Personal bankruptcy and consumer proposals are the top two insolvency options available in Canada. While both will resolve your debts, and provide legal protection from creditors, there are differences between them. Let’s start with definitions of bankruptcy and a consumer proposal:
A bankruptcy is a legal proceeding filed under the Bankruptcy & Insolvency Act to surrender your assets in exchange for which you will receive a discharge from your unsecured debts.
A consumer proposal is a legal consumer credit proposal filed under the Bankruptcy & Insolvency Act where you make an offer to your creditors to settle your debts for less than you owe.
Filing for Bankruptcy
In plain language, the concept behind personal bankruptcy in
Canada is this: you assign (surrender) everything you own to a Licensed
Insolvency Trustee in exchange for the elimination of your debts. Certain
exceptions that vary by province allow you to keep some minimum necessities.
It is s a legal process, governed by federal law (the Bankruptcy & Insolvency Act), and features a “stay of proceedings” that prevents a garnishment or any legal action from happening.
To file for Bankruptcy, the first step is to meet with a Licensed Insolvency Trustee. Your first meeting is free. A typical first Bankruptcy lasts 9 or 21 months, depending on your income level.
You may be required to liquidate significant assets such as your house and investments, and you may also need to make monthly payments.
When the term of the Bankruptcy is finished and you have completed your obligations, your unsecured debts will be erased.
Bankruptcy only deals with unsecured debts – things like credit cards, personal loans, income taxes, overdrafts, etc. A secured debt, such as a car loan or mortgage, may not be included. Since you have given an asset as collateral, your creditor can recover the amount owing to them. Any shortfall can be dealt with in the bankruptcy.
Some unsecured debts are not discharged in a bankruptcy, such as student loans less than 7 years after you stopped going to school, and/or any alimony or child support, as well as any debt arising from fraud.
Some assets are not taken from you in bankruptcy. These are the “exemptions” that the government has determined you need to survive.
The list of exemptions is set by each provincial or territorial government. For example, in Ontario, a car not exceeding $6,600.00 is exempt, also personal items such as clothing and household items worth less than $13,150.00, RRSPs as well as equity in your residence to a maximum of $20,000.00. For most people, the assets they must surrender include their investments and RESPs.
If there is a mortgage on your house or car, the exemption
applies to the equity you hold. When there is a secured debt against your
asset, the equity is the value of the asset after your unpaid debt amount is
deducted.
For example, if you live in Alberta and have a car worth $15,000, and there is a secured loan against it with $11,000 owing, your equity in the car is $4,000. Alberta`s exemption for a car is $5,000, so your car is exempted from your bankruptcy, so you can keep it.
However, even if your payments are up-to-date, the secured creditor might repossess your car if you go bankrupt. This varies with the current policy of the creditor.
On top of the trustee fee and your loss of assets, a bankruptcy may cost you some of your income, depending on how much you earn and the size of your household. The principle is that, if you earn more than your household needs to survive, you must pay a portion of the “surplus income” to your trustee for the creditors.
Filing a Consumer Proposal
For those who can afford to pay some, but just not all, of their debts, a Consumer Proposal is the best alternative to Bankruptcy.
A Consumer Proposal is a way for you to pay a reduced portion of your debt and write off all interest payable on that debt. It is a legal process under the Bankruptcy and Insolvency Act between you and your creditors to repay part of what you owe. The amount you repay is largely based upon your income and what you own.
Given that they are less restrictive, CPs can be managed and filed by a Consumer Proposal Administrator through a Licensed Insolvency Trustee firm. They will help you summarize your financial affairs for review by your creditors, and together with you, drafts an offer of settlement for your creditors to consider. There are generally no court appearances required.
You’ll pay an initial setup fee, and if it is accepted by your creditors, you will pay the balance to proceed. In addition, the trustee will keep 20% of your future payments as your Consumer Proposal administration fee.
In most cases, the creditors, in reviewing your situation, recognize that it is better for them to accept a reduced settlement amount, rather than force you into bankruptcy.
For the proposal to be legally binding, the creditors who own the majority of your debt must agree to the arrangement, and if approved, you will be required to repay the agreed upon amount over a maximum term of 5 years.
Creditors have 45 days to agree to the terms and conditions. The creditors can choose to accept, decline or ask for a meeting of creditors. Your administrator or trustee could amend your initial proposal if the creditors do not agree to your terms.
The terms of the proposal are legal and binding and as such, you can move on. If you get a new job, make more money, sell an asset, get a bonus or tax refund then that revenue is yours to keep. You will never be required to pay more money even if you make more money.
Once you enter into a Consumer Proposal, a special notation is placed on your credit report in the public records section. Anyone who you allow to look at your credit report can see the public records section.
If you are making payments to secured creditors, like for a car loan, outside of your Consumer Proposal, those creditors will report on those debts separately.
If you are able to maintain a good payment history on a secured debt while you’re making your proposal payments, this can help you re-build credit afterwards. The reporting agencies will treat a proposal as an R7, and bankruptcy an R9.
A proposal will stay on your credit bureau for 3 years after receiving your certificate of completion and a bankruptcy will remain for 6 years after receiving your certificate of discharge. Credit repair will take effort and time.