What Are The Cost Differences Between Consumer Proposals and Bankruptcies

Posted on 9 September 2019

Written by Trevor Pringle

Cost differences between debt options shouldn’t worry you, let us explain why!

If you’ve spent any time looking into your debt relief options, you may have noticed that no two options will amount to the same cost. If you don’t understand why there are differences in the cost of a bankruptcy versus a proposal, we’ve got you covered. We take the worry out of searching for a debt reduction strategy. We help you understand the cost differences between your options – because your debt relief should make sense to you. You should be comfortable with your final decision. Let us help you compare all of your options so that you can make an informed choice about your debt relief plan.

Consumer proposals and bankruptcies can be very different in terms of cost. It doesn’t surprise us that many people get confused about these options when they hear how much they cost by comparison. We take the time to explain why understanding both options can be very important – even if you already know that you want to avoid bankruptcy. To understand what makes a consumer proposal work, we show you what a bankruptcy looks like. We show you what a bankruptcy will look like first, because your proposal must offer your creditors more money than a bankruptcy would give them. In over 30 years of helping people out of debt we have always taken this approach, because you can’t compare your options if you don’t understand what they are and how they relate to each other.

Understanding Consumer ProposalsConsumer Proposal

The cost differences between consumer proposals and bankruptcies can be significant. A bankruptcy can cost as little as $200 per month for just 9 months. For $1800 plus the loss of any income tax refunds you may be entitled to, you can be debt free in less than a year. Bankruptcy can also cost a lot more. When we compare options, we look at all of the rules that a bankrupt person is subject to and forecast the total expected cost. Part of this calculation is a monthly income equation to determine something called surplus income.

When bankruptcies have surplus income, the cost goes up. One of the ways we approach building a proposal for your creditors is to offer them more than what they would get if you were bankrupt. The surplus income calculation acts as a “penalty” for people who file bankruptcy when they earn what the Office of the Superintendent of Bankruptcy has determined to be a fair or “good” income. Essentially, the more money you earn while in bankruptcy, the more you pay. The equation is based on family size and national average salaries and cost of living based on Statistics Canada information.

Unlike other debt relief solutions, bankruptcy has very strict rules. With strict guidelines to follow, the cost of a bankruptcy also has to factor in any assets you may have that would be considered of value to your bankrupt estate. Your assets, combined with a forecast of surplus income, help us to quote you on the cost of personal bankruptcy. While we do this, we’ll also compare your bankruptcy results with a proposal to see which monthly payment will be more affordable for your budget. One thing a proposal can give you that a bankruptcy cannot – up to 5 years of interest-free structured payments at a fixed rate. Depending on what bankruptcy looks like for you, spreading your debt out over 5 years may be the better way to go.

Consumer Proposal Payments are Flexible

While bankruptcy payments are not very flexible, consumer proposal payments are. Bankruptcy surplus is non-negotiable). If you don’t pay off your bankruptcy surplus within the required time (usually 21 months if you’ve never been bankrupt before), you won’t be allowed to complete your bankruptcy. A consumer proposal allows you to spread out your payments over a flexible term of up to 60 months (5 years) to make it easier to budget for them.

Bankruptcies make sense  if you’ve got few assets, lower income, have never been bankrupt before and/or have too much debt for a consumer proposal. While proposal payments are flexible and tailored to offer a better return than a bankruptcy, they must also offer enough debt repayment to be palatable to your creditors. Essentially, your offer must “bring them to the table” and we know how to make your initial offer work for you.

Your consumer proposal payments will not only be based on a comparison to the cost of a bankruptcy, but we also try to offer to repay enough that your creditors only have to write off about 70-75% of the debt that you currently owe. If you owe an average sum, let’s say $30,000 to $50,000 your proposal payments will be much less than someone who owes a little more such as $70,000 to $100,000. The creditors you owe will also be considered. With some creditors, such as Canada Revenue Agency, negotiations can be a challenge – every situation is unique so please ask us if you’ve got a lot of tax debt.

Administrative Fees make a Proposal a better deal for your creditors

For some creditors, it comes down to the administrative fees. Creditors will vote in your proposal and let you know if they accept your deal. Creditors know that a proposal will increase the money they receive. Increased revenue may be enough to convince them to say yes. We provide your creditors with a breakdown. Our analysis demonstrates how your proposal will benefit. The report explains that they will receive more than if you were to file bankruptcy.

You will want to show your creditors that you will be able to afford to maintain a proposal. You also want to offer them a little extra than bankruptcy would. Most creditors prefer proposals above other debt relief solutions. The structure of a proposal is reliable. The involvement of a Licensed Insolvency Trustee makes a proposal safer than other debt consolidation plans. Strict rules regarding missed payments in a proposal helps. Knowing this helps your creditors mitigate the risk of accepting a deal (especially if you’ve had debt in collections).

Essentially the administrative fees in a either a bankruptcy or a consumer proposal should be less of a concern for you than they are for your creditors. Your monthly payments will be tailored to include fees. Your creditors understand that any fees will be deducted before their share  is sent to them. We do not charge you additional fees and there are no hidden costs. Your creditors can only be paid what they’ve agreed to be paid under the proposal – net of your Trustee’s fees.

