Consumer Proposal vs Bankruptcy: What's the Difference?

Being caught up in serious financial problems and being in debt can be difficult to manage. Whatever the cause, you shouldn't be ashamed to ask for help. Are you considering bankruptcy or a consumer proposal, but can't quite figure out the difference between the two? In this article, we'll look at which options seem to be best for you;

What is a consumer proposal?

The consumer proposal is a legal solution provided for under Canada's Bankruptcy and Insolvency Act, overseen by a licensed insolvency trustee (LITI). Unlike a consolidation loan or an informal agreement with your creditors, it is an official mechanism recognised by the law, providing a secure framework for people wishing to reduce or reorganise their debts.

In practical terms, it allows you to negotiate partial or total repayment of your debts according to your ability to pay. You then make fixed, interest-free monthly payments, generally over a period of 3 to 5 years. The trustee acts as an intermediary between you and your creditors, putting an end to direct communications and collection procedures.

What is personal bankruptcy?

The personal bankruptcy is a legal procedure also supervised by an insolvency trustee. It involves wiping out the majority of your debts when you are unable to repay them.

In return, some of your assets may be liquidated to pay your creditors. Bankruptcy also has a more severe impact on your credit rating and remains registered for longer than a consumer proposal.

Differences between bankruptcy and consumer proposal

1. Impact on your property and assets

A consumer proposal allows you to keep your essential assets, such as your home, car or RRSPs, as long as you keep up your payments.

In bankruptcy, certain assets may be liquidated by the trustee in order to pay off your creditors, which represents a greater loss for your assets.

2. Consequences for credit rating

A consumer proposal is recorded as an R7 rating on your credit file. This is a negative mark, but it is less onerous and disappears more quickly than a bankruptcy.

Personal bankruptcy, on the other hand, results in an R9 rating, the most severe, which remains registered for longer and makes access to credit much more difficult.

3. Process duration

The consumer proposal is generally spread over a period of 3 to 5 years, depending on your ability to repay. It therefore offers a longer plan, but one that is better suited to your budget.

Bankruptcy, on the other hand, is quicker, often taking between 9 and 21 months to resolve for a first bankruptcy. However, the financial and psychological consequences are more severe.

4. Psychological and practical consequences

A consumer proposal is often seen as a more discreet and less stigmatising solution. It allows you to preserve your assets and negotiate with your creditors within a legal framework.

Bankruptcy is still associated with a last resort, with a significant psychological impact linked to the loss of assets and the negative social perception often associated with it.

Alternatives to bankruptcy and a consumer proposal

Before considering bankruptcy or a consumer proposal, there are other solutions that can help you regain control of your finances.

Debt consolidation

Consolidation involves combining all your debts into a single loan, often with a lower interest rate. You then make a single monthly payment, which is easier to manage. This solution may be suitable if your credit rating still allows you to obtain financing and your debts are not too high.

Voluntary agreement with creditors

It is sometimes possible to negotiate directly with your creditors to reduce payments, postpone due dates or eliminate interest. However, this option requires good negotiating skills and does not offer the legal protection of a consumer proposal.

Budget advice and financial recovery

Budget management support allows you to review your income, expenditure and financial habits. Our financial recovery experts can help you put in place a realistic plan to reduce your debts, better manage your monthly obligations and regain stability without resorting to a more cumbersome legal solution.

Get help to make the right decision

Bankruptcy and consumer proposals are fairly complex to understand. Whatever your situation, your licensed insolvency trustees is the best person to explain your options and guide you through the process. He or she will take the time to analyse with you the alternatives that best meet your needs;