Consumer Proposal versus Bankruptcy: Which one is best and what’s the difference?

2021-03-10   minute read

Linda Paul


Consumer Proposal

Consumer Proposals and Bankruptcies are government legislated insolvency options that can provide relief from serious debt problems. Both solutions can only be administered by a Licensed Insolvency Trustee. In addition, both solutions provide a legal stay of proceedings which require creditors to discontinue harassing collection calls, wages garnishments and other legal proceedings.

So, what’s the difference and when might one be better than the other?

Bankruptcy may be the right choice if…

A Licensed Insolvency Trustee will discuss filing a Bankruptcy in instances where you are:

  • Having wages garnisheed or are under threat from a creditor to garnishee your wages
  • Unable to make credit card, line of credit, or loan payments in full or on time
  • Receiving past due notices and calls from creditors or collections agents

Advantages of Bankruptcy

  • Immediately stops collection action, harassing phone calls, interest and garnishees
  • Creditors cannot reject the Bankruptcy
  • Licensed Insolvency Trustee will often file any outstanding personal income tax returns
  • Process lasts either nine or 21 months if you have never been bankrupt before, which is less time than a typical Consumer Proposal
  • No upper limit on the size of debt load to be eligible to file
  • Budgeting, setting financial goals, and money management counselling is provided
  • Repay less than you owe

Disadvantages of Bankruptcy

  • Assets vest with trustee, subject to some exemptions
  • Monthly payments may fluctuate if your income changes during the Bankruptcy
  • Creditors can oppose your discharge and a court hearing may be required to complete the Bankruptcy (there must be legal grounds to oppose)
  • Negatively impacts your credit score for six years after completion
  • May affect ability to secure certain employment positions
  • Some tax refunds are turned over to the Licensed Insolvency Trustee

Filing a Consumer Proposal may be the right choice if…

A Licensed Insolvency Trustee will discuss filing a Consumer Proposal in instances where you:

  • Owe less than $250,000 excluding the mortgage on your principal residence
  • Need more time or an achievable plan to repay your debts
  • Need relief from accumulating interest and wage garnishments
  • Want to keep assets that may otherwise not be exempt from seizure in a Bankruptcy

Advantages of Consumer Proposals

  • Immediately stops collection action, harassing phone calls, interest, and garnishees
  • Consolidates all monthly debt obligations into a single affordable monthly payment
  • You keep all your assets and tax refunds
  • Repay less than you owe
  • Offers higher recovery to creditors than a Bankruptcy
  • You don’t have to make higher payments if your income increases
  • Avoid Bankruptcy – you are driving the process and taking charge of your situation – payments are set by you and within your financial means
  • Will have less of an impact on your credit rating than filing a second or subsequent Bankruptcy
  • You can often keep credit cards with NIL balances
  • Budgeting, setting financial goals and money management counselling is provided

Disadvantages of Consumer Proposals

  • Longer than a Bankruptcy: A typical Consumer Proposal is repaid over four to five years
  • Payment is fixed: You must amend the Consumer Proposal and go through the voting process again to amend the payment schedule
  • You may not file another Consumer Proposal if you default (three missed payments)
  • Impacts your credit rating for three years after completion
  • Must have less than $250,000 in debt excluding mortgage on principal residence)
  • Your creditors decide whether to accept your offering

What’s the difference and which is best?

The main difference between a Consumer Proposal and a Bankruptcy is that a Consumer Proposal:

  • Allows you to keep more of your assets,
  • Has less of an effect on your credit rating, and
  • Will stay on your record for three years instead of six years for a first-time Bankruptcy

Both solutions are legally binding — however a Consumer Proposal is less invasive than a Bankruptcy. For example: A Consumer Proposal requires regular payments of a fixed amount agreed upon by you and your creditors. With Bankruptcy, monthly payments may vary depending on your income throughout the process.

There are benefits and drawbacks to both options, as we have discussed above. There is no best option that covers every situation. The best option for you will depend heavily on your financial means, desired timeline to become debt free, and what compromises you’re willing to make to become debt free.

It can be a difficult choice to pursue either a Consumer Proposal or Bankruptcy, but a Licensed Insolvency Trustee can provide the guidance and advice you need to do what’s right for you. Schedule a Free Confidential Consultation with MNP today to discuss your finances, understand your options and discover how a Life-Changing Debt Solution could change your life for the better.

Consultation icon