. Trustee fees are set by the government and the processes that they administer are regulated under the federal Bankruptcy and Insolvency Act.

Another similarity that is important to note when looking at bankruptcy vs consumer proposal is that both options provide legal protection. Once you file either of these processes, you will receive protection from your creditors. This means they cannot take legal action against you and any actions that are already in place (such as a wage garnishment or frozen bank account) must be stopped. Your creditors are not able to communicate with you directly either. All communication is handled by the trustee.

It’s important to note that bankruptcies and consumer proposals can only include unsecured debt. This is debt that is not tied to an asset. Credit card debts, lines of credit, personal loans, and other such debts are all examples of unsecured debt. Mortgages and automobile loans are tied to assets (your home or your vehicle) and thus they are considered to be secured debt and cannot be included in a bankruptcy or consumer proposal. You will need to keep making payments on these debts if you want to keep your home or your car.

Both bankruptcies and consumer proposals are noted on your credit report. This means that it could be more difficult to get a loan in the future once you have filed. However, the length of time that each process is noted differs. If it is your first time filing for bankruptcy, it will remain on your credit report for six years after you have been discharged. If you have filed for bankruptcy in the past, this note will remain for longer. A consumer proposal will stay on your credit report for three years after it has been paid off and completed.

With both a bankruptcy and a consumer proposal, you are required to complete two financial counseling sessions with the trustee. These sessions are designed to teach you about debt, money management, and handling credit. Completing these sessions is part of the duties that come with filing a bankruptcy or consumer proposal and are designed to help you avoid debt trouble in the future.

The similarities between consumer proposals and bankruptcies are important to consider. However, while many similarities can be seen when looking at bankruptcy vs consumer proposal, there are also several key differences to understand.

Bankruptcy vs Consumer Proposal: The Differences

By understanding the differences between the two processes, it becomes easier to choose between bankruptcy vs consumer proposal and to find the option that is right for you.

Perhaps the biggest difference between a consumer proposal and bankruptcy is the fact that a proposal sees you pay off a portion of what is owed, while a bankruptcy eliminates all your unsecured your debts and allows you to start over. However, you may still have to make monthly payments when you file for bankruptcy, depending on your income.

When you file for bankruptcy, you are required to provide the trustee with monthly income statements. If you earn more than an amount set by the government for your family size during your bankruptcy, you may need to make additional payments to the trustee who will distribute them to your creditors.

These payments are called Surplus Income Payments and they can change each month, depending on how much you earn. With a consumer proposal, your payments do not change once your proposal is accepted. If you earn more money, you can decide to pay off your proposal more quickly without penalty, but you are not obligated to do so.

Another difference between bankruptcies and consumer proposals is their length. If it is your first time filing for bankruptcy and you do not have to make surplus income payments, you can be discharged from bankruptcy in nine months. If it is your first time filing and you are required to make additional payments, you can be discharged in 21 months. These timeframes will be longer if you have filed for bankruptcy in the past.

The length of a consumer proposal varies depending on your financial situation, but the maximum length of a proposal is 60 months (five years).

One difference that many people consider very important when looking at bankruptcy vs consumer proposal, is what happens to your assets when you file. In bankruptcy, you may lose some assets when you file, depending on what you own. Most provinces exempt certain assets from the bankruptcy process (such as assets needed to live a basic lifestyle or earn an income), but you may be required to give up some assets if you own more than the limit for your province. If you file a consumer proposal, you will not lose any assets as a part of this process.

Choosing Bankruptcy vs Consumer Proposal

If you’re having trouble meeting your financial commitments, looking at the potential pros and cons of bankruptcy vs consumer proposal can help you figure out if either of these options is right for you. Every financial situation is unique and your specific circumstances will determine if either option is right for you.

Meeting with a Licensed Insolvency Trustee can help you understand your options and make an informed choice for your financial future. While trustees are the only ones who can administer bankruptcies and consumer proposals in Canada, they are legally required to provide information on all possible debt relief options. This includes ones that they do not administrate.

When you meet with a trustee, they will review your financial situation and give you information on the available options. Once you have all the details, it is up to you to decide how you wish to proceed. A Licensed Insolvency Trustee will never pressure you into choosing one option over another. The decision is always entirely yours to make.  Most trustees offer a free consultation and review.

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