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Everything You Need to Know About Bankruptcy vs Consumer Proposal

Updated: Dec 9, 2022

During a recent Ipsos survey that took place in Canada, a whopping 30% of respondents reported being insolvent. That being said, if you're unable to pay your bills, you are not alone, and bankruptcy isn't your only option.


The top two insolvency options available for individuals include personal bankruptcy and consumer proposals. Both will allow you to resolve issues with your debt while providing you with legal protection from creditors. However, there are some key differences between the two solutions to keep in mind.


Read on to learn more about your top two options for resolving your debt and reclaiming your life.


Bankruptcy: Your First Option

In simple terms, bankruptcy is a legal process outlined in Canada's Bankruptcy and Insolvency Act that gives one a fresh start from debts and prevents creditors from seizing your assets.


When claiming bankruptcy in Canada, you will need to work with a Licensed Insolvency Trustee. This person will investigate your affairs, take control over your assets, and oversee your progress with bankruptcy duties.


The duties you're required to complete are embodied in s 158 of the Bankruptcy and Insolvency Act which includes among other things: attendance in two credit counselling sessions, submission of monthly income/expense reports. 


When you complete your duties and when there is no opposition to your discharge, you are eligible to get your discharge at the end of 9 months (first time bankrupt, without surplus income), 21 months (first time bankrupt, with surplus income), 24 months (2nd time bankrupt, without surplus income) and 36 months (2nd time bankrupt, with surplus income).


Consumer Proposal: Your Second Option

Your other option, a consumer proposal, is for individuals with total debt not exceeding $250,000 (excluding mortgage on principal residence). The consumer proposal should offer a better benefit compared to what your creditors will receive in a bankruptcy scenario.  Your offer will be decided by your creditors within 45 days from your date of filing and by Court 15 days thereafter. The approval of your proposal means that you are bound to comply with the proposal terms. If you are on a monthly payment plan, arrears of 3 months will result to the deemed annulment of your proposal so better not miss any payment. The term of the consumer proposal is up to a maximum of 5 years.


How Is Your Credit Affected?

Both bankruptcy and consumer proposal are considered to be viable insolvency solutions, though they will affect your credit in different ways. When you claim a consumer proposal, your credit rating will change to R7 for the period of time during which you are making payments. Your R7 credit rating will be removed three years after you complete the proposal.


If you choose to declare bankruptcy, your credit rating will read as an R9 for 6 to 7 years after your debt is discharged. If you declare more than once, your credit rating will reflect an R9 for 14 years. 


Which Choice Is Better?

Bankruptcy and consumer proposals are solid solutions for someone who cannot repay their debts. If you're drowning in debt, choosing between the two may not be easy.


No matter which option you choose, you will be protected from creditor actions, wage garnishments, and your unsecured debt will be eliminated. 


That being said, both options are quite different from one another and will impact your life and finances in different ways. 


For a better understanding of all available options and their merits and consequences, please contact our Licensed Insolvency Trustees at Campbell Saunders Ltd. Get in touch with us today to get started.


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