What is the Difference Between a Consumer Proposal and Bankruptcy?

For Canadians struggling to meet their financial obligations, a consumer proposal and bankruptcy are the two most popular debt management options available, and for good reason. Both can help you resolve your debt problems and stop collection action. However, there are also significant differences between the two – differences which are important to examine if you’re considering which one suits you best.

This week we are covering the difference between a consumer proposal and a bankruptcy.

In a consumer proposal, a Licensed Insolvency Trustee makes a formal proposal to your unsecured creditors based on various factors such as your total debt, who your creditors are, current income and the value of any realizable assets. If the majority of your creditors accept the proposal, it is legally binding on all creditors and you make a monthly payment which is collected by your Trustee and then paid to your creditors, generally on an annual basis. Once accepted, you do not have an ongoing obligation to report your income to the Trustee.  In addition, you are free to deal with your assets as they do not vest in the Trustee. The maximum term for a consumer proposal is 5 years, but you are able to pay it in full at any time once it has been accepted. Once you have completed the proposal payments, the consumer proposal is removed from your credit report after 3 years.

In a bankruptcy, the Licensed Insolvency Trustee determines the length of your bankruptcy and your monthly payment based on your household income and whether or not you have previously filed a bankruptcy. If you are a first-time bankrupt, you can be automatically discharged after 9 or 21 months; in the case of a second-time bankrupt, this term becomes 24 or 36 months; in a third or higher bankruptcy, the Trustee has to apply for a court date for your discharge following the expiry of 24 or 36 months.

The term of your bankruptcy will depend on whether or not you have “surplus income”, which is calculated using income standards for household sizes set out by the Superintendent of Bankruptcy. You are required to report your income to the Trustee for the bankruptcy period and the Trustee will average your net income after a certain period as described above.   If you have surplus income, you will be required to make a payment to the bankruptcy estate, generally 50% of the surplus income.

In addition, your assets vest in the Trustee in a bankruptcy.  There are provincial exemptions for certain assets such as a motor vehicle and personal effects.  In addition, where an asset is secured, the Trustee will calculate whether any equity exists in the asset.  If you have any realizable assets, you will have to make arrangements to pay the estate for the realizable value or release the asset to the Trustee.

Unlike a proposal, a bankruptcy does not have to be accepted by your creditors. Once a bankruptcy is filed, you are bankrupt until you receive your discharge. Furthermore, once filed, the Trustee manages your estate over the course of your bankruptcy. You will have ongoing responsibilities to the Trustee such as making agreed upon monthly payments, participating in two credit counselling sessions, and reporting your income until you are discharged. Once you are discharged, the bankruptcy will be removed from your credit report after 6 years from the date of discharge.

In both cases, if a creditor has taken collection action against you (even the Canada Revenue Agency) or has imposed an enforcement measure such as a wage garnishment or frozen your bank account, this is stopped once a bankruptcy or consumer proposal is filed.

As you can see, there are some important differences between a consumer proposal and bankruptcy. Both are an effective means by which to resolve your debt that has taken over your life.

To learn more about these options and to determine which option works for your, contact a Licensed Insolvency Trustee at Spergel. We can help you find a solution that meets your needs.

Find out more by visiting www.spergel.ca today or call 310-4321.