Consumer Proposal vs. Bankruptcy: What’s the difference?

Many Canadians may find themselves overburdened with debt due to various factors beyond their control. This may be the result of job loss, illness, relationship breakdown, addiction — and, most recently, a global pandemic.

Person using tablet while sitting on sofa and holding white cup coffee in hand at home

Debt relief options can range from improved budgeting, direct repayment arrangements, debt consolidation, and debt management — to legislated solutions such as a Consumer Proposal or Bankruptcy. Determining which option is best for you will depend on your personal and financial circumstances.

Let’s take a closer look at how a Consumer Proposal or Bankruptcy can provide debt relief and give you a fresh financial start.

What is a Consumer Proposal?

A Consumer Proposal is a government legislated, legally binding arrangement with your unsecured creditors to settle your debt. It can be structured to:

  • Repay your creditors a percentage of the outstanding debt
  • Extend the debt repayment period (up to a maximum of five years), or
  • Both reduce the outstanding debt and increase the payment period.

A Consumer Proposal must provide a greater recovery to your unsecured creditors than they could expect if you were to claim Bankruptcy. It must also offer a monthly payment you can afford within your current monthly budget. Only a Licensed Insolvency Trustee or a person appointed by the Superintendent of Bankruptcy may negotiate and administer a Consumer Proposal.

Who can file a Consumer Proposal?

To qualify for a Consumer Proposal, an individual must:

  • Be insolvent (i.e., owe $1,000 or more and cannot repay their debts as they become due).
  • Be a Canadian citizen or permanent resident.
  • Owe less than $250,000, excluding the mortgage on their principal residence.

Advantages

A Consumer Proposal offers numerous advantages which can help to relieve the stress and anxiety of problem debt, and help you overcome the debt once and for all. These include:

  • Immediate legal protection from collection actions, court judgements, and wage garnishees.
  • Negotiate the terms of your debt and amount to be repaid.
  • Retain ownership of your assets, including tax refunds and GST credits.
  • Pay less than you owe.
  • Fixed monthly payment (not affected by a change in income).
  • Interest free payments.
  • Includes most debts owed to Canada Revenue Agency (Income Tax Debt).
  • Student loan debt could be included (subject to certain criteria).
  • If accepted by the majority of creditors, the proposal is binding on all unsecured creditors.
  • Avoids a bankruptcy.
  • Two consumer debtors (usually spouses) can file one (joint) Consumer Proposal.
  • Budgeting and money management counselling.
  • Damage to credit rating is less severe than Bankruptcy (R7 vs. R9).
  • Rebuilding credit can begin during the Consumer Proposal period (subject to creditors discretion).
  • Consumer Proposal can be withdrawn by consumer debtor prior to court approval if necessary.
  • A Consumer Proposal does not resurrect a prior Bankruptcy on your credit report.

Disadvantages of Consumer Proposal

There are also several drawbacks to a Consumer Proposal and some situations where it may not be the most appropriate debt solution. These include:

  • A majority of creditors (by dollar value) must vote in favor of the Consumer Proposal. A creditor with a significant claim could defeat the Proposal.
  • Creditors can negotiate a higher payment or request additional terms added to the Consumer Proposal (e.g., sale or redemption of certain assets).
  • Trustee may not be able to negotiate a payment the debtor can afford.
  • Terms of a Consumer Proposal cannot exceed five years and may not be suitable for all debtors, such as seniors on fixed incomes.
  • A total of three missed payments results in an annulment. When a Consumer Proposal is annulled, creditors can resume collection activities on their debt.
  • A record of your Consumer Proposal is retained on your credit report for the lesser of eight years total or three years after completion.
  • Could impact your ability to rebuild your credit.
  • Could result in higher interest rates on new credit.

What is Bankruptcy?

Bankruptcy is a government legislated, legal process which provides immediate relief to an insolvent individual or business. It provides for a fair and orderly distribution of the bankrupt’s non-exempt property among the unsecured creditors. A Bankruptcy may only be administered by a Licensed Insolvency Trustee.

Upon filing an assignment in Bankruptcy, the Licensed Insolvency Trustee takes possession of your assets, except for those exempt under provincial and territorial law. You and the Licensed Insolvency Trustee will review your assets prior to filing to determine what (if anything) must be liquidated for the benefit of your creditors.

In a Bankruptcy, the Licensed Insolvency Trustee will also have an interest in assets the debtor acquires up until the date of discharge. These include, but are not limited to, tax refunds, inheritances, and lottery winnings.

Who can file a Bankruptcy?

To qualify for Bankruptcy, an individual must:

  • Be insolvent (i.e., owe $1,000 or more and cannot repay their debts as they become due).
  • Be a Canadian citizen or permanent resident.

Advantages

Like a Consumer Proposal, Bankruptcy offers numerous advantages to help debtors get much needed financial relief and recover from unmanageable debt situations. These include:

  • Immediate legal protection from collection actions, court judgements, and wage garnishees.
  • Relief of most income tax debt and other government debts.
  • Creditors cannot refuse a Bankruptcy and are legally bound to the process.
  • Creditors cannot negotiate terms of the Bankruptcy.
  • Student loan debt could be included (subject to certain criteria).
  • No maximum limit on amount of debt owed.
  • A first-time bankrupt may be released from their debts in as little as nine months, or 21 months if surplus income is available.
  • Potentially pay less than through a Consumer Proposal.
  • Budget and money management counselling provided.

Disadvantages

Despite the benefits, there are also several downsides to Bankruptcy. Depending on your situation, these drawbacks may make another debt solution such as a Consumer Proposal preferrable if possible.

  • Trustee takes possession of, and must realize on (i.e., sell), certain assets with some exemptions.
  • No negotiation of which debts can be included.
  • Surplus income (if applicable) can extend Bankruptcy timeline. Payment is based on income.
  • Monthly income and expense statements are required each month .
  • Personal income tax refunds are assets of estate.
  • GST refunds are assets of the estate.
  • Creditors can oppose your discharge, and a court hearing may be required.
  • Trustee can oppose your discharge if you fail to comply with your duties and obligations.
  • Process is highly structured and governed by legislation.
  • Cannot withdraw from the Bankruptcy after filed.
  • Credit rebuilding begins after discharge.
  • First bankruptcy is retained on your credit report for six years from date of discharge.
  • A subsequent Bankruptcy revives the previous Bankruptcy(ies) on your credit report, and all are retained for 14 years from date of discharge.
  • Could pay higher interest rates on new credit.
  • Publication in local newspaper if the realizable assets exceeds $15,000 (less claims of secured creditors).

Consumer Proposal and Bankruptcy Comparison


 Consumer Proposal Bankruptcy
Vesting of assets with Trustee No Yes
Creditors can reject Yes No
Fixed payment Yes Can fluctuate
Interest free payment Yes Yes
Credit rating R7 R9
Administration period Max. 60 months 9, 21, 24, 36 months or longer
Tax returns / GST rebates Debtor keeps Trustee keeps
Stops collection activity Yes Yes
Stops wage garnishments Yes Yes

Life happens. Debt happens. MNP is here to help. Contact one of our experienced Licensed Insolvency Trustees for a Free Confidential Consultation today. We’ll review your financial situation, discuss your options, and provide an unbiased opinion on which, if either, Life Changing Debt Solution will provide you with the financial fresh start you deserve.

No matter what we uncover, we’ll make sure you have the information, resources, and support you need to defeat your debt for good.