Consumer proposals vs. personal bankruptcy

Deciding between a consumer proposal vs bankruptcy may not be something you thought you’d have to think about, but at some point or another, you may face serious challenges with your finances, enough to seek out professional advice. Between paying rent or a mortgage, a car lease, and credit card debt, dealing with debt can seem insurmountable. Perhaps you have reached a point where you cannot make a plan that will help you pay off your debts and are unable to make your minimum payments. You will probably want to know the pros and cons of your available options.

When is a consumer proposal preferable to bankruptcy?

Wondering whether a consumer proposal or bankruptcy is the right choice for you? A consumer proposal is often preferable to bankruptcy in the following three situations:

• If you have a steady income or are expecting your income to increase in the near future;
• If you are still able to make some amount of regular payment; and/or
• If your debt is not excessive (i.e., less than $250,000 in unsecured debt, excluding mortgage debt).

While a consumer proposal will not clear out your debt entirely, creditors generally agree to erase a substantial portion of the debt in exchange for an agreement to make payments at regular instalments over a set period, not exceeding 5 years.

Further, with a consumer proposal, your assets will not be subject to seizure and sale, as they may be in bankruptcy. Your house will not be impacted by a consumer proposal, regardless of its value, the amount owing on your mortgage and your net equity in the home.

When is bankruptcy preferable to a consumer proposal?

If you do not have a regular income or have lost your job, your creditors may not accept a consumer proposal. While bankruptcy is rarely preferable to a consumer proposal, some potential advantages of declaring bankruptcy are:

• If you wish to completely absolve yourself of unsecured debts; and/or
• If you wish to be absolved of your debts in a reasonably short time frame;
• Filing for personal bankruptcy allows you to restart on a new footing, which may have an appeal if your debts are simply too large to manage, and you cannot propose to pay any significant portion of it soon.

Further, although bankruptcy proceedings may be complex, a first-time bankruptcy generally lasts only 9 months and the costs are relatively minimal.

The effects of bankruptcy vs consumer proposals on your credit rating

Your credit rating will be affected by both a bankruptcy and a consumer proposal. However, the effect of a consumer proposal on your credit rating will be softer than the effect of bankruptcy.

During your consumer proposal, you will have the same credit rating as you would have during bankruptcy. However, upon completion of your consumer proposal, your credit rating immediately gets upgraded from an R9 to an R7. Three years after the completion of your consumer proposal, the proposal will come off your credit report completely.

In a bankruptcy situation, you will receive an R9 rating on your credit score, which is the worst rating possible. The R9 rating will stay on your credit score for 6 years after your date of discharge from bankruptcy.

If you find yourself in a debt situation, it can be difficult to know whether bankruptcy or consumer proposal is right for you. While each situation is unique, it’s best to speak to a licensed insolvency trustee to discuss the best option in your circumstances.

To discuss a consumer proposal or bankruptcy in Barrie, Brampton, Brantford, Hamilton, Kitchener, Markham, North York, Oshawa, Pickering, St. Catharines, Toronto with one of our licensed insolvency trustees, call us today. Contact Harris & Partners Inc. at 1-800-268-8093.