If you are deep in debt, you are probably looking for a solution to solve your financial troubles. But how do you choose between a consumer proposal and bankruptcy?
The role of the Licensed Insolvency Trustee
Let’s start by making one thing clear: consumer proposals and bankruptcy are two legitimate solutions to solve debt problems. Choosing between these solutions is a personal decision that falls to the debtor. But to make an informed decision, debtors can rely on Licensed Insolvency Trustees (LIT).
The LIT’s job is to assess debtor’s financial situation. They must then fully inform the debtor about each processand their benefits, and the differences between them. The LIT cannot impose the solution of their choice. The debtor must always make the final decision.
Consumer proposals and bankruptcy have the same goal: to enable the debtor to resolve their debt problems. These solutions have similar benefits, but the duration and cost of each are different.
Legal protections
Consumer proposals and bankruptcy both lead to a stay of proceedings. This means that all actions against a debtor must stop, and therefore:
- creditors cannot sue
- any ongoing trial must stop, unless the court grants permission to continue
- wage garnishment must end
- collection agency calls must stop
Non-dischargeable debt
Consumer proposals and bankruptcy deal with the same types of dischargeable debts. Outstanding credit card debt, tax debt, and overdue hydro bills are just a few examples.
In fact, much of the debt incurred by the people we meet can be part of one of these solutions.
However, some debts can persist despite a consumer proposal or bankruptcy. This is true for the following debts, which must still be repaid once the proceeding is complete:
- Alimony arrears
- Debt resulting from misconduct in office, fraud, or misrepresentation
- Fines, penalties, and violations (e.g. parking tickets)
- Judicial compensation granted in a civil case
- Student loans, if you completed your studies fewer than seven years ago
To learn more about non-dischargeable debts, read our post, “7 Types Of Debt Excluded From Bankruptcy And Consumer Proposal”.
Mortgage loans and car loans are considered secured debt. Therefore, they are generally excluded from a consumer proposal or bankruptcy. However, it is possible to include them if the debtor wishes.
The obligations of debtors
A person who files for bankruptcy is required to provide proof of income and expenses before and during their bankruptcy to the Licensed Insolvency Trustee (LIT). These documents are used to set the cost and duration of bankruptcy and to determine the obligation to pay contributions on surplus income.
In a consumer proposal, the debtor is obligated to provide proof of income and expenses to prepare the offer filed with the creditors.
Although very rare, a debtor may also be obligated to appear before a judge to obtain a bankruptcy discharge. This can occur if a creditor opposes the discharge.
In a consumer proposal, creditors must vote to approve or reject the debtor’s settlement offer. Therefore, the requirement to appear in court usually does not occur in the case of a consumer proposal.
What is the best solution?
There is no right or wrong answer to this question. As we noted in the introduction, this decision is up to the debtor themselves.
That said, although totally unjustified in my view, you should know that there are some negative connotations associated with bankruptcy. For this reason, many people would rather choose the consumer proposal over bankruptcy. It helps them feel like as though they are fulfilling their commitment by repaying more than what they would have paid in a bankruptcy.
The option of a consumer proposal, however, must be compatible with your financial situation and ability to pay. Refusing to declare bankruptcy out of pride, when it is not the best option is not recommended. Additionally, in most cases, bankruptcy can be declared with complete discretion.
How do I know which solution is best for me?
It depends on your financial situation. Here are some criteria to consider:
Seizable property
First, your Licensed Insolvency Trustee (LIT) will examine your property. Do you have a house with lots of equity? Do you have a car that you wish to keep? Do you have investments in Registered Education Savings Plans (RESPs) or Tax Free Savings Accounts (TFSA)?
If you answered yes to these questions, the consumer proposal may be a good solution, because unlike bankruptcy, you may keep your property.
In a bankruptcy, any property with value may be seized to repay your creditors.
Surplus Income
Your LIT will examine your income and your situation to determine whether you will have to pay contributions on surplus income in the case of bankruptcy. If so, your contributions will increase the cost of your bankruptcy. In such circumstances, the consumer proposal may be the best financial solution.
Time Frame
Typically, a first bankruptcy has a firm time frame of nine or 21 months.
The term of a consumer proposal varies from one to 60 months. The time frame is determined based on your ability to pay. Should your financial situation change, it is possible to speed up your payments to reduce the term of your consumer proposal.
Payment
Depending on the circumstances, there may be a significant disparity in the sum of monthly payments to make.
In the case of a bankruptcy, calculating contributions on surplus income may result in a monthly payment that is too high for the debtor’s budget. A consumer proposal accepted by the creditors, even for an amount just slightly greater than a bankruptcy, has the advantage of spreading the process over a longer period of time. Monthly payments would therefore be better suited to the debtor’s ability to pay.
Meet with a Licensed Insolvency Trustee
If you are looking for a solution to your debt problems, meet with one of our Licensed Insolvency Trustees (LIT). They will assess your situation and tell you the costs associated with each option based on your financial situation.
Our LITs will answer all your questions and ensure that you have all the information you need to make an informed decision.