Most people don’t want to go bankrupt. For that very reason they are often reluctant to contact a bankruptcy trustee. However a consumer proposal is a great alternative to bankruptcy. It provides you with the same creditor protection and the ability to eliminate your debts, with some very significant differences. First we will review why you would want to choose either a consumer proposal or personal bankruptcy. Then we will take a look at some of the key differences in how the process for each works.
Why Would I File a Proposal Instead of Going Bankrupt?
There are two main financial reasons for filing a proposal instead of bankruptcy.
- You are able to keep assets like your home, car or potential investments.
- If you are required to pay surplus income in a bankruptcy, your monthly payments will be much lower in a proposal because they are spread out over up to 5 years.
If the creditors accept my proposal because I am offering to pay them more than if I went bankrupt, does that not also mean a proposal costs me more than if I went bankrupt? The answer, in most cases, is “yes”. If you offer your creditors less than they would receive in a bankruptcy, they have no reason to accept your proposal; they would prefer that you go bankrupt.
However, a proposal may still be your best option:
- You are avoiding bankruptcy. Many people feel better knowing they repaid what they could afford. Also, if you employment may be impacted by filing bankruptcy because you need to be bonded or are a professional that deals with trust money, then a consumer proposal is better because you would not be bankrupt.
- With a proposal you have certainty. You know exactly what you are required to pay each month and your payments may be more affordable.
Let’s look at an example. You owe $50,000 and if you filed bankruptcy your creditors would expect to receive $15,000, including $7,000 equity in your home and $380 a month in surplus income payments for 21 months. To buy out your equity in your home from the trustee, and make your surplus income payments, your total monthly payment in your bankruptcy would be $715 per month for 21 months. You offer your creditors $19,200 by paying $400 per month for 5 years.
Benefit to your creditors: They receive $4,200 more than they would in a bankruptcy.
Benefits to you: You get to keep your home and your monthly payments drop from $715 per month to $400 per month.
Filing a consumer proposal is a win-win for both you as debtor and your creditors. With the help of your trustee, you negotiate a deal you can both agree to. Get started today.
While both a consumer proposal and bankruptcy are filed through a trustee in bankruptcy and administered under the Bankruptcy & Insolvency Act, there are some considerable differences in your requirements and how each are completed:
| Consumer Proposal: | Bankruptcy: | |
| Debts | Less than $250,000 (excluding your mortgage). | More than $1,000, no upper limit. |
| Who is Eligible | Individuals. | Individuals and companies. |
| Filing | Through a Bankruptcy Trustee acting as a Consumer Proposal Adminisitrator. | Through a Bankruptcy Trustee. |
| Creditor Protection | Immediate. | Immediate. |
| Approval | Voted on by your unsecured creditors within 45 days. Only accepted if 50% + 1 of dollar value of claims agree. | Automatic. No voting required. |
| Creditor’s Meeting | If 25% of creditors require. Meeting may be called to review proposal prior to acceptance where you can renegotiate terms. | Very rare. More based on creditor’s concern over procedure & legal issues. |
| Cost | Negotiated settlement. | Cost defined based on surplus income and value of assets. |
| Payments | Fixed, over the period of the agreement (not more than 5 years). | Payments and length of time can vary based on surplus income calculation. |
| Monthly Reporting | None. | Monthly budget statement required. |
| Tax Refunds | Your’s to keep. | Estate keeps tax refunds/credits due to you during bankruptcy. |
| Length | Typically 1 to 5 years. | Legislated. Minimum 9 months. Extended for second time bankrupts and those with surplus income. |
| Discharge | Upon completion of payments. Can be paid out and completed early. | After completion of all payments AND minimum legislated period. Creditors can also object. |
| Early completion option | Yes. | No. |
| Credit Rating | 3 years after completion. | 6 years after discharge. |
The information above is a lot to take in. Whether you should file a consumer proposal or bankruptcy is a choice you must make based on your circumstances and preferences. We recommend you talk to a Consumer Proposal Administrator about these differences. They can help you understand which will be of most importance for you and your family.