When debt reaches a point where budgeting, consolidation loans, and payment arrangements are no longer effective solutions, Canadians look at formal debt relief options. At that stage, two solutions are usually discussed most often: bankruptcy and a consumer proposal.
Because both options are administered through the same legal system and both provide protection from creditors, many people assume they are largely the same. That is not the case..
While you may qualify for both the bankruptcy and the consumer proposal protection options it is important to understand which option is more suited to your specific circumstances.
What both options have in common
Before looking at the differences, it helps to understand what attributes these solutions share.
Both bankruptcy and consumer proposals are governed by federal legislation and can only be administered in Canada by a Licensed Insolvency Trustees. In both cases, filing creates legal protection from most unsecured creditors, can stop most collection calls, legal actions, and in many cases wage garnishments. The Licensed Insolvency Trustee now deals with the creditors.
Both options are designed to resolve debt. Unlike debt consolidation loans, which reorganize debt, bankruptcy and consumer proposals are intended to provide a path toward eliminating or settling debt so you can move forward.
The biggest difference: settlement versus elimination
The most important difference between bankruptcy and a consumer proposal is how the debt is addressed.
A consumer proposal focuses on repayment, usually for a reduced amount of the total debt. The majority of your unsecured creditors need to accept the offer you make (initial offer or as negotiated) through the Licensed Insolvency Trustees. Once the majority accept, all the creditors (even those who voted against accepting or were holding out for a bigger settlement) are locked into the deal under the law. The payments are based on what you can reasonably afford, usually run interest free for 60 months without interest or other fees. Once the deal is locked in, if you honour your payment obligations there is no backing out for the creditors – even if you receive a lottery winning or an inheritance fortune.
Bankruptcy in Canada focuses on eliminating debt when settlement is no longer realistic. The bankruptcy process is designed for situations where the honest but unfortunate debtor cannot repay their debts and cannot come to a fair settlement agreement pursuant to the laws governing consumer proposals. In the bankruptcy, you are only allowed to keep limited assets (called exempt from seizure) and must turn over the other assets to the Trustee to divide the proceeds amongst your creditors. You may also have to make payments from your income (known as surplus income contribution requirements) for between 21 and 36 months. You will have several other duties and failure to comply with them means that your bankruptcy is not ended (you are not discharged from bankruptcy) until the court orders you may be. Any assets that you accumulate (e.g. an inheritance) up until the date of your discharge from bankruptcy) can be seized by the Trustee for the benefit of your creditors.
The negotiation with the creditors is up front when you file the consumer proposal. In a bankruptcy, the creditors cannot prevent you from entering the protection of bankruptcy, but they can make your life more difficult when you are trying to exit the bankruptcy.
How much you need to offer to make a viable consumer proposal offer depends on the amount of debt, what your creditors would be expected to receive in a bankruptcy scenario and other factors which are too case specific for this article and can best be reviewed with a Licensed Insolvency Trustee.
If you could have made a viable consumer proposal but opted to simply go into bankruptcy instead you will not be eligible for a discharge from bankruptcy authorised by the LIT. Instead, the LIT must refer your bankruptcy to the court so the court can decide whether to discharge you and on what terms and conditions.
How payments are handled
One of the reasons many people prefer consumer proposals is the predictability of the payments.
In a consumer proposal, the payment amount is established at the beginning of the process and remains fixed (in some circumstances you can revise the payment plan with your creditors through an amending consumer proposal) throughout the proposal. This creates certainty and makes long-term budgeting easier because you know exactly what is expected each month.
Bankruptcy works differently.
In bankruptcy, payments may be affected by surplus income contribution rules. If your income exceeds government-established thresholds, additional payments may be required. As income changes, those obligations may change as well. Up or down. You are required to report your monthly income and household expenses to the Trustee monthly while in bankruptcy. If, during the bankruptcy your income increases by enough, the amount you may have to pay can exceed what may have been acceptable (at the start) to your creditors in a locked-in consumer proposal settlement plan.
The impact on your assets
Asset preservation is often one of the most important considerations when comparing these options.
In a consumer proposal, you generally keep your assets (everything you own). Because the proposal is based on a negotiated payment settlement arrangement, there is typically no requirement to surrender property. This can be particularly important for individuals who have equity in a home, investments, or other assets they wish to preserve. If you have assets you no longer wish to keep, it may make sense to sell them (or have the LIT sell them) and use the proceeds to reduce the amount you would otherwise need to pay as part of your settlement offer.
In bankruptcy, the treatment of assets depends on provincial exemption rules and the amount of equity involved. Certain assets are protected, but assets above exemption limits may need to be addressed during the bankruptcy process.
For many people, especially homeowners, this difference alone makes a consumer proposal worth exploring before considering bankruptcy.