Bankruptcies Can Have Added Costs

Whether it’s you or your creditors looking at cost differences, we explain when and why costs differ. The cost of a bankruptcy doesn’t always increase beyond the minimum payment and time frame. First, there is surplus income for those in bankruptcy who earn a lot of money month to month. Second, if you’ve been bankrupt in the past you are automatically required to be bankrupt longer. As a result, this means more payments too. Lastly, there’s court – if you’re expected to attend court to get your discharge, your LIT will add additional fees. The court can ask you to make additional payments too. If you’ve been bankrupt more than twice, you can expect a court hearing. Know that a Trustee will have to appear in court on your behalf at the end of the process.

Consumer proposals avoid court hearings for those who have been bankrupt before. In addition, if problem gambling has contributed to the cause of your debt, a proposal can avoid court for you as well. While there are many benefits to choosing a consumer proposal over a bankruptcy, (including specific jobs that require bonding insurance or handling trust funds), the greatest benefit typically comes for those who have assets. In particular, home owners with equity in their property may want to consider a proposal. In a bankruptcy home equity is something that your creditors are entitled to have. What this means is, you must either sell the home and allow your creditors to have the sale proceeds, or, “buy it back.” To “buy back” your equity, you’ll make payments to your LIT that will be distributed to your creditors at the end of your bankruptcy to help them reduce the debt they must write off.  Whether your equity is $10,000 or $100,000 – your bankruptcy won’t end until the agreed upon value is paid into your estate.

A bankrupt with a lot of tax debt can also end up in court and be ordered to pay more, same with those who have taken out private student loans for high-level professions in medicine and law. Bankruptcies can get messy and expensive when there are complications. Assets (and future assets like the earnings of a future doctor or lawyer) can become major bankruptcy complications. A lot of home equity or a big education savings account for your son/daughter is a factor. A proposal may be a better route and this should become clear while comparing options.

Missing Your Bankruptcy Payments – Work With Us

BankruptciesAn incomplete list of bankruptcy duties can lead to increased costs if your bankruptcy discharge is opposed. Missing the two mandatory counselling sessions required in a bankruptcy is included in the list. Not submitting the required monthly income reports or mandatory tax information is also on the list. Finally, missed bankruptcy payments can all lead to a longer time in bankruptcy. If you have payments that bounce at the bank, you’ll also be charged an NSF fee. If you don’t communicate with your LIT, he/she may have to oppose your bankruptcy discharge. So, if you can’t get to the office for your counselling sessions, reach out to us and explain why. Don’t be embarrassed if you fall behind in submitting your budgets or find it challenging to locate your tax info. Keeping the communication open with your LIT can avoid issues during your bankruptcy. If you experience trouble and need to discuss your payments, we’re always here to work with you.

Bankruptcies always carry the risk that if you can’t complete them for any reason, your debts will come back. When you file a consumer proposal things are a little different. If you fall 3 payments behind at any time, it’s similar to if you didn’t finish a bankruptcy. However, you’ll have one major difference in options – if a proposal fails, bankruptcy is always there as a last resort. You can file a bankruptcy after a proposal, but you can’t file a proposal after a bankruptcy.

Lower payments in a bankruptcy may seem appealing. However, if you can afford a consumer proposal you might want to try it. Bankruptcy payments may not be that different from your monthly proposal amount. In a proposal you’ll pay that amount for a longer time to avoid bankruptcy. A proposal is open-ended which means you can pay it off or speed it up at any time. Conversely, bankruptcy is boxed into a fixed time frame. Even if you try to pay your bankruptcy off early, you’ll still be bankrupt for the prescribed time.

Spergel Debt Relief Solutions – No Comparison

When it comes to debt relief solutions, we’ve helped more than 60,000 people. People like you, facing the decision to file a bankruptcy or consumer proposal. Our service excellence is beyond compare. We outline both options, the differences between them, both in cost and in obligation. For example, a bankrupt is obligated to have his/her LIT file their income tax return for the year of bankruptcy. As a result he/she will lose his/her refund. In a consumer proposal, you file your income tax return as usual. If you’re entitled to a refund you keep it. You can even use your return to pay off your proposal earlier or accelerate payments to finish sooner.

Consumer proposals are among the most popular debt restructuring programs in the country. Whether you live in British Columbia, Saskatchewan or Ontario – a proposal can work for you. Bankruptcies have their place, and when they make the most sense, they can be the quickest path to debt freedom. Conversely, proposals give debtors flexibility. Proposals also give debtors a sense of accomplishment. Paying back some of what is owed without the crushing effects of growing interest can be empowering.

If you’re exploring debt relief solutions, make the call to review a consumer proposal today. With our help you can discover how great it feels to become debt free. Regardless of your debt solution, consumer proposal, bankruptcy or other – you deserve to understand your options and compare the different costs of formal remedies and informal options such as debt consolidation loans and credit counselling – don’t worry, we’ll cover those too! Let us help you, you owe it to yourself!


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Trevor Pringle

Trevor B. Pringle is a Chartered Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on consumer proposals and small business debt. When Trevor isn't at the office providing debt relief to Canadians and corporations with his innovative problem-solving skills, Trevor enjoys regular trail runs in the Dundas Valley.

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