Consumer Proposal Vs Bankruptcy – What Are My Options?

Posted on 22 March 2019

Written by Colin Boulton

When looking for debt resolution alternatives, it’s important to know your options. At Spergel, we want you to feel confident that you are making informed decisions. If you are unsure what to do about your debts, understanding the differences between a consumer proposal and debt settlement, for example, can take the stress off your shoulders and save you thousands of dollars. In this article, we explore these key differences so that you can make the best choices for your financial future.

Consumer Proposal vs. Bankruptcy

Bankruptcy and consumer proposals are the top insolvency solutions for many Canadians who are struggling to meet their financial obligations. While both resolutions offer creditor protection and resolve your debts, they work very differently.

A consumer proposal is a legally binding agreement between you and your creditors that allows you to settle your unsecured debts at a much lower rate, interest-free, over an extended period of time.  You will work together with a Licensed Insolvency Trustee to compose a proposal that is both agreeable to your creditors and affordable to you. In many cases, you will pay less than 70% of what you owe.

When filing for bankruptcy, you have the opportunity for a fresh financial start by agreeing to surrender your assets and any potential surplus income to your creditors in exchange for release from the debts owed. Debt freedom can be achieved in less than 9 months or, in some circumstances, up to 21 months.

Is a consumer proposal the best debt solution for you?

In most cases, a consumer proposal is the preferred option for people, with up to $250,000 in unsecured debts, who are not able to make their payments in full but can pay a portion of what is owed.

A proposal will ensure that:

  • Your agreement is based on what you can financially afford each month.
  • Your monthly payments are fixed and are not at risk of being increased.
  • You will not lose your assets or tax refunds/credits.
  • There are no surprises – the terms and conditions of your agreement are laid out at the start.

How do the requirements compare?

  • Any person who owes more than $1,000 in unsecured debt, who is unable to pay their debts and owes more than what they own, qualifies to file bankruptcy. This action will provide immediate creditor protection and financial relief.
  • To file a consumer proposal, your total debt must be $250,000 or less (not including a home mortgage), and you must be financially able to repay some of your debts. Working together with your Licensed Insolvency Trustee, you will create an offer that’s both affordable for you and fair to your creditors. Once filed, your proposal must be accepted by a majority vote of your creditors.

How do payments compare?

  • If you choose to file for bankruptcy, you surrender your assets, and you are subject to surplus income payment, which means that your payments will be determined by your income. As a result, the higher your income, the higher you can expect your monthly payments to be, and they can fluctuate.
  • If you choose to file a consumer proposal, repayment is up to 70% less than the amount originally owed, and monthly repayments are determined through negotiations between you and your creditors. Both parties must agree to a fixed monthly payment for the duration of the proposal.

How do the terms of repayment compare?

  • When bankruptcy is declared, the window for repayment is typically smaller than other debt relief alternatives. In most cases, your debts will be repaid in less than 9 months. If your income is higher, surplus income payments may be instituted up to a 21 month period, which potentially increases the cost of your bankruptcy.
  • A consumer proposal allows a 5-year window for repayment, which results in lower monthly payments, and is typically the more financially affordable option for most people.

How does the allocation of your assets compare?

  • If you wish to declare bankruptcy, you automatically surrender your assets in order to resolve your debts. In most cases, you should be able to retain some smaller assets such as household belongings and your vehicle (so long as it is below a certain value).
  • A person filing a consumer proposal is not required to relinquish any assets. 

How is your repayment plan affected by changes to income?

  • During bankruptcy, you are at risk of increasing surplus payments if your income increases.         
  • Once the terms of a consumer proposal are accepted, monthly payments are not subject to any changes.

How will credit scores compare?

  • Declaring bankruptcy drops your score to R9, which is the lowest credit rating. This rating will remain on your report anywhere from 7 to 14 years.
  • Filing a consumer proposal will result in an R7 rating on your report. This note of credit settlement will remain on your report 3 years after your last payment.

How do your monthly duties compare?

  •  If you declare bankruptcy, you will be required to write monthly budgets detailing your income, including pay stubs as well as your expenses. Based on these numbers, your trustee will evaluate on a month-to-month basis if you are required to make surplus payments.
  •  A consumer proposal does not require you to make monthly reports of your finances, nor do you have to disclose changes to your income.

In both circumstances, you will be required to attend two sessions of credit counselling.

Are tax refunds affected?

  • Bankruptcy laws dictate that you will lose all tax refunds and/or tax credits.
  • A consumer proposal allows you to keep all tax refunds or credits.

Which option is right for you?

All of your debts will be eliminated in either debt relief solution. The decision to file a consumer proposal or bankruptcy should be based on a detailed comparison of the impact of each option on your finances and assets. They are both debt management solutions intended to absolve outstanding debts. They vary significantly from one another and will not always be immediately clear which course of action is best for your circumstances.

A free initial consultation with a Spergel Licensed Insolvency Trustee will help you determine the most cost-effective option for you, and advice the best way to move forward.  

Consumer Proposal vs. Debt Settlement

At first glance, a consumer proposal may appear similar to a debt settlement. In reality, they are very different. Why is this? A typical “debt settlement” plan offers the client 3 years to come up with a lump sum of money to offer creditors, in the hopes that creditors will accept the settlement.

A debt settlement company will typically advise their clients to stop paying their creditors and send that money to their agency instead. Once the client has managed to pay the company’s fees and spent several months to years building up substantial funds, the debt settlement company will then contact the creditors to see if they will accept the settlement.

This strategy is entirely opposite to a consumer proposal, which requires a legally binding agreement with creditors, followed by regularly scheduled payments to the creditors. A debt settlement program does not guarantee creditor protection from collection calls, lawsuits, or wage garnisheeing.

Consumer Proposal vs. Debt Consolidation

Debt consolidation requires that you take out a single loan to pay off multiple debts. This simplifies your payments into a single monthly payment to your new lender and, ideally, lowers your interest rate. A significant advantage to debt consolidation is that your credit scores and creditor relationships will not be negatively affected.

There are a few things to consider with a debt consolidation loan:

  • You may not qualify for a loan.
  • You may not be able to afford your monthly payment.
  • You are still required to repay all your debts with interest.
  • Your interest rates may be high if you have a lower credit score.

The biggest problem with this approach to debt consolidation is that you are still in debt. A debt consolidation loan does not settle your debts for less than you owe. You must still pay back the full amount, with interest. If you have pledge assets as security, they may also be at risk if you are unable to make your payments.

If you are concerned by any of these factors, you may want to consider a consumer proposal which allows you to consolidate and settle your debts at a fraction of what is owed.

Here’s how to get started!

At Spergel, we have helped over 55,000 people achieve their goal of debt freedom. Our knowledgeable Licensed Insolvency Trustees are well-equipped to answer all your questions about consumer proposals, personal bankruptcy, and other debt resolutions. We are available to answer your questions by email, over the phone, or in person. Call us at 1-877-501-4321 or book online and take the first step towards your financial freedom. You owe it to yourself!


Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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