Consumer Proposal vs Bankruptcy
FRANÇOIS GILBERT – Licensed Insolvency Trustee (LIT)
Taking the time to learn about your debt management options can save you thousands of dollars and reduce the stress and worry about your financial future. At Fontaine & Associates, we are here to help you find the right debt management solution for you. This article explains the most (and least) effective top debt relief solutions for most Canadians.
In most cases, consumer proposals and bankruptcy are the primary debt solutions for Canadians who find themselves unable to pay their debts. Although the process of repayment is very different, they both offer legal protection from creditors and ensure debt resolution.
A consumer proposal is a legally binding contract between you and your creditors that allows you to settle your debts, interest-free, at a reduced amount over a period of up to 5 years. A Licensed Insolvency Trustee (LIT) will work together with you to create an offer that is agreeable to your creditors and affordable for you.
Bankruptcy will eliminate your total debts quickly through the surrender of your assets and garnishing of surplus income, if applicable. This is a fast acting method of debt resolution gives most individuals the capability to resolve their debts in less than 9 months. In certain circumstances, a person may pay for a maximum period of 21 months.
Advantages of a Consumer Proposal
Any individual with up to $250,000 in debt (mortgage not included), with the ability to pay a portion of what they owe, may be a good candidate for a proposal.
Every proposal guarantees:
- Payments will be an amount you can financially afford.
- Your fixed payments will never be increased.
- You have the ability to retain your assets and any tax credit/refund(s).
- The terms and conditions of your agreement will never change or fluctuate.
A consumer proposal may be a great option for some, but it may not be the right solution for everyone. In order to know what option is best for you, it is important to understand the key differences between a proposal and bankruptcy.
Who is eligible?
- Any person who is unable to pay their bills when they come due and owes more than $1,000 can qualify for bankruptcy. There is no voting panel or approval process so, if the criteria are met, bankruptcy takes effect immediately, and they will receive financial relief and creditor protection.
- Any person who wishes to file a consumer proposal must not owe more than $250,000 (home mortgage and vehicle not included). That individual must be able to repay a portion of their debts. Working together with a licensed trustee, they will come up with an offer to the creditors that is affordable and fair for both parties. Consumer proposals are generally accepted by creditors; however, the final decision is based on a majority vote. Creditors have 45 days to either accept or reject the proposal.
Rules of repayment
- If a person declares bankruptcy, they agree to surrender their assets and any surplus income. Surplus payments can increase if that person’s income increases.
- When a consumer proposal is filed that person agrees to repay a portion of what they owe, however at a much lower percentage than what they originally owed. Single monthly payments are determined through a process of negotiation between the Licensed Insolvency Trustee and creditors.
Terms of repayment
- In general, bankruptcy offers the quickest repayment when compared to other debt relief solutions. Most persons will repay their debts in less than 9 months. Those with higher incomes may be subject to making surplus income payments up to 21 months, which can increase the overall cost of bankruptcy.
- A consumer proposal allows up to a 5-year window for repayment. This means that monthly payments are generally lower and more affordable for most people.
- Bankruptcy requires the surrender of assets as a form of repayment to creditors in order to resolve debts. In most cases, a person can keep assets of lesser value like their household belongings and vehicle. A person can also, in most cases, keep their primary residence if there is no significant equity in it.
- A consumer proposal does not require the surrender of assets.
Changes to income
- If a person’s income increases during bankruptcy, they may be required to make increasing surplus payments.
- Regardless of changes to income, the fixed payments agreed upon in a consumer proposal will remain the same.
Your credit score
- A person who declares bankruptcy will receive at R9 credit score. This is the lowest credit rating, and it will remain on their report anywhere from 7 to 14 years.
- A consumer proposal results in an R7 rating and remains on the credit report for 3 years after the proposal is complete. A person with a 5-year proposal can expect an R7 to appear on their credit report up to a maximum of 8 years.
