Finance

Difference Between Consumer Proposal and Bankruptcy

Consumer Proposal vs Bankruptcy

What is the difference between Consumer Proposal & Bankruptcy? Both legal processes are effective debt solutions for unsecured debts and can deal with –

  • Credit card debt
  • Bank loans
  • Payday loans
  • Tax debt
  • Store credit cards
  • Student loans, if seven years have passed since you were last a student
  • Medical bills.

Both options offer protection from your creditors and the courts. This means –

  • Collection calls stop
  • Interest charges are frozen
  • Wage garnishment stops
  • Legal actions can be stopped

From the moment you file, your Licensed Insolvency Trustee deals with your creditors on your behalf, and ensures that your rights as a debtor are protected, in accordance with the Bankruptcy and Insolvency Act of Canada.

Most certainly, a consumer proposal and bankruptcy can give struggling debtors the opportunity to start fresh and get back on their feet financially. 

While both have certain advantages and disadvantages,  there are key differences in the way they are structured and the process that has to be completed. 

Knowing how each debt solution works can be helpful in taking out some of the stress when making these tough financial decisions.

See Also: What is SWOT Analysis

Consumer Proposal vs Bankruptcy

Debt requirement 

For an individual to file for bankruptcy,  they will have to owe at least $1,000 of unsecured debt. In a consumer proposal, you will need to have a maximum of $250,000 in unsecured debt (excluding mortgage) to be able to file.

How much will you have to pay monthly? 

A consumer proposal has a fixed monthly payment for the duration of the plan,  your payment will not rise no matter the changes in your income.  In a bankruptcy, your payment may rise or fall depending on your income. In the event that your monthly income increases while you are in bankruptcy, you may have surplus income and may be required to pay more.

How long will it last?

Consumer proposals may last up to 5 years, and there is no penalty for early termination, while the duration of a bankruptcy can be up to 9 months or 21 months based on income.

How will it affect my assets

You keep all your assets in a consumer proposal.  In a bankruptcy, you may have to surrender some of your assets to the trustee which will be sold to repay money you owe to your creditors. These non-exempt assets are determined by the Exemptions Law specified in the Bankruptcy & Insolvency Act (also known as the BIA or the Act). Each province has its own laws to determine non-exempt assets.

How will it impact your credit?

When you file a consumer proposal, an R7 rating remains on your credit history for up to 3 years after completion, while a bankruptcy filing will show as an R9 rating which will remain on your history for 6 to 7 years after completion.

Consumer Proposal or Bankruptcy – Which One to Choose?

When you find yourself in a financial bind and feel overwhelmed about your options, the best step to take is to speak with an LIT who can assess your financial situation and help you weigh both options. Both options can only be administered by a Licensed Insolvency Trustee (LIT) so their expertise will be advantageous in helping you make the right choice. You can speak with an LIT free of charge, most will offer a free initial consultation to assess your debt situation and help you to understand how each process works.

Each person’s financial situation is different. A LIT will help you find out all your debt relief alternatives and help you decide when a consumer proposal is a better debt solution than bankruptcy or the other way around.

Contact us to find out how we can help you be free of debts.

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