Consumer Proposal or Bankruptcy – Which Is Better?

If you have more debt than you can handle, you may be considering filing for bankruptcy or a consumer proposal.

The percentage of insolvent debtors filing consumer proposals instead of filing for bankruptcy is on the rise in Canada. The percentage of personal insolvencies that were consumer proposals was only 23% in 2009. This number increased to 31% in 2010 and 37% in 2011. Consumer proposals are expected to exceed personal bankruptcy filings in 2012.

Both personal bankruptcies and consumer proposals are governed by the Bankruptcy and Insolvency Act. Both are administered by a Trustee in Bankruptcy, licensed by the federal government. Both offer a way for someone suffering from too much debt to deal with their money problems and obtain a fresh start.

While there are a number of factors that may affect which option is best for you, keep in mind that only a licensed Trustee in Bankruptcy (who will meet with you to review your financial situation in detail) will be able to help you decide which option is best for your specific situation.

Why choose a Consumer Proposal over Bankruptcy?

  1. To avoid bankruptcy. You know you have too much debt and just want to make a plan to eliminate that debt. A consumer proposal allows you to make a deal with your creditors while avoiding bankruptcy.
  2. You have assets you want to keep. You may be able to maintain the mortgage payments on your home, or keep up with your car loan payments and would like to protect the equity you have built up in those assets. In a bankruptcy the Trustee is required to sell those assets to realize on the equity. In a consumer proposal you can repay that equity over a period of up to 5 years.
  3. You have high surplus income. When you file bankruptcy, your payments are based on your income. The more you make the higher your payments. It may make more sense to submit a consumer proposal and offer to pay a smaller monthly payment over a longer period of time.
  4. A consumer proposal can be simpler. You meet initially with a consumer proposal administrator and work out a plan. Once approved you simply make your monthly payments. Unlike a bankruptcy there are no monthly requirements to submit proof of income (paystubs and budgets).
  5. Your payments are determined ahead of time, providing certainty about your financial obligation to the trustee up front. Payments do not vary based on your income, as they do in a bankruptcy.
  6. You work in a profession that does not allow bankruptcy or have other factors which make a consumer proposal a more attractive option.
  7. A consumer proposal may have less impact on your credit rating and your ability to obtain credit in the future.

Why choose Bankruptcy?

  1. You have a consistent monthly income but also have a high number of dependents or eligible expenses that would lower your surplus income and may make it difficult to provide enough surplus over a period of time to support a proposal.
  2. Your monthly income is uncertain or can be seasonal making it difficult to commit to regular proposal payments over a long period of time (eg 3 to 5 years).
  3. You have one or more large creditors who are not likely to vote in support of any proposal you offer. While your Trustee can help you design a proposal that would likely be more successful with a broad range of creditors, some creditors such as the Canada Revenue Agency have certain considerations that you may not be able to meet.

Contact a licensed Consumer Proposal Administrator, who is a trustee in bankruptcy to arrange a personal consultation. All of the Trustees listed on offer this service free of charge. The trustee will sit down with you and evaluate your situation and help you determine the right debt relief solution for you.

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