Exploring The Differences Between A Consumer Proposal And Bankruptcy

In today's constantly shifting economic landscape, many Canadian households are struggling to keep up from one payment to the next — let alone keep up with an ever-increasing cost of living. To compensate, many have relied on credit to carry them through financial difficulties. While credit can be a valuable tool, credit reliance can quickly lead to a dangerous cycle of debt and stacking interest that seems impossible to get out of. Sound familiar?

If debt has taken hold, it's first important to understand that you're not alone and you have options. For eliminating debt all-together, two widely used options for Canadian households are bankruptcy and Consumer Proposals.

Two people looking at a laptop with paper spreadsheets and charts on the table

There are several differences between a Consumer Proposal & bankruptcy. Although both filings are legislated under the Bankruptcy and Insolvency Act (also known as the BIA) and must be filed by a Licensed Insolvency Trustee, these are two separate processes. And while many people have a basic understanding of what a bankruptcy entails, fewer understand how or what it means to file for a Consumer Proposal.

Retain Your Assets

A Consumer Proposal is an arrangement made with your creditors which, in most cases, allows you to retain all your assets. Furthermore, debtors who would like to retain their non-exempt assets like non-exempt vehicle or non-exempt equity in their home may arrange with their creditors to pay an amount over specified timeframe instead of filing for bankruptcy. In the case of a bankruptcy, only certain assets are exempt.

(Note: exemptions on assets also depends on provincial legislations where you reside.)

Simplified Process

Filing a Consumer Proposal is a different process from that of a bankruptcy. Generally, a Consumer Proposal will not require a court appearance. Creditors have 45 days to vote on the Consumer Proposal and have the option to accept, refuse or request a meeting of creditors. It is possible to amend the initial Consumer Proposal filing if the creditors do not agree with the terms.

Fewer Requirements

Once your creditors accept the Consumer Proposal, your only other requirements are to attend two counselling sessions. Provided you continue meeting the terms of the Consumer Proposal, the Administrator or the Licensed Insolvency Trustee will not monitor your income, expenses or any disposition of assets.

In a bankruptcy, a Trustee will monitor the bankrupt's income throughout the process and must file certain income tax returns on the bankrupt's behalf. Trustees may also be required to seize any acquired properties in a bankruptcy scenario.

Less Credit Damage

One of the most significant differences between a Consumer Proposal and bankruptcy is the impact it can have on your credit rating. Bankruptcy is registered as an R9 and will remain for six years after you receive your certificate of discharge. A Consumer Proposal, on the other hand, is reported as an R7 and will stay on your credit bureau for three years after receiving your Certificate of Full Performance.

Know Your Options

Many individuals may wish to avoid bankruptcy for several reasons — which could include stigma, legal implications (an inability to sponsor while undischarged for example), business ramifications or disclosure requirements in retaining professional designations.

When you're struggling from one payment to the next, understanding which route to choose can be daunting. During a Free Confidential Consultation, a Licensed Insolvency Trustee can help you understand your options. That way you can make a fully informed decision as you work towards a stronger, debt-free future.