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What's the difference between a consumer proposal and bankruptcy?

These are two distinct legal processes that allow you to discharge your debts and stop collection measures. The bankruptcy declaration and the consumer proposal require the intervention of a licensed insolvency trustee who will help you make the best choice based on your income and assets.

What is a consumer proposal?

This is a legal process designed to reduce and consolidate your debts. It's an agreement with your creditors in which you pay off part of your debt, interest-free, through new payment terms.

This is a negotiation in which your insolvency trustee intervenes so that you can get rid of most of your debts after a period of up to 5 years, while reducing the total value of your indebtedness. Certain unsecured debts cannot be included in the agreement (fines, penalties, alimony, fraud, etc.).

What about bankruptcy?

Bankruptcy is a solution for people who can no longer pay their debts, as the monthly amounts far exceed their income. Under the Bankruptcy and Insolvency Act, bankruptcy is a legal procedure that allows debtors to repay their debts by selling their assets.

Personal bankruptcy allows you to be discharged from all debts, except those provided for in section 178 of the Act, such as traffic tickets, alimony debts, student loans less than 7 years old, etc. However, in addition to the seizure of assets, there is a monthly payment to be made, which will be established by the trustee according to the directives of the Superintendent of Bankruptcy.

A consumer proposal is often seen as a life-saving alternative to bankruptcy. It's more flexible and gives you the option of monthly payments that respect your budget, whereas bankruptcy payments are non-negotiable and depend solely on your income.

The main differences are :

• A fixed amount for the consumer proposal, while monthly payments vary for bankruptcy depending on your income.
• Protecting your assets in the consumer proposal against the risk of seizure if you declare bankruptcy
• Preservation of tax refunds when you file a proposal against their loss in bankruptcy

So it's important to check with your syndic to find out which solution is best suited to your financial situation, depending on the type of debt you have.

The consumer proposal to rebalance your finances

Consumer proposals have become a much sought-after alternative for avoiding personal bankruptcy.

Eligibility criteria

To file a consumer proposal, you must meet certain requirements:

• Your debts are less than $250,000 (not including mortgage)
• You are insolvent (your debts exceed $1,000 and you are unable to repay them)
• Residing or owning property in Canada

How does it work?

If you meet these criteria, you can consult an insolvency trustee who will guide you through the process. He or she will assess your financial situation to verify the feasibility of your proposal. The trustee will then file the application with the Office of the Superintendent of Bankruptcy.

You will then stop paying your creditors, and the legal proceedings against you will cease. You will be required to attend two financial counselling sessions to help you better manage your finances.

The presentation will then be proposed to the creditors, who have 45 days to respond. They may call a meeting of creditors where a vote will be taken to accept or reject the proposal.

If the proposal is refused, legal proceedings and payments will resume. You can then modify the proposal and try again, or consider other alternatives such as debt consolidation or bankruptcy.

If the proposal is accepted, your creditors and trustee will negotiate new payment terms.

Advantages and disadvantages of the consumer proposal

A consumer proposal allows you to renegotiate your unsecured debts without affecting your secured debts, such as your mortgage. There are several advantages to this negotiation:

• No interest
• Only one debt to pay
• Debt reduction of up to 70%.
• No further contact with creditors
• One monthly payment to fit your budget
• Protection against the risk of seizure
• Asset preservation
• Fixed administration fee included in monthly amounts
• Your RRSP and life insurance will not be seized.
• A consumer proposal is flexible in that it allows you to ensure that your monthly payments stay within your budget, unlike a bankruptcy where payments are determined solely on the basis of income.

However, it affects your credit file negatively by indicating an R7 rating for 3 years after the end of repayment or six years after the application was filed. What's more, your creditors have the right to object to your proposal, so you can try to find other terms of negotiation, or the consumer proposal may be refused altogether.

Bankruptcy as a way out of debt

Bankruptcy is a solution provided for under the Bankruptcy and Insolvency Act that allows you to get rid of some of your debts by surrendering some of your assets.

Steps in declaring bankruptcy

Just like a consumer proposal, if you're thinking of declaring bankruptcy, you should start by making an appointment with a trustee who will assess your situation. If bankruptcy is your only alternative, your trustee will fill out the necessary forms to formalize the bankruptcy.

Your seizable assets will be liquidated to collect the necessary sum. Some assets, such as furniture, alimony, certain benefits, etc., remain unseizable. During the bankruptcy, you will be required to make monthly payments to your trustee. He/she will represent you before creditors and ensure that your monthly payments are distributed equitably.

During this process, you will be required to attend two financial counseling sessions to help you establish and manage your budget. Bankruptcy can last from 9 to 21 months. If you have completed all the steps in the bankruptcy process, you will be discharged of all your debts.

The advantages and disadvantages of personal bankruptcy

When you file for bankruptcy, you benefit from certain advantages:

• Protection against seizure
• Reduced monthly payments
• Possibility of keeping your belongings
• Debt relief
• Stop harassing creditors
• Duration between 9 and 21 months
• Creditors cannot oppose your bankruptcy

However, you should be aware that some of your assets may be seized or liquidated. Your RRSP of 12 months or less, as well as your life insurance, may be seized, and you will not be able to contribute to your RRSP during the entire bankruptcy period.

The declaration of bankruptcy will mark your file with an R9, which will last for up to six or seven years, even after your discharge. What's more, the cost of bankruptcy depends on your income. These monthly payments are not fixed and increase according to your income.

How to make the right choice for your financial situation

Once you understand the differences between a consumer proposal and bankruptcy, it's time to choose the option that's right for you. Anyone who owes more than $1,000 and is unable to repay it can declare bankruptcy. All you have to do is own property or reside in Canada and be insolvent. It's a last-resort solution, but one that's available to you at any time.

The consumer proposal, on the other hand, concerns all those who are able to assume part of their debts and wish to meet their commitments. Both solutions are fairly restrictive, but the consumer proposal is legally less severe. It allows you to keep your assets and has less impact on your credit file.

So, if you're overwhelmed by your monthly expenses and can no longer repay your debts on time, but you have a stable income, you can choose the consumer proposal. With a lower interest rate and less stringent payment terms, you'll be able to regain your financial equilibrium.

If none of these options work for you, consider debt consolidation.

Another alternative is debt consolidation. This is a financial operation that allows you to borrow a single amount from a financial institution to pay off part of your debts. This solution allows you to reduce your debts, with only one creditor to repay. However, debt consolidation does not include secured loans, and must meet certain criteria:

• Stable revenues
• Guaranteed repayment of your debt
• Owning assets
• Debt ratio below 40%.
• A good credit rating

Need help managing your financial problems?

Bankruptcy and consumer proposals are both administered by a trustee in bankruptcy whose activities are regulated by the Canadian federal government. So, if you already have an idea in mind and are looking for validation, you can contact us for a free consultation.

Our team will guide you through your debt problems and help you find the best solution. With over 25 years' experience, Groupe Serpone will support you throughout the legal process, putting all its resources at your disposal.

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