It’s a common question received by Trustees: “Bankruptcy vs. Consumer Proposal – What’s the difference?” While we’ve highlighted the most significant differences in detail below, the short answer is that a proposal is always preferred but not always feasible. Consumer proposals must always offer your creditors more than they would receive if you declared bankruptcy. For this reason, they are more expensive than bankruptcy. If you can afford to make a consumer proposal and choose to declare bankruptcy, the court can lengthen your bankruptcy or take other actions that it sees fit. Only after ruling out a consumer proposal will a Trustee in Bankruptcy recommend bankruptcy. It’s always a last resort. That said, for many people it’s a great way to relieve stress and get a fresh start. Without further ado, find the most significant differences discussed by category below.
Length of Process
Bankruptcy: Lasts 9-36 months based on whether it is your first or second time going bankrupt, and whether you earn more than the government guideline.
- A first time bankrupt without surplus income can be discharged after 9 months
- A first time bankrupt with surplus income can be discharged after 21 months
- Second time bankrupts without surplus income can be discharged after 24 months
- Second time bankrupts with surplus income can be discharged after 36 months
Consumer Proposal: Lasts as long as 60 months. Most of the proposals that we administer take advantage of this maximum length. By stretching your proposed repayment over the maximum 60 months you lower your monthly payment, and you can always pay off your proposal early if you can afford it.
Your Assets or Belongings
Bankruptcy: All non-exempt assets are surrendered to the Trustee in Bankruptcy for the general benefit of creditors. Exempt assets in Ontario include: A vehicle worth less than $5,650 Furniture and appliances worth less than $11,300 Clothing and apparel worth less than $5,650 Tools of the trade worth less than $11,300 RRSPs contributed to at least 12 months prior to the bankruptcy Consumer Proposal: Filing a Consumer Proposal allows you to keep all of your assets or belongings. Since a Consumer Proposal must always provide more money to your creditors than a bankruptcy, the payments you make are in lieu of surrendering any of your belongings to your Trustee.
Payments or Cost
Bankruptcy: Our minimum fee is $1,800 or $200 x 9 months. Your payment in a bankruptcy will increase if you decide to keep non-exempt assets or earn surplus income. For example, if you own a non-exempt $3,600 camper, you can keep the camper and pay $3,600 to your Trustee instead. This money will be used for the general benefit of your creditors. Consumer Proposal: As a rule of thumb, your payments in a consumer proposal will be 33% of your unsecured debt spread over 60 months assuming that this amount is higher than your creditors would receive if you declared bankruptcy. This is anything but a hard and fast rule. Proposal payments can vary significantly and must be high enough to earn the support of at least 50% of your creditors.
Bankruptcy: No approval by your creditors is required to declare bankruptcy. Once you sign the papers you are bankrupt whether your creditors like it or not. Consumer Proposal: At least half of your unsecured creditors representing at least half of your unsecured debt must approve your proposal for it to proceed. If your proposal is rejected, you can amend it before the 45 day voting period elapses or resubmit a revised proposal. Your proposal not being accepted does not mean that you are bankrupt.
Bankruptcy: Declaring bankruptcy results in an R9 credit rating for 7 years after you complete the 9-21 month bankruptcy process as a first time bankrupt or 14 years after you complete the 24-36 month process as a second time bankrupt. Consumer Proposal: A Consumer Proposal results in an R7 credit rating for 3 years after you complete your proposal. An R7 and R9 credit rating are really two shades of black. They’re both unfavourable and frowned upon by lenders. Your credit rating shouldn’t be a significant factor that motivates you to file a consumer proposal.
Income Tax and HST Refunds
Bankruptcy: Your post-bankruptcy income tax refund is always seized by the Trustee and used for the general benefit of creditors. HST refunds are also seized by the Trustee if the realizations by the estate are insufficient to generate a dividend for unsecured creditors. Consumer Proposal: You keep all income tax and HST refunds when filing a consumer proposal.
Conclusion: Bankruptcy vs. Consumer Proposal
Both bankruptcy and a consumer propsal are legal options to erase your debt. The main factor in determining which option is best for you is your ability to afford ongoing proposal payments. If 3 or more proposal payments are missed then the proposal is annulled and your creditors’ rights are revived meaning that they can once again pursue you in court, and take other action to collect their debt. Welker and Company considers both solutions during every free initial consultation and tailors its recommendation based on your unique personal situation. There is no substitue for having a debt management expert like the licensed Trustees in Bankruptcy at Welker and Company review your situation, but to conduct further independent research on either solution please refer to our individual service pages here: Bankruptcy Consumer Proposal Don’t hesitate to contact us with any questions. You’ve got nothing to lose except your debt.