Consumer proposal vs bankruptcy - what’s the difference between the two? A lot of Canadians are wondering – and for good reason. A lot of people are advertising consumer proposals. Sales people are pushing them. Are they as good as they sound? Is there something they’re not telling us? How does a proposal compare to good old fashioned bankruptcy? The answer is, it all depends on your financial situation. When used appropriately, both bankruptcy and a consumer proposal can be effective forms of debt relief. However, both can also have significant impacts on your life both in the short-term and in the long-term. Below we discuss the major differences between the two, the costs of both options, their effects on your assets, the time each process takes, their impact on your credit, the long-term consequences, and how to figure out which option is best for you.
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Both bankruptcy and consumer proposals are governed by the Bankruptcy and Insolvency Act, directives issued to bankruptcy trustees by the Superintendent of Bankruptcy, and provincial laws. They are intended to provide protection from the courts for people who are insolvent and unable to repay their debts in full. Bankruptcy was originally designed to provide honest people who had fallen upon unfortunate circumstances a fresh start when they had so much debt they didn’t have any hope of repaying it.
How bankruptcy works is that if someone files for bankruptcy, all collection activity on the debts included in the bankruptcy is stopped and creditors are typically forced to accept less for the debts owed to them than the borrower originally agreed to repay. A consumer proposal is different from bankruptcy in that your bankruptcy trustee must offer your creditors an amount of money to settle your debts, your creditors vote on the offer, and if the creditors who own the majority of your debt accept it, you repay the agreed on amount over a set length of time (usually just under 5 years).
The cost of a consumer proposal versus bankruptcy depends on a lot of factors, but here is a general overview of what the costs look like:
- Bankruptcy Costs - The Office of the Superintendent of Bankruptcy issues income guidelines to bankruptcy trustees. The guidelines govern how much income someone going through bankruptcy is allowed to keep each month based on their family size. If their household income is over the allowed amount, they are required to pay their determined “surplus income” to their creditors. For someone going through bankruptcy for the first time who does not have any surplus income, they would be “discharged” (released by the courts) from their bankruptcy proceedings after 9 months (possibly without having to pay anything). Once they are discharged, they are legally released from all debts included in the bankruptcy (secured debts like car loans and mortgages aren’t included in a bankruptcy). If someone has “surplus income,” they would likely be required to pay their surplus income to their creditors for 21 months before being discharged. In addition to this, anyone going through bankruptcy also has to give up any valuable assets such as their vehicle if it’s over a certain value, their home if the equity they own is over a certain value, and any other valuable assets. Finally, filing for bankruptcy usually costs somewhere around $1,800.
- Consumer Proposal Costs - When you break it down, consumer proposals have many layers of costs. To begin with, filing a proposal costs approximately $1,500. However, trustees then keep the first 20% of your monthly payments as their administration fee. So if you file a consumer proposal for $35,000, the trustee will collect an additional $7,000 from you in fees. If you enter into a proposal through a debt consultant or company who is not licensed to file consumer proposals (here’s a list of all licensed companies), they can charge you thousands of dollars before referring you to a trustee (that you could have found for free on Google). If you have assets, that may increase the cost of your proposal too, but we’ll talk more about that below.
- Another Common Cost - After you emerge from bankruptcy or finish your consumer proposal program, your credit score will be very low. To fix their credit, a lot of people are turning to credit repair companies who charge thousands of dollars for credit repair services. So for many people, this is an added cost of bankruptcy that should be considered since so many are doing it (we don’t recommend these kinds of service. We believe most people can do a good job of fixing their credit on their own for a small fraction of the cost).
If you thought a consumer proposal was the cheapest way to get out of debt, you might be surprised to learn that filing for bankruptcy can be much cheaper and faster for a lot of people. If you thought bankruptcy had a lot more disadvantages than a consumer proposal, you may be interested to learn that they both actually share many of the same disadvantages. We're not saying all this to promote bankruptcy. What we're trying to promote is an open and honest discussion of the facts so people can make informed decisions.
With a consumer proposal, you technically aren’t required to give up any assets, but things aren’t always that simple. For creditors to accept the offer your trustee is proposing to them, the trustee must offer them more money than they would receive if you filed for bankruptcy. If you have assets that would need to be sold if you went bankrupt, your creditors will want your trustee to include the value they would receive from those assets in your proposal. So in essence, you can end up buying back your assets through a consumer proposal. This can significantly increase the cost of a proposal on top of all the fees previously mentioned.
With bankruptcy, you may of course be required to give up certain assets. What you are required to give up depends on the value of your assets and the province you live in. Each province has its own guidelines governing which assets you are allowed to keep and what you have to give up. Generally speaking, you are usually allowed to keep the stuff you own in your house, a vehicle as long as it isn’t worth very much, and your home as long as you only own a small amount of equity in it. Tradespeople and farmers are also able to keep certain tools and equipment that they need to generate an income up to certain values. For more details and to find out what you would specifically have to give up, you should speak with a bankruptcy trustee.
