Bankruptcy versus Consumer Proposal

What is bankruptcy?

A legal process, bankruptcy provides an individual whose debts his or her assets and who is unable to meet financial commitments with a solution for eliminating his or her debt. If you are in such a situation and your situation is not likely to change, bankruptcy may be an option for you. Bankruptcy  can only be filed through a Trustee in Bankruptcy in Canada. This is an individual who is licensed by the Federal Government.

What is Consumer Proposal?

A Consumer Proposal is legal contract between an individual and his or her creditors. A consumer proposal lets a person reduce their debts significantly and eliminate the interest. It is an option for an individual who is unable to pay the full amount of his or her debts, but who can pay a portion. A Consumer Proposal can only be filed through an Administrator that is licensed by the Federal Government in Canada.

Comparing Consumer Proposal with Bankruptcy

Ownership of Assets

  • In a bankruptcy, certain assets are exempt. This means that certain assets cannot be touched you do not have pay the Trustee in order to keep them. These include RRSPs (except for contributions made in the 12 months prior to your bankruptcy), a vehicle up to a value of $5,650, household furniture and appliances up to $11,300, personal effects (clothing and miscellaneous items) up to a value of $5,650 and tools of the trade up to $11,300.

You can keep your non-exempt assets in a bankruptcy by compensating the Trustee for their value.  The Trustee will sell the non-exempt assets that you do not want to keep.

  • You retain ownership of all of your assets under a consumer proposal. This includes your home, RRSPs and vehicles. You must commit to paying your creditors a fixed monthly amount for a certain period time in order to receive this protection under a consumer proposal.  In many cases, a consumer proposal will result in you paying back about 30% of your debts


How Long Does a Bankruptcy Last?

This depends on your situation. If you have never been bankrupt before, your bankruptcy can last 9 to 21  months. If you have been bankrupt before, the process can last between 24 months to 36 months.

How Long Does a Consumer Proposal last?

Typically, a Consumer Proposal is done over 60 months. This is to give you the financial flexibility of repaying a portion of your debts under the proposal while still meeting your living expenses. You do the option of paying off your proposal in a shorter period of time. You can even pay your proposal through a one-time lump sum payment.

“Surplus Income”

  • The term “suplus income” is a technical term that applies only to bankruptcy. In a bankruptcy, the cost of the bankruptcy depends on your income during the bankruptcy. If you have an increase in your income during the bankruptcy period, your cost of the bankruptcy might increase. In a consumer proposal, surplus income rules do not apply. Once your proposed settlement has been agreed to, the amount does not change. Simply put, if your income increases, the cost of your Consumer Proposal DOES NOT increase. For more on consumer proposal versus debt settlement in Barrie, click here.

Protection from your Creditors

  • Protection from creditors is similar under a consumer proposal and a bankruptcy. Once you file, you are completely protected from your creditors. They are not allowed to call or take other actions to collect their debts. Consumer Proposal and Bankruptcy also prevents creditors from starting a legal action against you. If legal action has already started, Consumer Proposal or Bankruptcy stops that process.

Impact on Credit Score

  • Your bankruptcy remains on your record with the credit bureau for seven years if it is your first bankruptcy.
  • A Consumer Proposal remains on your credit bureau record for three years after the process is completed.

Use of a Secured Credit Card

  • If you apply for new credit over $500 while in bankruptcy, you have to volunteer the fact that you are bankrupt.
  • If you apply for new credit while completing a Consumer Proposal, you do not have to volunteer that information.


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