Consumer Proposal or Bankruptcy? Which one is best for you?

If you’re dealing with a lot of debt, you might be considering either filing for Bankruptcy or entering into a Consumer Proposal. While these options do offer relief from overwhelming debt, it’s important to note that they come with differing implications and requirements.

In this article, we’ll explore Consumer Proposals and Bankruptcy in more detail, from what they are to how they work and what responsibilities you have in order to complete each process successfully.

What is a Consumer Proposal?

A Consumer Proposal is a legal process that allows you to negotiate with your creditors to repay a portion of your debt over a maximum of five years. Essentially, you’re asking your creditors to accept a reduced amount as full payment, based on what you can afford to pay each month. 

To file a Consumer Proposal, you’ll need to work with a Licensed Insolvency Trustee (LIT) to help you prepare a proposal that outlines the amount you can afford to pay and the duration of the repayment period. Once your proposal is complete, your LIT will submit it to your creditors, who will have 45 days to vote on whether to accept it or not. If a majority of your creditors (in terms of dollars owed) vote in favour of the proposal, it will be accepted and become legally binding. 

After your proposal is approved, you'll begin making payments to your LIT, who will then distribute the funds to your creditors. You'll also be required to attend two credit counselling sessions.

What are the benefits of a Consumer Proposal?

A significant benefit of a Consumer Proposal is that it enables you to steer clear of Bankruptcy. Although Bankruptcy can provide relief from debt, it also has severe consequences, such as damage to your credit, the possibility of asset loss, and restrictions on your ability to obtain credit in the future. 

In contrast, a Consumer Proposal can help you avoid or minimize these consequences while you retain control over your assets and financial affairs. 

Another benefit of a Consumer Proposal is that it allows you to negotiate a more manageable payment plan. By collaborating with your creditors, you may be able to decrease your total debt and extend your repayment period, making your monthly payments more affordable. Essentially, you’re telling your creditors that you cannot afford to continue as you have been but that you can still make some payments.

What is Bankruptcy?

Bankruptcy is a legal procedure that enables you to eliminate your debts and start fresh. In Canada, the Bankruptcy and Insolvency Act regulates the Bankruptcy process. To initiative this process, you need to work with an LIT who will help you complete the necessary paperwork and guide you through.

During Bankruptcy, you may have to surrender some of your assets to your LIT who will sell them and use the proceeds to pay off your creditors. However, certain assets may be exempt from seizure such as basic household items, personal effects, and, in most cases, your vehicle can also remain in your possession.

After your Bankruptcy is complete, most of your debts will be discharged, which means you won’t be liable to pay them anymore. However, some debts such as child support, student loans (if they are less than seven years old), and court fines are not dischargeable.

What are the benefits of Bankruptcy?

One of the primary benefits of Bankruptcy is that it provides a fresh start by eliminating most of your debts. This can be particularly beneficial if you're struggling with overwhelming debt and can’t see a way out.

Bankruptcy also offers legal protection from your creditors, which means that most collection actions, such as wage garnishments and collections calls, will stop as soon as you file for Bankruptcy. This can provide immediate relief from some of the more overwhelming aspects of debt and debt collection.

What is required of you in a Consumer Proposal or a Bankruptcy?

In a Consumer Proposal, you are required to complete two one-on-one credit counselling sessions. These sessions allow you to review your financial file, learn financial strategies to avoid debt, and discuss ways to rebuild your credit. Additionally, in a Consumer Proposal, you cannot fall more than three payments behind at any given time or your proposal will be cancelled.

In a Bankruptcy, there are four essential duties you must successfully complete to obtain your Certificate of Discharge:

1. You must attend two credit counselling sessions
2. You must submit monthly proof of income and a budget sheet to your LIT
3. You must maintain your Bankruptcy payments
4. You must provide your LIT with all the necessary documentation to file your taxes for the year in which you filed Bankruptcy.

In summary, both Consumer Proposals and Bankruptcies are effective option if you are struggling with debt. It’s worth consulting your local MNP Trustee for a free, confidential consultation to see which one might be right for you.

During these consultations, your LIT will perform a comprehensive financial review and discuss potential options available to you, including any they might see outside of a Consumer Proposal or Bankruptcy.

Reach out to learn more and to take the first step towards financial freedom.