If it’s your first time going bankrupt, bankruptcy is much faster than a consumer proposal – and a lot cheaper too - if you don’t own your home (or don’t own a lot of equity in your home), don’t have a valuable car, don’t own other valuable assets, or have a high income. However, the effects of bankruptcy on your credit report usually last slightly longer. As we previously saw, the first time someone goes bankrupt, the court usually requires them to remain in bankruptcy or make payments to their creditors for 9 to 21 months. A typical consumer proposal, on the other hand, usually results in someone making payments to their creditors through their trustee for close to 5 years (you can pay it off more quickly if you can afford to).
One of the worst things you can possibly do for your credit is to file a consumer proposal or file for bankruptcy. Both have the same effect on your credit and typically remain on your credit reports for roughly the same length of time (a consumer proposal typically takes around 5 years to pay off and then the record lasts on your credit report for another 3 years after that. So it’s normal for a proposal to impact someone’s credit for around 8 years – even with a credit repair program. Bankruptcy payments last for 9 to 21 months. After that, the record stays on your credit report for 6 to 7 years depending on your province. So a first-time bankruptcy can impact your credit for 7 to 9 years. Click here for specific details).
People who sell proposals will usually split hairs about the difference in how a proposal is reported on your credit reports versus a bankruptcy. Technically, debts included in a proposal will report as an R7 (really bad) on your credit reports and debts included in a bankruptcy will report as an R9 (the very worst). But this is only half the story. The other half is that your credit report also displays a special warning notifying creditors that you have become insolvent and have received court ordered protection.
In the eyes of the court system, the credit reporting system, and banks, consumer proposals and bankruptcies are very close to the same thing: they are seen as insolvency. The difference in the way the two are reported on your credit report is so small that a lot of lenders can’t actually tell whether you actually filed a consumer proposal or bankruptcy. From a bank’s or credit union’s point of view, they’re not interested in splitting hairs to figure out the difference. To them, both mean the same thing: instead of repaying your debts as you initially agreed to, you sought court protection and only repaid a small portion of what you owed. You may have had some very good reasons for becoming insolvent, but even for the most compassionate banker, it’s very hard for them to help you until the record of your insolvency falls off your credit report.
Obtaining credit after filing a consumer proposal or bankruptcy is a huge problem for a lot of people. There are things you can do to try and restore your credit score as quickly as possible without paying credit repair companies thousands of dollars, but until the record of your insolvency is removed from your credit reports, obtaining credit can often be challenging.
Both consumer proposals and bankruptcy come with long term consequence that should be carefully considered before entering into either option. Since both options involve the courts, a permanent public record is created. One place you can access this record is through a searchable online database which anyone can search for a small fee.
It’s also possible that having an insolvency on your record can affect future employment opportunities. Careers in finance, banking, security, law enforcement, and public service can be affected. For trades and occupations that require employees to be bonded, insolvency can be a reason why some insurance companies can refuse to issue a bond.
If you choose to go bankrupt, you should also know that future bankruptcies have more serious consequences than your first bankruptcy. For example, after your first bankruptcy, a record is kept on your credit report for up to 7 years. However, for subsequent bankruptcies, a record is kept for 14 years.
As you can see, when you look at a consumer proposal versus bankruptcy, there are definitely differences between the two, but they also have a lot in common too. What’s most important, though, is that you find the best way to get your finances back on track in a way that will help you achieve your long-term goals. Consumer proposals and bankruptcy aren’t the only ways of obtaining debt relief and consolidating debt. There’s also the Debt Management Program: a private and confidential form of debt relief that takes about the same length of time as a consumer proposal, comes off your credit report faster, and has no negative long-term side effects. There are also other ways of resolving debt problems that don’t involve an official program or paying anyone. If you honestly want to carefully and objectively look at all your options, contact a local non-profit credit counselling organization and speak with one of their credit counsellors. They’ll work with you to help you find what will work best for you – even if it is a consumer proposal or bankruptcy. Their help is usually free, non-judgmental and always confidential. You can contact any member of Credit Counselling Canada* or give us a call. Our help is always free, and we have professionally accredited credit counsellors who would be happy to help you.
*Credit Counselling Canada is the only association in Canada whose member organizations are not allowed to pay their staff any kind of financial incentive for signing people up for a program or referring them to another service provider. Credit Counselling Canada believes that this high level of integrity is critical for non-profits who serve the public in a capacity of trust since it allows the member organizations’ credit counsellors to be objective and recommend whatever is in their client’s best interest rather than what is in their own financial interest.