Consumer Proposal vs Bankruptcy
In Quebec, when you declare being insolvent and incapable of paying your debt when they’re due, two solutions are possible, either filing for a Consumer Proposal or filing for bankruptcy.
A Consumer Proposal vs Bankruptcy argument depends on which one best suits your circumstances.
What is a Consumer Proposal?
Filing for a Consumer Proposal is a legal procedure under the Bankruptcy and Insolvency Act.
It requires negotiation with your creditor(s) to reduce the amount of debt you owe them.
The negotiation is supervised by a Licensed Insolvency Trustee (LIT) acting as a referee.
To file for a Consumer Proposal, your unsecured debt should not exceed $250,000.
The LIT working with you develop a proposal to present to your creditors either to pay a percentage of your debt, extend the time you need to pay or both.
Under a Consumer Proposal, the terms for repayment cannot be more than 5 years.
What is Bankruptcy?
Bankruptcy is also a legal procedure regulated by the Bankruptcy and Insolvency Act.
When you file for bankruptcy, an LIT acts as a referee between you and your creditors.
The trustee assesses your financial situation and considers the possibility you have to repay the creditors.
During a bankruptcy, some of your assets are seized and sold.
The Bankruptcy and Insolvency Act sets the rule for the seizure of your assets and/or income for the benefit of the creditors.
In Quebec, you can declare bankruptcy for amounts liable to creditors more than $1000.
Difference Between a Consumer Proposal vs Bankruptcy
It must be noted that when you file for a Consumer Proposal or for bankruptcy, the consequences are different, but to file for one or the other depends on your circumstances.
Firstly as mentioned above you can file either for a Consumer Proposal or bankruptcy if you’re insolvent. In a proposal your debt cannot exceed $250,000 of unsecured debt.
The cost of a Consumer Proposal and a bankruptcy differ greatly.
In a bankruptcy, your assets are seized and the payment of the bankruptcy will depend on the value of your assets and your income.
You should expect to pay more the higher your income.
The Consumer Proposal is a negotiated settlement between you and your creditors.
In exchange for fixed monthly payments your creditors are willing to reduced your total debt.
Length of Insolvency
Under the Bankruptcy and Insolvency Act, if it is your first time being bankrupt, you can benefit from automatic discharge after a period of 9 months.
If you have surplus income, the period can be extended to 21 months.
If it’s your second time being bankrupt expect automatic discharge after 24 months.
For the Consumer Proposal, the length of time you can arrange with your creditors for monthly payments cannot exceed 5 years;
When you file for bankruptcy, you are required to surrender certain assets.
The Bankruptcy and Insolvency Act defines the type of assets that can be seized.
When you file for bankruptcy you are entitled to keep certain assets.
You do not lose any assets when you file for a Consumer Proposal.
Credit Score Impact
The consequences of filing for bankruptcy apart from losing some of your assets is that you will receive an R9 rating on your credit score, the worst in Quebec.
It remains on your credit report for at least 6 years after you’ve been discharged.
For the Consumer Proposal you’ll receive a mention or R7 on your credit report and it remains for at least 3 years after you’ve been discharged.
The R9 classifies you as bankrupt, while the R7 indicate that you’ve made an arrangement with your creditors to repay your debt.
Bankruptcy vs Consumer Proposal: Which One is Better?
Outlining the similarities and differences between bankruptcy and a Consumer Proposal, your choice between the two should be based on your financial circumstances.
At initial glance, a Consumer Proposal seems a better option.
When you go to the initial consultation with a trustee, prior to starting your bankruptcy claim he/she might suggest trying alternative solutions.
However, even if you qualify for a Consumer Proposal, it may not always be possible.
One of the major stumbling blocks are your creditors with whom you have to negotiate.
There might be some advantages with filing for bankruptcy.
For instance, you can be discharged in as little as nine months.
This is often much shorter than a consumer proposal.
Schedule a Free Evaluation to Discuss Your Situation
You can learn more during your initial consultation with a trustee.
Their professional advice while assessing your situation will allow you to make an informed decision.