This month’s edition of Sands & Associates’ “Ask a Licensed Insolvency Trustee” series breaks down three key differences in bankruptcy versus Consumer Proposal.
Q: What’s the difference between Consumer Proposals and bankruptcy?
Although they do share a few similarities, Consumer Proposals and personal bankruptcy are in fact two completely separate debt options, with two different sets of processes. Before we compare some of their distinct differences, let’s look at where they are similar:
Who Files a Consumer Proposal or Personal Bankruptcy
In short, only a Licensed Insolvency Trustee can assist with filing either a Consumer Proposal or personal bankruptcy.
The legal procedures for both Consumer Proposals and bankruptcy are governed by the Bankruptcy and Insolvency Act and the federal government authority that oversees both processes is the Office of the Superintendent of Bankruptcy (OSB).
The OSB is responsible for licensing, regulating and supervising the insolvency profession. This ensures a transparent and fully regulated debt solution for consumers.
Unlike systems in the US, a lawyer can’t help you file a Consumer Proposal or bankruptcy – in Canada you’ll need to engage the services of a Licensed Insolvency Trustee (like Sands & Associates) to help you undertake either action.
What Debts Can be Forgiven under a Consumer Proposal or Personal Bankruptcy
Virtually all debts can be forgiven under a Consumer Proposal or personal bankruptcy filing, and both will automatically freeze further interest from being charged by your creditors.
In addition to consumer debts like credit cards that most people carry, government debts like income taxes and student loans (and more) can also be forgiven.
Now that we’ve highlighted some similarities between these two debt options, let’s review some of their big differences:
How Long It Takes to Finish
Consumer Proposal: Because Consumer Proposals are tailored to each person’s unique situation, the amount of time a person’s Consumer Proposal will take can vary. A Consumer Proposal could be as short as one or two months and as long as 60 months, although Consumer Proposals that last around 24 to 48 months are most common.
Consumer Proposals can be paid off early at any time, without penalty.
Bankruptcy: The amount of time a person will be “in bankruptcy” for is mostly based on their income. If it’s the first time someone is filing a bankruptcy, it will generally be 9 or 21 months until the person is discharged (released from bankruptcy).
How Much You Have to Pay
Consumer Proposal: Similar to how long a Consumer Proposal will take to finish, how much of their debt a person will repay also varies. It’s not uncommon for debts to be cut by up to 80%, and there is no fee charged on top of what is offered to creditors. The cost of the Consumer Proposal is simply taken from what the creditors will get.
For example – if you owed $40,000 and offered a Consumer Proposal to repay 20%, you could pay around $220 a month total for 36 months, writing off the other $32,000.
Government-set tariffs determine fees in both Consumer Proposals and personal bankruptcy – they are not billed or invoiced separately and your Licensed Insolvency Trustee will not give you a bill for their services.
Bankruptcy: A person’s out of pocket cost in bankruptcy is primarily based on their income. For most bankruptcies a person will only pay the minimum filing fee, $200 per month for 9 months.
How Filing Impacts Your Credit History
Consumer Proposal: After filing a Consumer Proposal an R7 credit rating will show for two to three years (depending on which credit bureau is reporting) after the proposal is finished. The same rating and length of time is given for traditional and non-profit credit counselling programs.
A person can start rebuilding their credit at any time, there is no need to wait for the Consumer Proposal or bankruptcy to expire from credit history.
Bankruptcy: After filing a personal bankruptcy an R9 credit rating will be noted for six years following completion (discharge). Credit bureaus can report most “negative information” such as a late payment or collection accounts for up to seven years after the occurrence. By following the correct steps to rebuild credit, most people can significantly improve their credit rating in as little as 2-3 years after bankruptcy discharge.
To learn more about these (and other) Consumer Proposal and bankruptcy differences, view our detailed infographic comparing Bankruptcy versus Consumer Proposals.
Ready to find out if a Consumer Proposal or personal bankruptcy could be your debt solution? Book your free confidential debt consultation in one of our BC locations today.