There are many instances where a person qualifies for the bankruptcy but chooses to file a consumer proposal even though this may cost them more. Why? Many folks simply want to do the best they can in their circumstances and are willing to pay a little more to avoid bankruptcy.
How long does each option last?
Many people assume bankruptcy is always the faster solution, but the answer depends on the circumstances.
A consumer proposal can run for up to five years, although it can be paid off early without penalty. Many people choose to accelerate repayment when their financial situation improves.
Bankruptcy timelines vary depending on factors such as whether it is a first or repeat bankruptcy and whether surplus income obligations apply. Certain conduct issues can make a person ineligible to obtain an automatic discharge from bankruptcy (that is, the court needs to decide when and on what terms your bankruptcy can be ended). These issues include; owing CRA more than $200,000 in taxes (that also comprises more than 75% of your total unsecured debt); if you have gambled; if prior to bankruptcy you paid some creditors in preference to others; if you disposed of assets and cannot satisfactorily account for what happened to the funds. Some bankruptcies are completed in a shorter timeframe than a full proposal term.
The question is not only which option ends sooner. The better question is which option provides the most fair and suitable solution allowing you to rebuild your financial future.
The emotional side of the decision
Financial decisions are not only mathematical.
People considering bankruptcy or a consumer proposal are often dealing with months or years of financial stress. Collection calls, creditor pressure, mounting balances, lawsuits, wage garnishments, and concerns about CRA collection enforcement can take a significant emotional toll.
Many people feel overwhelmed and exhausted long before they ever speak with a Licensed Insolvency Trustee.
That is why the right solution is not always the one that looks best only on paper. The right solution is the one that also feels right for you and creates a realistic path forward and allows you to stop living under constant financial pressure.
When a consumer proposal is often appropriate
A consumer proposal is commonly used when:
- Your budget can allow for a structured monthly payment
- You want to retain your assets
- Your debt has become difficult to manage but is not impossible or too onerous to settle through reduced repayment
- You prefer to avoid bankruptcy if possible
Many Canadians find themselves in this category. They are working, earning income, but struggling to stay on top of their obligations. The debt has simply become too large relative to what they earn.
When bankruptcy is often appropriate
Bankruptcy is commonly considered when:
- Debt levels are significant
- Income is not stable enough to make a reliable commitment
- Circumstances such as job insecurity, health issues, parenting or caregiving responsibilities
- Repayment is not realistic, even at a reduced level. There is no responsible way to make an offer that the creditors are likely to accept
- Collection pressure has become severe
- Immediate debt relief is required
Contrary to common misconceptions, bankruptcy is not surrendering and is not a punishment. It is a legal right given by the Canadian government to honest and unfortunate debtors – designed to help people recover when their financial situation has become unsustainable and have a fresh start.
Common misconceptions
One of the biggest misconceptions is that bankruptcy is always worse than a consumer proposal.
In reality, the appropriate solution depends entirely on the person’s circumstances. For some people, a consumer proposal provides the ideal balance between debt relief and asset preservation. For others, bankruptcy may be the most practical and cost-effective solution.
Another misconception is that a consumer proposal is always the right choice because it sounds less severe and future employers, landlords, lenders and even life partners will judge you less severely if you file a consumer proposal rather than a bankruptcy. While proposals offer many advantages, they still require the ability to maintain payments over time. If those payments are not realistic, bankruptcy may actually be the more appropriate and practical solution for you.
This is why professional advice is so important.
Why Licensed Insolvency Trustees matter
Many people begin researching debt solutions online and quickly become overwhelmed by conflicting information. They also do not know if the source of that information is trustworthy.
A Licensed Insolvency Trustee can provide clarity – and their initial consultations are without charge or obligation. They are private and confidential.
Licensed Insolvency Trustees are well educated, federally licensed and tightly regulated professionals who are legally required to explain all your available options. They do not simply recommend one solution. They review your income, debts, assets, expenses, and overall financial and life situation to provide you with the information you need to decide what is most appropriate.
A Licensed Insolvency Trustee in Ontario or a Licensed Insolvency Trustee in Alberta can review your situation and explain how both options would apply.
Moving toward resolution
Both bankruptcy and consumer proposals are designed to accomplish the same goal: helping people resolve debt and move forward towards a debt free fresh start.
The difference lies in how that outcome is achieved. A consumer proposal focuses on settling debt through affordable repayment. Bankruptcy focuses on eliminating debt when a negotiated settlement repayment is no longer realistic.
The right option depends entirely on your financial reality, not on which solution sounds better in theory.
Speak with Baigel Corp about your options
If you are comparing bankruptcy and consumer proposals, the most effective next step is to review your situation in detail.
Baigel Corp works with individuals across Ontario and Alberta to provide confidential, no cost consultations. The goal is to help you understand your financial position and determine which option is most appropriate.
If you would like clarity on your next steps, speaking with a licensed insolvency trustee can provide a practical path forward. Visit www.baigel.ca.
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee