Consumer Proposal Vs. Bankruptcy - Which is Best?

Consumer Proposal vs Bankruptcy – Which Is Best?

When someone contacts us to find a solution to their debt problems we are required to gain an understanding of their financial situation. We refer to this free and confidential meeting as providing a financial assessment. During the meeting, we go over a variety of options that might provide debt relief. Often, questions arise after we explain the two options that are made available by the federal government. Specifically, the question is: Which is best for me, a Consumer Proposal or Bankruptcy?

Both of these options are very effective in providing relief from debts and an opportunity to obtain a fresh financial start. Both must be filed through a Licensed Insolvency Trustee. However, there are differences that should be considered before making a final decision. Let’s take a look at a few.

Consumer Proposal BC Bankruptcy BC
What happens to my assets? You keep all your assets. You may keep some assets (i.e. clothing, furniture, vehicle) however luxury items are sold by the Trustee to the benefit of your creditors. Most personal assets are exempt from your creditors.
How long will it take to finish? Up to 60 months. It is dependent upon your ability to make payments. You are allowed to finish earlier if your cash flow allows. 9 months or 21 months for a first-time Bankruptcy and up to 36 months if you have a previous Bankruptcy.
Do my creditors have to approve? Your creditors have 45 days from the date the proposal is filed to determine if they approve or reject it.

If the majority of the creditors vote in favour, then it is approved.

You do not require creditor’s approval. Your creditors may object to your discharge but that is quite rare.
How is my credit rating affected? You will receive an R7 rating. After your Consumer Proposal is finished, it is scheduled to drop from your credit rating in three years or six years from the start, whichever is earlier. You will receive an R9 rating that will stay for 6 years after you are discharged.
What are my payments? Your monthly payment will remain as you proposed throughout the Consumer Proposal. It will not change if your income changes.

Monthly payments have a wide range depending on your circumstances. The terms of your payments can be as flexible or creative as we can think of.

The important thing is that you get to decide on what payment to offer. As such, there is true financial relief in the future months. No matter what option you choose, this is the most important piece.

You must report your income monthly to your Trustee. If you earn over the allotted income per month you will be required to make a payment referred to as surplus income. If you are below the allotted income you will normally make monthly payments totaling $1,800 for fees.

On the other hand, if your income is high, a Bankruptcy may result in a large monthly payment.

Can I finish the process early? You can often pay off the entire amount of a Consumer Proposal before the completion date. You must remain in Bankruptcy and report your income for the allotted time.
Duty to Report You do not have to report if your income changes. Overall, this option is less intrusive. There is a duty to report your income and expenses to the Trustee monthly in addition to other duties.
Tax Refund You keep your tax refund. Your tax refund is surrendered to the Trustee for the benefit of your creditors.
GST Credit You keep your GST Credits. GST credits are sent to the Trustee however, they may be returned to you after your discharge if there are sufficient receipts from other sources.
End Result Once you have completed your payments and financial counselling sessions you will receive a Certificate of Full Performance and your debts are extinguished. For the majority of people, a Certificate of Discharge is issued at the end of your scheduled timeline and your debts are extinguished.

Some debts, such as support payments and recent student loans can survive. Please call for details.

Other Questions

  • Will I lose my Canada Child Benefit (CCB)? You will not lose your CCB with either option. So long as you remain eligible, you will continue to receive it.
  • Can I keep my car? Yes, so long as you continue to pay the car loan and the lender allows for it (which they usually do).
  • Does it cover income tax debt? Yes, both options will cover income taxes so long as you complete the terms and receive your discharge. These two options are the only way the Canada Revenue Agency is allowed to write off debt.

Find Peace in Your Decision

It is also important that you feel right about the choice that you make. Some people we talk to have every desire to repay their debts in full but they are frustrated by the amount of interest they are paying. By using a Consumer Proposal you can limit the interest to 0%! The payment required to complete the process is then often within your means.

On the other hand, some people are uncomfortable with the voting process and are looking for the fastest, least expensive option. In that case, a Bankruptcy filing might be the better fit as you will potentially be complete in just 9 months.

If you are facing a mountain of debt, consider both a Consumer Proposal and a Bankruptcy filing as two different roads that will get you around the mountain. Each road is slightly different, with one slightly longer in length. But you will get to the other side.

Your decision can be made easier by contacting a Licensed Insolvency Trustee. They can help you decide whether a Consumer Proposal or Bankruptcy is your best option. Ultimately, you need to find a way to get relief from your debt and have a future monthly budget that allows you to make life work. Take advantage of our no cost, confidential initial consultation to ask the questions that relate to your unique situation. Talk to us. We are here to help.

Derek L. Chase, CPA, CA, LIT

Being able to offer debt help assistance to individuals and corporations on a more intimate basis was a driving force in completing a “second CPA” by becoming licensed by the Federal Government as a Licensed Insolvency Trustee (previously Trustee in Bankruptcy) in 1997. It is extremely satisfying to be able to witness lives change for the positive due to a restructuring of financial affairs.