Consumer Proposal vs. Bankruptcy

Length of Process

Bankruptcy: Lasts 9-36 months.

  • 9 months = A first time bankrupt without surplus income can be discharged after 9 months
  • 21 months = A first time bankrupt with surplus income can be discharged after 21 months
  • 24 months = Second time bankrupts without surplus income can be discharged after 24 months
  • 36 months = Second time bankrupts with surplus income can be discharged after 36 months

Consumer Proposal: Lasts as long as 60 months.  Most of the proposals that we administer utilize this 60 month limit.  By stretching your proposed repayment over 60 months you lower your monthly payment, while still being able to repay your proposal as quickly as you can afford.

Your Assets: What you own

Bankruptcy: All non-exempt assets are either surrendered to the Trustee in Bankruptcy or repurchased by the bankrupt.  Exempt assets in Ontario include:

  • A vehicle worth less than $5,650
  • Furniture and appliances worth less than $11,300
  • Clothing and apparel worth less than $5,650
  • Tools of the trade worth less than $11,300
  • RRSPs contributed more than 12 months prior to the bankruptcy

The above noted exempt assets are unaffected by a bankruptcy.

Consumer Proposal: Your assets are unaffected by a Consumer Proposal.  Filing a Consumer Proposal allows you to keep all of your assets or belongings.  Since a Consumer Proposal must always provide more money to your creditors than a bankruptcy, the payments you make are in lieu of surrendering any of your belongings to your Trustee.

Payments or Cost

Bankruptcy: Our minimum fee for a bankruptcy is $1,800 or $200 x 9 months.  Your payment in a bankruptcy will increase if you decide to keep non-exempt assets or earn surplus income.  For example, if you own a non-exempt $3,600 camper, you can surrender the camper or keep it and pay $3,600 to your Trustee instead.  This money will be used for the general benefit of your creditors.

Consumer Proposal: As a rule of thumb, your payments in a consumer proposal will be 30% of your unsecured debt spread over 60 months assuming that this amount is higher than your creditors would receive if you declared bankruptcy.  This is anything but a hard and fast rule.  Proposal payments can vary significantly and must be high enough to earn the support of at least 50% of your creditors.

Creditor Approval

Bankruptcy: No approval by your creditors is required to declare bankruptcy.  You are bankrupt after signing the papers whether your creditors like it or not.

Consumer Proposal: Your consumer proposal will be accepted unless creditors representing 50% of the proven unsecured claims against you vote to reject it.  If your initial proposal is rejected, you can work with your Proposal Administrator to amend it in hopes of changing your creditors’ votes.  If your consumer proposal is rejected, you are not automatically deemed bankrupt.

Credit Rating

Bankruptcy: Declaring bankruptcy results in an R9 credit rating for 7 years after you complete the 9-21 month bankruptcy process as a first time bankrupt or 14 years after you complete the 24-36 month process as a second time bankrupt.

Consumer Proposal: A Consumer Proposal results in an R7 credit rating for 3 years after you complete your proposal. An R7 and R9 credit rating are really two shades of black.  They’re both unfavourable and frowned upon by lenders.

Income Tax and HST Refunds

Bankruptcy: Your income tax refunds generated in the year of your bankruptcy or years prior to your bankruptcy will be sent to your Trustee by the Canada Revenue Agency for the general benefit of your creditors.  Refunds generated in tax years after the year of your bankruptcy are not taken by your Trustee.  HST refunds are also seized by the Trustee, but are refunded if the bankrupt makes the required payments.

Consumer Proposal: You keep all income tax and HST refunds when filing a consumer proposal.

Conclusion: Consumer Proposal vs. Bankruptcy

Both bankruptcy and a consumer proposal are legal options to erase your debt.  We mainly consider your debt load in relation to your income when weighing bankruptcy against and a consumer proposal.  For example, a single person earning $1,800/month can likely make a viable proposal to discharge $20,000 in debt, but not $75,000 in debt.  If you’re unsure which option is best for you the answer is only a phone call away.  A licensed Trustee will assess your situation over the phone in a matter of minutes, and there is no substitute for this process.

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