- If a person chooses to declare bankruptcy, they will have to provide their trustee with a monthly budget that includes all pay stubs and expenses. The trustee reviews this information in order to decide if surplus payments should be made.
- A consumer proposal does not require a monthly report on finances or incomes changes.
Tax refunds and credits
- Canadian law dictates that a person who declares bankruptcy will not receive tax refunds/credits.
- A person that files a consumer proposal can legally keep any tax refunds/credits they receive.
Which one is right for you?
Both debt solutions guarantee creditor protection and the reassurance of walking away debt-free. When choosing the best debt solution for your circumstances, it is important to take into consideration the impact each option would have on your finances, assets, and financial future. Bankruptcy and consumer proposals offer different ways to clear your debt. It can be challenging to determine which course of action best fits your unique situation. Consulting an expert is the best way to understand your options.
A consultation with a Fontaine & Associates licensed expert is always free and ensures that you are able to make an informed decision. We want to know your debt story and help you find an affordable solution that suits your specific needs.
What is debt settlement?
A consumer proposal is a form of debt settlement, but should not but confused with agencies that advertise ‘debt settlement’ plans. Any company that is not licensed will generally offer their services at a cost with no legal guarantee that the settlement will even be accepted. Debt settlement programs are not legally recognized and do not guarantee creditor protection from collection calls, legal action, or garnishing of wages.
It is common for debt settlement companies to advise their clients to stop making payments to their creditors. It is common for debt settlement ‘plans’ to give the client 3 years to make regular payments to the agency. Only once the client has paid that company’s fees and spent several months to years coming up with adequate funds, will the agency contact the creditors regarding a settlement.
Alternatively, a consumer proposal begins with a legally binding agreement that is agreeable to both parties before any payments are made.
Have you considered debt consolidation?
Broadly speaking, a consumer proposal is also a form of debt consolidation. When most people talk about debt consolidation, however, they are most likely referring to the action of taking out a single loan to pay off several smaller debts. Similar to a proposal, this action will consolidate multiple credit payments into single monthly payments made to a single lender. In most cases, your interest rate will also be lower with a loan as opposed to multiple credit cards, for instance. Debt consolidation offers two significant advantages: 1) you retain good credit scores, and 2) your creditor relationships will not be negatively affected.
There are potential disadvantages to this type of debt management:
- It is possible that you may not be eligible for the loan.
- The monthly payment may be higher than you can afford.
- You will be paying interest.
- If your credit score is high, the interest rates you pay on your loan may also be high.
The most significant difference to this debt plan is that you are still in debt and paying interest. This type of debt resolution does not offer the opportunity to settle your debts for less than what is owed. And if you leverage any of your assets as security, they are potentially at risk if you are ever unable to make your arranged payments.
If you have concerns about your capability to make consolidated loan payments, a consumer proposal may be worth considering.
Get started today!
At Fontaine & Associates., we have made debt freedom a reality for thousands of people in Ontario just like you. Our Licensed Insolvency Trustees are well-equipped to answer your questions and tailor the best debt management solution for your unique circumstances. Call 1.877.241.6018 and take the first step towards a fresh start!
Licensed Insolvency Trustee (LIT)
Francois obtained his CPA accounting designation in 1995, his CIRP insolvency designation in 1998 and became a Licensed Insolvency Trustee (LIT) in 1999. He has been working in the field of insolvency since graduating from University of Ottawa in 1991 and has been with Fontaine & Associates since 2002. Prior to that, Francois was working in the Ottawa office of PwC.
Francois has been helping individuals solve their debt problems now for over 20 years by providing advice on credit counselling, consumer proposals and personal bankruptcies. He also has extensive experience in business restructuring.
When he is not at work, Francois spends most of his time with his wife and kids doing outdoor activities and he also volunteers with local non-for-profit organizations in the Ottawa area from time to time. He is an avid musician and plays the keyboard, mainly for his own enjoyment.